Non-Resident Directors & The Illusion Of Accountability

Do courts have personal jurisdiction over non-resident directors of companies incorporated in their state? Delaware, the center of so much corporate litigation, confers jurisdiction over non-resident directors by statute. In other states, the long-arm jurisdiction statute may apply. Most states lack a specific statutory basis and leave it to the courts to develop common law on the matter. However, common law can produce inconsistent positions among states, or even within states. Two Maryland state courts reached different conclusions on the issue. Compare Gary W. Stisser v. SP Bancorp, Inc., No. 24-C-14-003610, 2015 Md. Cir. Ct. LEXIS 3 (Balt. Cir. Ct. April 13, 2015) with Costa Brava Partnership III, L.P. v. Telos Corp., No. 24-C-05-009296, 2006 Md. Cir. Ct. LEXIS 21 (Balt. Cir. Ct. March 30, 2006). This is an important issue in shareholder litigation because in the absence of:  (i) a director-consent-to-service statute, or (ii) specific enumeration in their long-arm statute, states risk having domestic corporate legal issues adjudicated by courts in other states. Moreover, the rise of corporate bylaws mandating certain forums to adjudicate all shareholders claims, even if that chosen forum lacks jurisdiction over the individual non-resident directors, creates unacceptable confusion for shareholders seeking to bring claims against directors. The issue currently is up on appeal.

As background, in 1977, the Supreme Court in Shaffer v. Heitner, 433 U.S. 186, rejected the idea that non-resident directors of a Delaware-formed corporation impliedly consented to Delaware’s jurisdiction. Id. at 216. In reaction to that decision, Delaware enacted a statute that provided that non-resident directors of a corporation chartered in Delaware were subject to personal jurisdiction in Delaware. See 10 Del. Code Ann., § 3114. No other state has followed Delaware’s lead, but 15 states have long-arm statutes that expressly apply to directors, and in some cases officers, of corporations incorporated in that state.  For example, Illinois’ long-arm statute extends jurisdiction to “any cause of action arising from . . . [t]he performance of duties as a director or officer of a corporation organized under the laws of this State or having its principal place of business within this State.” 735 Ill. Comp. Stat. Ann. 5/2-209.

Maryland has neither a director-consent-to-service statute nor a long-arm statute conferring jurisdiction over non-resident directors. Maryland’s long-arm statute provides the traditional bases for a court to exercise jurisdiction over a party, including if the party (i) transacts any business or performs any character of work or service in Maryland; (ii) contracts to supply goods, food, services, or manufactured products in Maryland; (iii) caused tortious injury in Maryland by an act or omission in Maryland; (iv) regularly does or solicits business; or (v) engages in any other persistent course of conduct in Maryland or derives substantial revenue from goods, food, services, or manufactured products used or consumed in Maryland. Md. Code Ann., Cts. & Jud. Proc. § 6-103(b). Under any of the above circumstances, a court may find that the party availed itself of the laws and protections of Maryland, and had sufficient contact with Maryland to evoke personal jurisdiction.

On October 7, 2016, the Maryland Court of Special Appeals heard oral argument in Gary W. Stisser v. SP Bancorp, Inc., No. 24-C-14-003610, 2015 Md. Cir. Ct. LEXIS 3 (Balt. Cir. Ct. April 13, 2015) to resolve conflicting decisions by lower courts on the issue in Stisser and Costa Brava.

In Stisser, Plaintiffs brought suit challenging SP Bancorp Inc’s merger with Green Bancorp Inc., alleging that the Proxy omitted material information concerning a director’s conflict of interest, SP Bancorp’s financial projections, the sale process, and the financial advisor’s fairness opinion. Stisser, 2015 Md. Cir. Ct. LEXIS 3 at *8. The Circuit Court dismissed the stockholder litigation in part for lack of personal jurisdiction over the individual director defendants, non-residents of Maryland. Holding that Plaintiff failed to establish specific personal jurisdiction, the Court stated that mere service as a director of a Maryland corporation did not equate to purposeful availment of the laws of Maryland. None of the defendant directors resided in Maryland; all of the company’s director and shareholder meetings occurred in Texas; and the voting and negotiations of the merger agreement occurred in Texas or New York. Id. at *30-31, 33. Importantly, the company, not the individual defendants, signed and filed the articles of merger. Id. at *33.  The Court concluded that the individual defendants did not conduct any tortious act in Maryland, holding that plaintiffs failed to satisfy the co-extensive long-arm statute.

The lower court’s decision in Stisser contrasts with a previous interlocutory decision in Costa Brava. Costa Brava Partnership III, L.P. (“Costa Brava”), filed suit against Telos Corporation (“Telos”), and its directors and officers alleging fraudulent and illegal conduct by Telos, its board of directors and officers. Costa Brava owned 15.9 percent of Telos’ Cumulative Exchangeable Redeemable Preferred Stock (“ERPS”). Costa Brava, 2006 Md. Cir. Ct. LEXIS 21 at *1. The Circuit Court held that service as a director to a corporation evoked Maryland’s jurisdiction, for it demonstrated “transact[ing] any business or perform[ing] any character of work or service in the State . . . . Any action taken by the Directors and Officers with respect to the management of Telos can only be given effect in Maryland by virtue of Maryland law.” Id. at *12 (analyzing Pittsburgh Terminal Corp. v. Mid Allegheny Corp., 831 F.2d 522, 524–25 (4th Cir. 1987) (finding personal jurisdiction over non-resident officers and directors whose only contact with West Virginia was their corporate position).)

Personal jurisdiction in Costa Brava was grounded in the proposition that each act by the non-resident directors with respect to the corporation could only be effected under the auspices of Maryland law. Stisser, on the other hand, failed to address Costa Brava, stating that: (i) the fact that a corporation conducts business in a state is not sufficient to establish jurisdiction over the corporation’s directors, (ii) the filing of articles of merger in Maryland does not constitute “transacting business,” (iii) and the absence of a Maryland statute comparable to 10 Del. Code Ann., § 3114 is significant.

States without a director-consent-to-service statute, or a specifically enumerated long-arm statute run the risk of inconsistent adjudications, as seen in Maryland. Directors cannot be surprised when they are individually sued in either the state of incorporation or principal place of business, if the cause of action is a violation of their duties as directors. Upon acceptance of their position, directors are afforded significant benefits and protections under the laws of their states of incorporation. For example, they benefit from the application of state law through the power to manage the corporation, receive interest-free loans, and are indemnified and protected by state-specific exculpation provisions. Most importantly, a state has a substantial interest in having its own corporate law adjudicated in their own courts. Armstrong v. Pomerance, 423 A.2d 174, 177 n.6 (Del. 1980).

About Faruqi & Faruqi, LLP

Faruqi & Faruqi, LLP focuses on complex civil litigation, including securities, antitrust, consumer class actions, shareholder derivative litigation and whistleblower (Qui Tam) litigation.  The firm is headquartered in New York, and maintains offices in Delaware Pennsylvania, Georgia and California.

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About Anthony J. Ortiz

Anthony J. Ortiz is an associate in Faruqi & Faruqi’s New York office and focuses his practice on securities litigation.

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