McWANE, INC., McWANE TECHNOLOGY, LLC, AND SYNAPSE WIRELESS, INC., Plaintiffs,
MONRO B. LANIER III, as Stockholder Representative of each EFFECTIVE TIME STOCKHOLDER under that certain Agreement and Plan of Reorganization dated May 23, 2012 by and among McWane, Inc., McWane Technology, LLC, McWane Synapse, LLC, Synapse Wireless, Inc., and Monro B. Lanier III, as Stockholder Representative; and GARY SHELTON, an Effective Time Stockholder; BRAD FLOWERS, an Effective Time Stockholder; and SANDY MORRIS, an Effective Time Stockholder, Defendants.
Submitted: October 14, 2014
Richard P. Rollo, Esq., Robert L. Burns, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael D. Mulvaney, Esq., J. Ethan McDaniel, Esq., James C. Lester, Esq., MAYNARD COOPER & GALE P.C., Birmingham, Alabama; Attorneys for Plaintiffs.
Paul D. Brown, Esq., CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware; Attorneys for Plaintiffs.
Norman M. Monhait, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; David J. Hodge, Esq., MORRIS, KING & HODGE, P.C., Huntsville, Alabama; Attorneys for Defendants.
PARSONS, Vice Chancellor.
Before the Court is a motion by three individual defendants to dismiss or stay this action. These defendants contend that the Court lacks personal jurisdiction over them. In the alternative, the three defendants seek dismissal or a stay of this case in favor of an allegedly first-filed action in Alabama based on the principles of McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co. I conclude that the individual defendants are bound by a forum selection clause in the merger agreement. This Court, therefore, has personal jurisdiction over the individual defendants, and McWane is inapplicable. Accordingly, for the reasons that follow, the motion to dismiss or stay is denied.
Plaintiff McWane, Inc. ("McWane"), is a Delaware corporation with its principal place of business in Birmingham, Alabama. Plaintiff McWane Technology, LLC ("McWane Technology, " and together with McWane, the "Buyers"), is a Delaware limited liability company with a principal place of business in Birmingham, Alabama. McWane Technology is the entity utilized by McWane to accomplish the acquisition of Synapse Wireless, Inc. ("Synapse, " and together with the Buyers, "Plaintiffs"), a Delaware corporation with its principal place of business in Huntsville, Alabama.
Defendant Monro Lanier, III (the "Stockholder Representative") is sued solely in his capacity as the Stockholder Representative under the merger agreement. In that capacity, Lanier is responsible for representing the interests of the Effective Time Stockholders,  who are defined in the merger agreement as being the stockholders of Synapse immediately prior to the merger transaction.
The complaint also names three other Effective Time Stockholders as Defendants: Gary Shelton, Brad Flowers, and Sandy Morris. Shelton is a resident of Lincoln County, Tennessee. Flowers and Morris reside in Madison County, Alabama. Together, Shelton, Flowers, and Morris constitute the "Individual Defendants, " and they have moved to dismiss for lack of personal jurisdiction and inadequate service of process, or to dismiss or stay for improper venue.
B. Pertinent Facts
McWane sought to acquire Synapse. To that end, McWane Synapse, LLC, a wholly owned subsidiary of McWane Technology, executed a reverse-triangular merger with Synapse in which Synapse was the surviving corporation (generally, the "Merger"). The Merger was effectuated through a Merger Agreement, with Buyers, McWane Synapse, LLC, Synapse, and the Stockholder Representative Lanier, as the five signatories. The Merger involved a deal structure whereby the Buyers purchased a majority of Synapse's shares and are to acquire the remaining shares over a number of years, beginning in 2016, from the minority Continuing Stockholders through a series of annual put and call options. The framework for those later acquisitions is specified in a Stockholders Agreement. That scheme involves an elaborate system of annual valuations, put and call formulas, and dispute resolution provisions applicable to the period from 2016 through 2023. The Individual Defendants are signatories to the Stockholders Agreement.
The crux of this dispute involves the interplay between the Stockholders Agreement and the Merger Agreement. The Merger Agreement included a number of representations and warranties and required the Effective Time Stockholders, under certain circumstances, to indemnify the Buyers for breaches of those representations and warranties. As partial security for any such claims the Buyers may have, the parties to the Merger set aside $8, 000, 000 as an Escrow Amount. The Effective Time Stockholders are not liable for any indemnity claims in excess of their pro rata portion of the Escrow Amount, unless the Buyer asserts, and reduces to judgment, a claim for more than the Escrow Amount resulting from fraud or an intentional or willful breach of the Merger Agreement. Based on what they allege are fraudulent financial gimmicks employed by Synapse's management before the consummation of the Merger, Plaintiffs are asserting such an indemnity claim in this case.
