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Germaninvestments AG v. Allomet Corp.

Court of Chancery of Delaware

May 23, 2019

GERMANINVESTMENTS AG and RICHARD HERRLING, individually and on behalf of AHMR GmbH, Plaintiffs,
v.
ALLOMET CORPORATION and YANCHEP LLC Defendants.

          Date Submitted: March 5, 2019

          R. Craig Martin, Esquire, Ethan H. Townsend, Esquire and Peter H. Kyle, Esquire of DLA Piper LLP (US), Wilmington, Delaware, Attorneys for Plaintiffs.

          John P. DiTomo, Esquire, Ryan D. Stottmann, Esquire and Coleen Hill, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Attorneys for Defendants.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR

         Judges quickly learn to take certain things lawyers say with a grain of salt. "Just one more question" typically means the lawyer will ask at least three or four more. "I will be brief" typically means at least another ten minutes. And, "this is a simple case" often means the case is anything but simple. Here, the parties on both sides of the "v" maintain that the issues presented in the motion to dismiss before the Court are not just simple; they are "exceedingly simple."[1] This, of course, begs the question: if the issues are so simple, then why are the parties litigating them? I digress . . . .

         The motion to dismiss invokes Court of Chancery Rule 12(b)(3) and asks the Court to declare that Delaware is an improper venue for resolution of this dispute based on a forum selection clause within a Restructuring and Loan Agreement ("R&L Agreement") that purportedly designates Vienna, Austria as the exclusive forum. The gravamen of the complaint is that certain parties to this litigation contemplated the formation of a joint venture and that, in the midst of their negotiations, Plaintiffs caused loans to be extended to one of the Defendants under the R&L Agreement that remain unpaid and outstanding. Plaintiffs seek specific performance of various aspects of the R&L Agreement so that they can realize at least some benefits of their bargain. That contract is governed by Austrian law. Nevertheless, as to the portion of their specific performance claim that would have the Court compel Defendants to issue stock to Plaintiffs as contemplated by the contract, Plaintiffs invoke 8 Del. C. Section 168(a) ("Section 168(a)") as the basis upon which the Court can and should direct the stock issuance to occur.[2]

         Not surprisingly, the parties have presented differing interpretations of how Austrian law supports their respective positions regarding the meaning and scope of the R&L Agreement's forum selection clause. These disagreements relate to basic questions, including: (i) is the clause at issue actually a forum selection clause and, if so, is it mandatory; (ii) can the clause be enforced against a party who has not agreed to be bound by the specific regulations that Defendants argue would render the clause mandatory and enforceable; and (iii) can claims brought under Section 168(a) be subject to an Austrian forum selection clause?

         After carefully reviewing the applicable law, with due respect to counsel, I cannot agree the issues presented are "simple" in any degree of that term. Nevertheless, after carefully reviewing the applicable Austrian law, I am satisfied the only fair reading of that law is that the forum selection clause is mandatory and enforceable. Accordingly, there is no basis to require Defendants to answer Plaintiffs' claims in Delaware. The motion to dismiss, therefore, must be granted. For reasons explained below, however, the dismissal will be without prejudice.

         I. FACTUAL BACKGROUND

         I draw the facts from the allegations in the Complaint, documents incorporated by reference or integral to the Complaint and additional materials submitted by the parties in connection with Defendants' motion to dismiss.[3] For purposes of this motion to dismiss, I accept as true the Complaint's well-pled factual allegations and draw all reasonable inferences in Plaintiffs' favor.[4]

         A. The Parties and Relevant Non-Parties

         Plaintiff, Germaninvestments Aktiengesellschaft (AG) ("Germaninvestments"), is a Swiss holding company formed to manage assets for the Herrling family.[5] Its equity is divided among the family members as follows: Richard Herrling holds 34%; Anja Herrling holds 17%; Philip Herrling holds 24.5%; and Johannes Herrling holds 24.5%.[6] Plaintiff, Richard Herrling ("Herrling"), is a German citizen who resides in Switzerland.[7]

