Rabkin v. Philip A. Hunt Chemical Corp.

Delaware Court of Chancery · Corporations

Corporationsfiduciary dutiesmergerspersonal jurisdictiondirect vs. derivative claimsDelawarecash-out mergermajority stockholder

Facts

Olin bought Turner & Newall's controlling block of Hunt stock at $25 per share under an agreement requiring Olin to pay $25 per share if, within one year beginning March 1, 1983, it acquired all or substantially all of Hunt's remaining shares. Olin publicly disclosed that commitment and also stated in its Schedule 13D that any later acquisition could be at a higher or lower price depending on business and economic developments. Plaintiffs alleged that an internal Olin memorandum showed Olin had decided long before the commitment expired to acquire the minority shares, but deliberately waited until three weeks after expiration to propose a merger at $20 per share. Hunt's board created a special committee, which retained legal and financial advisors, considered the proposal over several weeks, concluded $20 was fair though not generous, unsuccessfully asked Olin to raise the price, and then recommended the merger.

Issue

Whether Delaware courts could exercise personal jurisdiction over Olin; whether the complaint stated claims against Olin Acquisition and Hunt; whether the claims against the Olin-affiliated Hunt directors were direct or derivative; and whether the complaint stated claims against the remaining Hunt directors for breach of fiduciary duty or neglect.

Rule

A foreign corporation has sufficient minimum contacts with Delaware when it purposefully avails itself of Delaware law by creating a Delaware subsidiary and using Delaware merger law to accomplish the very transaction under attack. A shareholder claim is direct if it alleges a special injury, including an injury distinct from that suffered by other shareholders, such as harm uniquely suffered by minority stockholders in an unfair merger. To state a knowing-participation claim, the complaint must allege a fiduciary relationship, a breach of fiduciary duty, and the defendant's knowing participation in that breach. For directors' response to a merger proposal, liability for lack of informed judgment requires gross negligence; for alleged ignorance-based inaction, directors may be liable if they failed to use the care ordinarily careful and prudent persons would use in similar circumstances.

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Northlake Industrial Holdings, a Nevada corporation based in Phoenix, formed Harbor Merger Sub, a Delaware corporation, solely to merge with Bay Circuit Systems, a Delaware corporation. Northlake then caused a Delaware certificate of merger to be filed to complete the challenged cash-out transaction, but it has no offices or employees in Delaware.

If former Bay minority stockholders sue Northlake in Delaware over the fairness of the merger, what is the strongest argument that Delaware may exercise personal jurisdiction over Northlake?

Explanation. The majority held that minimum contacts exist where a foreign corporation purposefully uses Delaware corporate law in connection with the challenged transaction, specifically by forming a Delaware subsidiary and using Delaware merger procedures. Physical presence is unnecessary, and jurisdiction does not depend on first proving the merits. (Derived from Rabkin v. Philip A. Hunt Chemical Corp. (n.d.).)