Under the Stockholders Agreement, the price for the annual put and call options is established by a formula pursuant to which the Continuing Stockholders can redeem a portion of their shares pro rata based on the greater of: (1) Synapse's annual valuation; or (2) $76, 300, 000, an amount defined in the Stockholders Agreement as the "Valuation Floor." If Synapse struggles in future years, the Valuation Floor becomes the more important number. The Valuation Floor can be reduced only if the Buyers suffer a loss arising from a breach of certain intellectual property representations in the Merger Agreement or fraud or a willful or intentional breach in connection with the Merger Agreement's representations, warranties, or covenants, among other things, as described in Section 8.2(f) of the Merger Agreement. Thus, Plaintiffs could lower the Valuation Floor if they assert a claim that meets the description in Section 8.2(f) of the Merger Agreement and win damages exceeding the Escrow Amount, among other conditions.Plaintiffs are alleging such claims in this action, and seek damages greater than $8, 000, 000.
Plaintiffs began to pursue their claims, however, not with a lawsuit, but by initiating the dispute resolution process outlined in the Merger Agreement. Plaintiffs submitted a Claim Certificate to the Stockholder Representative on December 13, 2013. The Stockholder Representative responded that the certificate was defective and did not comply with the Merger Agreement's requirements. Nevertheless, the Stockholder Representative lodged his Objection Notice to Plaintiffs' Claim Certificate on February 13, 2014. At that point, the Merger Agreement required a 30-business-day period of good faith negotiations. Thirty business days after Plaintiffs received the Objection Notice and with no resolution having been reached, Plaintiffs became entitled to file suit to pursue their claims. As detailed infra, the Merger Agreement includes a mandatory and exclusive forum selection clause that requires any suit "arising out of or relating to" the Merger Agreement to be filed in Delaware. The Stockholders Agreement, on the other hand, includes a "Consent to Jurisdiction and Venue" clause that permits "any action or proceeding against the parties relating in any way to" the Stockholders Agreement to be brought in Huntsville, Alabama. Competing lawsuits here and in Alabama underlie the present motion to dismiss or stay.
C. Procedural History
1. The Alabama lawsuit
On March 6, 2014, before the 30-day negotiation period expired, the Stockholder Representative filed suit against Plaintiffs seeking a declaratory judgment regarding Plaintiffs' indemnification claims in the Circuit Court of Madison County, Alabama (the "Alabama Action"). The Individual Defendants in this Delaware action intervened in the Alabama Action on March 27, 2014, by filing a Complaint in Intervention. That complaint was amended on June 12, 2014 (the "Alabama Complaint"). As amended, the Alabama Complaint asserts the following three claims: (1) Count I seeks a declaratory judgment that Plaintiffs are not entitled to any devaluation of the put rights or call options; (2) Count II alleges minority stockholder oppression, based on purported self-dealing by Plaintiffs and their efforts to retain the Escrow Amount and devalue the put and call options; and (3) Count III asserts a claim for breach of fiduciary duty based on Plaintiffs' conduct.
2. The Court of Chancery lawsuit
Plaintiffs filed suit here on March 31, 2014. According to Plaintiffs, the 30-day cooling-off period ended on Friday, March 28, 2014, and Plaintiffs filed their initial complaint the next business day. Early on, Plaintiffs filed two separate motions for a temporary restraining order ("TRO") to cause the Stockholder Representative to comply with the mandatory forum selection clause in the Merger Agreement and cease his efforts to litigate in Alabama. Those motions resulted in a Consent Order that was approved by this Court on May 20, 2014. In that Consent Order, the Stockholder Representative agreed to dismiss his complaint in the Alabama Action and litigate Plaintiffs' indemnification claims here. Also on May 20, the Individual Defendants moved to dismiss this action for lack of personal jurisdiction or to stay it. At the same time, the Individual Defendants continued to press their claims in Alabama. After Plaintiffs filed a third TRO motion to enjoin the Individual Defendants from pursuing the Alabama Action, the parties stipulated on July 9, 2014, that the Individual Defendants would not prosecute their claims in Alabama pending resolution of their motion to dismiss or stay this action.
Plaintiffs filed the operative Amended Verified Complaint (the "Complaint") in this Court on June 11, 2014. The Stockholder Representative answered and counterclaimed on June 19. Plaintiffs responded to the counterclaim on July 9. Thereafter, the parties briefed the Individual ...