         Defendant, Allomet Corporation ("Allomet"), is a Delaware corporation founded in 1998. It manufactures high-performance, tough-coated metal powders using a proprietary technology for coating industrial products.[8]

         Non-party, Fobio Enterprises, Ltd. ("Fobio"), a Hong Kong limited company, is the majority owner of Allomet, [9] initially owning 52, 249 of its 54, 132 outstanding shares of common stock and all of its 1, 304 shares of preferred stock.[10] In April 2016, Fobio acquired the remaining 1, 883 shares of Allomet's common stock, previously held by the Estate of Richard E. Toth.[11]

         Defendant, Yanchep LLC ("Yanchep"), is a Delaware limited liability company with a single member, Mirta Hereth. Its only assets are the two parcels of real property in North Huntingdon where the Allomet headquarters are situated and a lease, dated November 8, 2011, between Yanchep and Allomet.[12]

         Non-party, AHMR GmbH ("AHMR"), an Austrian limited company, was formed solely for the purpose of holding all of the equity interest in Allomet and Yanchep, Allomet's intellectual property and Yanchep's assets.[13] Non-party, Dr. Hannjörg Hereth ("Hereth"), a citizen of Switzerland, owns 100% of Fobio through various entities.[14] Hereth is also a director and the Chairman of the Board of Directors of Allomet.[15]

         B. Parties Negotiate A Potential Joint Venture To Keep Allomet Afloat

         Allomet struggled with declining performance as early as 2002. By the end of 2017, Allomet amassed net operating loss carryforwards of $25 million and $42.5 million in debt owed to its controller, Fobio.[16]

         In mid-2016, Tanja Hausfelder, an insurance professional who apparently knew or worked with both Herrling and Hereth, advised Herrling that Hereth was looking for a joint venture partner to join Allomet.[17] On October 5 and 6, 2016, Herrling and Hereth met in Switzerland, where Hereth confirmed he was interested in forming a joint venture for the purpose of raising capital for the struggling Allomet.[18]

         After their meeting in Switzerland, Herrling and Hereth discussed a general structure for their joint venture.[19] Specifically, the plan contemplated the formation of an Austrian holding company that would own (i) Allomet's intellectual property rights, (ii) the outstanding stock and membership interests in Allomet and Yanchep and (iii) all of Yanchep's buildings, land and rights.[20] Because Fobio had been the principal source of financing for Allomet since its founding, [21] the parties discussed whether it would be appropriate to assign or otherwise transfer Fobio's claims against Allomet to the joint venture.[22]

         As the parties negotiated the joint venture, it was clear that Allomet required additional funding to continue its operations. Accordingly, beginning January 31, 2017, Herrling extended a series of loans to Allomet to keep it afloat.[23] Herrling initially loaned $500, 000.[24] On March 3, 2017, Herrling loaned $150, 000.[25] And, on May 10, 2017, Herrling loaned another $200, 000.[26]

         C. The Parties Enter the R&L Agreement

         On May 29, 2017, a draft of what was to become the R&L Agreement was circulated amongst the various parties.[27] The express purpose of the R&L Agreement was "to regulate the funding of the Allomet Corporation until the establishment, under Austrian law, of a holding company in which [Herrling] and [Hereth] shall acquire a 50% stake and which shall later hold all of the shares (100%) of the Allomet Corporation."[28] The R&L Agreement memorialized the terms of the loans Herrling had extended to Allomet, the potential framework for continued discussions concerning a potential Austrian-based joint venture and the funding each party was expected to contribute to the joint venture.[29] It also detailed a loan schedule reflecting that Herrling would make loans to the entity in four tranches totaling $950, 000.[30] The loans would accrue interest at 5.5% interest per annum without pre-payment penalties or amortization.[31]

         Especially relevant here, the R&L Agreement states: "The agreement is subject to Austrian law. The place of jurisdiction is Vienna."[32]

