Sternberg v. O'NEIL

The appellant, Richard Sternberg (“Sternberg”), brought a double derivative suit 1 against GenCorp Inc. (“GenCorp”), its wholly owned subsidiary, RKO General, Inc. (“RKO General”), and certain past and present officers and directors of both corporations. GenCorp is an Ohio corporation qualified to do business in Delaware under 8 DelC. § 371. RKO General is a Delaware corporation. The Court of Chancery found “that the complaint does not allege a constitutionally permissible basis for the assertion of personal jurisdiction over either Gencorp or those individual defendants who are not directors of RKO General.” Sternberg v. O’Neil, Del. Ch., 532 A.2d 993, 994 (1987). The Court of Chancery also found that GenCorp was an indispensable party. Id. It, therefore, held that “the complaint must be dismissed as to all defendants.” Id.

On appeal, we conclude on two bases, that the Court of Chancery erred, as a matter of law, when it determined that it lacked personal jurisdiction over GenCorp. First, when GenCorp registered to do business in Delaware and appointed an agent in Delaware to receive service of process, it consented to the general jurisdiction of Delaware courts. Second, we hold alternatively, that GenCorp’s ownership of a Delaware corporation, whose alleged mismanagement is the subject of the double derivative suit, constitutes a “minimum contact” with Delaware which satisfies due process and enables Delaware courts to exercise specific personal jurisdiction over GenCorp in this matter. Therefore, we reverse the *1108 Court of Chancery’s decision to dismiss the complaint as to GenCorp. However, we affirm the dismissal of the complaint as to the individual nonresident defendants, who are not directors of RKO General.

FACTS

GenCorp, an Ohio corporation, has its principal place of business in Akron, Ohio, and was known as The General Tire & Rubber Company until 1984 when it changed its name. GenCorp is qualified to conduct business in Delaware as a foreign corporation. RKO General, a Delaware corporation, has its principal place of business in New York, New York. All of RKO General’s common stock has been owned by GenCorp since it was acquired in 1955. Sternberg is a shareholder of GenCorp.

Sternberg’s complaint in the Court of Chancery alleged, inter alia, that the directors and officers of RKO General and GenCorp breached their fiduciary duties to the GenCorp shareholders when they made numerous false and misleading statements and omissions to the Federal Communications Commission (“FCC”) about an investigation of GenCorp by the Securities and Exchange Commission (“SEC”). 2 During broadcast license renewal proceedings before the FCC, RKO General apparently first failed to disclose the SEC investigation and then denied reports about it in a competitor’s FCC filing. RKO Gen., Inc. v. Federal Communications Comm’n, 670 F.2d 215, 228 (D.C.Cir.1981), cert. denied, 456 U.S. 927, 102 S.Ct. 1974, 72 L.Ed.2d 442 (1982). As a result of this omission, the FCC denied the application for the renewal of the license for WNAC-TV, a television station in Boston, Massachusetts, that was owned by RKO General. Id. at 238. The denial of the application to renew the license for WNAC-TV was affirmed on appeal. Id.

In 1980, following the FCC’s denial of RKO General’s renewal application for WNAC-TV, several derivative suits were filed on behalf of GenCorp and RKO General. These derivative suits were brought to recover damages for the losses caused by the nonrenewal of the WNAC-TV license. These suits were subsequently joined with previously pending derivative lawsuits against GenCorp, its officers and directors. All of the cases were settled with the approval of the United States District Court for the Northern District of Ohio. Two shareholders objected to the settlement and appealed. The United States Court of Appeals for the Sixth Circuit upheld the settlement. In re General Tire & Rubber Co. Sec. Litig., 726 F.2d 1075, 1087 (6th Cir.), cert. denied, 469 U.S. 858, 105 S.Ct. 187, 83 L.Ed.2d 120 (1984). However, the Sixth Circuit noted that it did not “understand the settlement to bar all future shareholders’ claims arising out of the very serious additional F.C.C. and I.R.S. proceedings against General Tire.” Id. at 1085 n. 7.

In his complaint filed with the Court of Chancery in this case, Sternberg seeks equitable relief and damages, in excess of $298 million, “which have accrued since the settlement of previous derivative suits brought on behalf of GenCorp and RKO General.” According to Sternberg’s complaint, the FCC currently has before it a consolidated renewal proceeding which involves fourteen of the fifteen television and radio stations still operated by RKO General. Sternberg alleges that RKO General’s lack of candor in the WNAC-TV proceeding creates a strong probability that these licenses will not be renewed. Sternberg further contends that this past lack of candor “creates a strong probability of preventing RKO General from selling its stations for their full value or at all, since it is the policy of the FCC to prohibit transfer of a license until a transferor like RKO General, whose license qualifications are at issue, has first been found to be qualified to hold the license.” Sternberg’s double derivative claim is premised upon his allegation that the individual defendants, officers and directors of GenCorp and RKO General, failed to manage the affairs of *1109 GenCorp and RKO General in a “fair, careful and prudent manner” and that such failure constitutes a breach of their fiduciary duties.