         D. Formation of AHMR

         The parties formed the Austrian holding company contemplated by the R&L Agreement, AHMR, on July 3, 2017.[33] AHMR was registered with the commercial register of the commercial court in Vienna, Austria the following month.[34] Its initial stockholders were Hereth, Herrling, Hausfelder and Hereth's son-in-law, Valentin Biedermann.[35] On December 14, 2017, Herrling allegedly transferred his share of AHMR to Germaninvestments, the holding company for his family's investment assets.[36]

         AHMR is a "manager managed" entity with two groups of managing directors: Group A comprises Hereth, Biedermann and his wife, Mirta Hereth by proxy; Group B comprises Herrling, Hausfelder by proxy and Anja Herrling by proxy.[37] Both groups' managing directors must agree on AHMR's major decisions as stated in AHMR's governance documents and as provided by Austrian law.[38]

         E. Herrling "Walks" From the Negotiations

         From May 2017 through January 2018, while the parties continued to negotiate their joint venture, Herrling visited Allomet numerous times and received detailed information on Allomet's operations and finances.[39] He also extended additional loans to Allomet, either individually or through Germaninvestments, bringing Allomet's total obligation to Herrling to $3, 665, 000.[40] While he "book[ed]" these loans under "the terms of the [R&L] Agreement, "[41] the R&L Agreement only references $950, 000 in loans.[42] It is alleged that the parties discussed, but never finalized, a loan agreement among Herrling and Allomet to address the loans outside the R&L Agreement.[43]

         On January 29, 2018, the day before the R&L Agreement was to expire, AHMR's shareholders entered into a Supplementary Agreement, the purpose of which was to allow time for the parties to secure additional tax advice regarding the structure of the joint venture.[44] In this regard, the parties engaged BDO USA in Vienna to assist in creating a series of non-binding documents that outlined the transaction's structure.[45]

         Under the Supplementary Agreement, the parties were to "regard the already signed [Transaction Agreements] as definitive" and agreed they would "then be Executed/Implemented as such."[46] The Supplementary Agreement provided, however, that the documents referenced there are not legally binding and did not execute the joint venture. Specifically, the Supplementary Agreement stated the documents referenced had not yet "been legally signed," had not yet "become legally binding," and did not represent the "full legal implementation" of the joint venture.[47]It also deferred the parties' funding obligations and recognized that the potential joint venture still had to be negotiated.[48] By its terms, the Supplementary Agreement expired in March 2018.[49]

         By mid-April 2018, the parties had reached an impasse.[50] Herrling had not received the "transparency" he expected and believed "important business decisions were negotiated without [him.]" [51] On May 30, 2018, the parties stopped all joint venture discussions.[52] With hope for an agreement now lost, Herrling offered to "walk away from the [R&L] Agreement with Hereth, provided, of course, that Allomet return all funds to . . . Herrling and Germaninvestments, plus costs."[53]For his part, Hereth made clear that neither Herrling nor Germaninvestments possessed any interest in Allomet.[54] Herrling then offered to return only "a fraction" of the money Herrling had either loaned to (Hereth's view) or invested in (Herrling's view) Allomet.[55]

         F. Procedural Posture

         Plaintiffs filed their Verified Complaint on September 7, 2018.[56] Count I seeks to enforce the R&L Agreement and related agreements invoking 8 Del. C. Section 168 to require Allomet to "reissue" its stock certificates in AHMR's name as contemplated by the contract.[57] Count II alleges breach of the R&L Agreement and related agreements and seeks specific performance of those agreements' purported requirements that Allomet transfer its equity to AHMR, transfer its IP rights to AHMR and transfer Yanchep's membership interests and real property to AHMR.[58] Count III alleges unjust enrichment as a result of Defendants' failure to transfer all of Allomet's outstanding stock, Allomet's intellectual property and Yanchep's membership units and real property to AHMR as agreed to in the R&L Agreement.[59]

         The parties agreed to a status quo order that was entered on October 11, 2018.[60] Defendants filed their Motion to Dismiss and opening brief on December 10, 2018.[61] The thrust of the motion is that the Court should specifically enforce the forum selection clause in the R&L Agreement and dismiss this action so that the parties may litigate these claims in Vienna, Austria as they agreed. Plaintiffs oppose the motion and maintain the clause Defendants invoke is not a forum selection clause and, even if it is, it is either not mandatory or not enforceable with respect to their claim under Section 168(a).

         II. LEGAL ANALYSIS

         "The proper procedural rubric for addressing a motion to dismiss based on a forum selection clause is found under Rule 12(b)(3), improper venue. Although Delaware courts have, in the past, framed a forum selection clause analysis as jurisdictional in some sense, recent cases have all proceeded under Rule 12(b)(3) . . . ."[62] When addressing a motion under Rule 12(b)(3), the court "is not shackled to the plaintiff's complaint" and is "permitted to consider extrinsic evidence from the outset."[63]

         A. Construing the Forum Selection Clause

         In cases involving a contractual agreement to litigate in a particular forum, "the well-settled rule is that the court should give effect to the terms of private agreements to resolve disputes in [that] forum out of respect for the parties' contractual designation."[64] With this in mind, "[t]he courts of Delaware [will] defer to forum selection clauses and grant Rule 12(b)(3) motions to dismiss where the parties use express language clearly indicating that the forum selection clause excludes all other courts before which those parties could otherwise properly bring an action."[65] In other words, "[f]or a forum selection clause to be strictly binding [under Delaware law]," the "contractual language [must be] crystalline" in stating the parties' intent to litigate only in the designated forum.[66]

         As noted, the R&L Agreement, at Section 9, states "[t]he agreement is subject to Austrian law. The place of jurisdiction is Vienna."[67] The threshold question is whether this contractual language should be construed as a mandatory, exclusive forum selection clause or something else. To answer that question, the Court must first determine what law to apply. Here, the choice of law boils down to a choice between Delaware or Austrian law.

         1. Austrian Law Applies

         "When a contract contains a forum selection clause, this court will interpret the forum selection clause in accordance with the law chosen to govern the contract."[68] The parties agree Austrian law applies to the R&L Agreement.[69] "Delaware courts will generally honor a contractually-designated choice of law provision so long as the jurisdiction selected bears some material relationship to the transaction."[70] Here, this action is undeniably about Plaintiffs' claims to enforce the Austrian law-governed R&L Agreement.[71] The R&L Agreement contemplates the formation of an Austrian joint venture. There can be no doubt, therefore, that Austria "bears [a] material relationship to the transaction."[72] Thus, Austrian law will govern the construction of Section 9 of the R&L Agreement.[73]

         Under Austrian law, choice of forum and consent to jurisdiction provisions in contracts are governed by Article 25 of the European Regulation on Jurisdiction and Recognition and Enforcement of Judgments in Civil and Commercial Matters (the so-called "Brussels Regulation").[74] Since Austria subscribes to the Brussels Regulation, that law will apply in any civil and commercial dispute invoking a Member State's jurisdiction.[75] Article 25 of the Brussels Regulation provides, in relevant part:

[i]f the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise.[76]

         "The agreement conferring jurisdiction" is valid and enforceable if it is "in writing or evidenced in writing[.]"[77]

         2. The Forum Selection Clause Is Mandatory and Enforceable

         Forum selection clauses may be permissive or mandatory.[78] As understood in most United States jurisdictions, "[p]ermissive forum selection clauses, often described as 'consent to jurisdiction' clauses, authorize jurisdiction and venue in a designated forum, but do not prohibit litigation elsewhere."[79] In contrast, "[m]andatory forum selection clauses contain clear language that litigation will proceed exclusively in the designated forum."[80]

         As stated, under Delaware law, if the forum selection provision does not state that it is exclusive in crystalline terms, our courts will construe the provision as permissive.[81] The Brussels Regulation, however, takes the opposite approach. Under Article 25, jurisdiction vested in a member state "shall be exclusive unless the parties have agreed otherwise."[82] This means that when parties designate a single "jurisdiction" as the "place" where they will resolve their disputes, that contractual designation will be enforced as a mandatory forum selection clause.[83]