GENERAL JURISDICTION AND CONSENT

The first question that we must address is whether Delaware courts may assert general personal jurisdiction over a foreign corporation 3 upon the basis of that corporation’s qualification to do business in Delaware and its appointment of an agent to receive service of process in Delaware pursuant to a registration statute. If we determine that such registration can constitute consent to the general jurisdiction of the Delaware courts, we must then analyze the constitutional validity of that consent.

Although parties may not waive subject matter jurisdiction, they may waive personal jurisdiction. Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 703, 102 S.Ct. 2099, 2105, 72 L.Ed.2d 492 (1982). Therefore, consent has been recognized as a basis for the exercise of general personal jurisdiction. In fact, “[a] variety of legal arrangements have been taken to represent express or implied consent to the personal jursdiction of the Court.” Id.; Armstrong v. Pomerance, Del.Supr., 423 A.2d 174, 176-79 (1980). 4

Express Statutory Consent

Express consent has been found to be a basis for jurisdiction when a foreign corporation appoints an agent for service of process. 5 See Neirbo Co. v. Bethlehem Shipbuilding Corp., 308 U.S. 165, 170-71, 60 S.Ct. 153, 156, 84 L.Ed. 167 (1939); Pennsylvania Fire Ins. Co. v. Gold Issue Mining & Milling Co., 243 U.S. 93, 95, 37 S.Ct. 344, 344, 61 L.Ed. 610 (1917). In Pennsylvania Fire Ins. Co., the United States Supreme Court ruled that a foreign corporation, which authorizes an agent to receive service of process in compliance with the requirements of a state registration statute, has consented to the exercise of general personal jurisdiction in that state. Id. The unanimous opinion, written by Justice Holmes, held that Missouri could constitutionally exercise general jurisdiction over the defendant foreign corporation, and “not deprive the defendant of due process”, even though its only apparent contact with Missouri was its designation of the Missouri Superintendent of Insurance as its registered agent. Id. 6

Implied Consent

Implied consent has also been found to be a basis for jurisdiction over a foreign corporation. International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). In fact, the Supreme Court’s decision in International Shoe has become a landmark case because it established the modem doctrine of in personam jurisdiction by implied consent for state courts over foreign corporations (and nonresident defendants) when it held that:

due process requires only that in order to subject a defendant to a judgment in personam, if he not be present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.”

Id. at 316, 66 S.Ct. at 158 (emphasis added). As a result of International Shoe, “long arm” statutes have been passed in every state. See Lilly, Jurisdiction over Domes *1110 tic and Alien Defendants, 69 Va.L.Rev. 85, 89 (1983). These statutes are legislative enactments describing those contacts between the forum and the defendant by which the nonresident defendant has implicitly consented to the exercise of personal jurisdiction by the courts of the forum state. Id. 7

Questions Raised by International Shoe

It would appear that the due process holdings of Pennsylvania Fire Ins. Co. (express consent by registration) and International Shoe (implied consent by minimum contact) complement one another and are neither inconsistent nor mutually exclusive. However, many legal scholars are of the view that the “due process” basis for the Pennsylvania Fire Ins. Co. decision (statutory consent in the absence of any other contact) would no longer be viable under the “due process” standards of International Shoe and its progeny (requiring minimum contacts). See e.g., Walker, Foreign Corporation Laws: A Current Account, 47 N.C.L.Rev. 733, 734-38 (1969); Brilmayer, Haverkamp, Logan, Lynch, Neuwirth & O’Brien, A General Look at General Jurisdiction, 66 Tex.L.Rev. 721, 758-59 (1988). The United States Supreme Court has not directly examined its holding in Pennsylvania Fire Ins. Co., since its decision in International Shoe. The state and federal courts that have examined the due process basis for the holding in Pennsylvania Fire Ins. Co. in light of International Shoe áre divided as to whether statutory registration can operate as an express consent to personal jurisdiction in the absence of “minimum contacts.” 8 Thus, according to one scholar “the law regarding out-of-state claims against a foreign corporation is in disarray.” Hill, Choice of Law and Jurisdiction in the Supreme Court, 81 Colum.L.Rev. 960, 982 (1981).