         The Brussels Regulation contains a series of prefatory "Whereas clauses." Plaintiffs seize upon two of these clauses to argue that Article 25 does not actually mean what it says. Specifically, Plaintiffs argue that Whereas Clause 6 demonstrates "the Brussels Regulation itself does not aim to be applicable outside the EU."[84]Plaintiffs further argue that Whereas Clause 13 requires a "connection to the territory of an EU Member State."[85] Merging these clauses, Plaintiffs maintain a forum selection provision is not mandatory under Article 25 "in cases where only one of the parties (the plaintiff) is domiciled in a Member State while the defendant is not."[86] Thus, according to Plaintiffs, "the Austrian Supreme Court has denied applicability of the Brussels Regulation even though one of the parties to the proceedings was domiciled in a Member State."[87]

         Not only are the Whereas Clauses within the Brussels Regulation likely not binding, [88] Article 25 makes clear that it applies "regardless of [the parties'] domicile."[89] It is not surprising, then, that since the adoption of the revised Brussels Regulation in 2015, the Austrian Supreme Court has applied Article 25 when enforcing a contractual forum clause regardless of the domicile of the litigants.[90] Contrary to Plaintiffs' argument, under Article 25's express terms, its reach is not limited to parties located within a Member State.[91]

         Plaintiffs next invoke Article 8 and argue that this provision of the Brussels Regulation "provides that defendants can be sued where they are domiciled."[92]Of course, Plaintiffs ignore that Article 8 applies only to "person[s] domiciled in a Member State[;]" and neither Allomet nor Yanchep are domiciled in a Member State.[93] Moreover, to the extent Article 8 and Article 25 were at odds (they are not), Article 31(2) makes clear that Article 25 controls in cases of contractual designations of "jurisdiction" by providing, "[w]ithout prejudice to Article 26, [94] where a court of a Member State on which an agreement . . . confers exclusive jurisdiction is seised, any court of another Member State shall stay the proceedings until such time as the court seised on the basis of the agreement declares that it has no jurisdiction under the agreement."[95] Thus, the determination of whether Section 9 confers exclusive jurisdiction upon the courts of Vienna, Austria must be left to the courts of Vienna, Austria.[96]

         Finally, I reject Plaintiffs' argument that denying them a Delaware forum to litigate this dispute would somehow violate positive law or Delaware's public policy. As noted, Plaintiffs have invoked Section 168(a) as the justification for their request for "an order requiring Allomet to issue new uncertified shares or a new certificate of stock in the name of AHMR."[97] They argue that only a Delaware court should interpret and enforce this provision of the DGCL.[98] Even if that were true, Section 168(a) does not fit here. First, Section 168 provides for the replacement of a lost, stolen, or destroyed stock certificate for the beneficial owner of the stock. It is not and never was intended to address disputes regarding stock ownership, the resolution of which would require the issuance of new stock, not replacement stock.[99] But that is precisely what Plaintiffs seek here. No stock has been lost, stolen or destroyed. Defendants have simply elected not to issue stock to AHMR because they maintain they are not obliged to do so. Section 168(a), by its terms, has no role to play in that dispute. Second, the aspect of the parties' dispute where Plaintiffs seek to invoke Section 168(a) involves a disagreement regarding the ownership and transfer of shares under an agreement (i.e., the dispute among AHMR and Fobio under either the R&L Agreement or the SPA contemplated by the R&L Agreement). That is a dispute grounded in contract, not the DGCL.[100]

         Plaintiffs' other attempt to avoid Section 9 by invoking the DGCL fares no better. Relying on 8 Del. C. Section 115, Plaintiffs incorrectly contend that the R&L Agreement's forum selection clause cannot apply to their Section 168 claim because "the mandatory provisions of the DGCL, like [S]ection 168, control and this Court cannot be divested of jurisdiction."[101] Section 115 places limitations on the scope of forum selection provisions that Delaware corporations may place in their governing documents; it does not reach other contracts between the corporation's constituents.[102] Stockholders can expressly waive Delaware venue in a ...


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