The debate about the continued viability of the holding in Pennsylvania Fire Ins. Co. after International Shoe is now before this Court. Sternberg argues that GenCorp., by qualifying to do business in Delaware as a foreign corporation, and by appointing an agent for service of process, has expressly consented to the general jurisdiction of the Delaware courts. GenCorp argues that, independent of its compliance with the Delaware qualification statute, the extent of its consent, if any, to the jurisdiction of Delaware’s courts, must be exam *1111 ined in light of the International Shoe due process “minimum contact” requirements.

The Court of Chancery based its dismissal of Sternberg’s complaint upon Gen-Corp’s interpretation of International Shoe. Sternberg v. O’Neil, 532 A.2d at 997. The Court of Chancery “noted that personal jurisdiction is an individual right which, like other individual rights, may be waived.” Id. at 996 (citing Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 704-05, 102 S.Ct. 2099, 2105, 72 L.Ed.2d 492 (1982)). However, the Court of Chancery rejected Sternberg’s contention that GenCorp’s qualification as a foreign corporation constituted an express consent to the general jurisdiction of the Delaware courts. The Court of Chancery held that all assertions of state court jurisdiction — including statutory consent — must be evaluated according to the standards enunciated in International Shoe. Sternberg v. O’Neil, 532 A.2d at 995-96. We disagree.

Express Statutory Consent to Jurisdiction and Due Process

We are of the opinion that express consent is a valid basis for the exercise of general jurisdiction in the absence of any other basis for the exercise of jurisdiction, i.e. “minimum contacts”. In particular, we are of the view that after International Shoe, a state still has power to exercise general judicial jurisdiction over a foreign corporation which has expressly consented to the exercise of such jurisdiction. Pennsylvania Fire Ins. Co. v. Gold Issue Mining & Milling Co., 243 U.S. at 95, 37 S.Ct. at 344. See also Restatement (Second) of Conflict of Laws, §§ 43, 44 (1971). We find support for the continued recognition of express consent, through statutory registration, as a basis for general personal jurisdiction over foreign corporations, in several cases that have been decided by the United States Supreme Court after International Shoe.

Not long after its decision in International Shoe, the United States Supreme Court upheld the constitutional validity of an exercise of in personam general jurisdiction with respect to a claim unrelated to the foreign corporation defendant’s forum activity. Perkins v. Benguet Consol. Mining Co., 342 U.S. 437, 72 S.Ct. 413, 96 L.Ed. 485, reh’g denied, 348 U.S. 917, 72 S.Ct. 645, 96 L.Ed. 1332 (1952). 9 The Court of Chancery relied upon a portion of the Perkins decision which stated:

The corporate activities of a foreign corporation which, under state statute, make it necessary for it to secure a license and to designate a statutory agent upon whom process may be served provide a helpful but not a conclusive test.

Sternberg v. O’Neil, 532 A.2d at 996 (quoting Perkins v. Benguet Consol. Mining Co., 342 U.S. at 445, 72 S.Ct. at 418). The context of this quoted language was a search for “minimum contacts” which would support the legal fiction of implied consent to jurisdiction. It was necessary for the Perkins Court to conduct a minimum contact analysis before it could find an implied consent to the general jurisdiction of Ohio because the foreign corporation was not qualified in Ohio and had not appointed an agent for service of process. Nevertheless, Perkins reaffirmed the principle that there would have been no need to search for minimum contacts to support an implied consent to jurisdiction, if express consent had been given:

Today if an authorized representative of a foreign corporation be physically present in the state of the forum and be there engaged in activities appropriate to accepting service and receiving notice on its behalf, we recognize that there is no unfairness in subjecting that corporation to the jurisdiction of the courts of that *1112 state through such service of process upon that representative.

Perkins v. Benguet Consol. Mining Co., 342 U.S. at 444, 72 S.Ct. at 417. 10

The United States Supreme Court continued to acknowledge that the due process considerations are different when state court jurisdiction is based on implied consent and when such jurisdiction is based on express consent in Burger King Corp. v. Rudzewicz, 471 U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985). When jurisdiction is based on implied consent, “[t]he Due Process Clause protects an individual’s liberty interest in not being subject to the binding judgments of a forum with which he has established no meaningful ‘contacts, ties, or relations.’ ” Id. at 471-72, 105 S.Ct. at 2181 (citing International Shoe Co. v. Washington, 326 U.S. at 319, 66 S.Ct. at 159). However, immediately after stating this general proposition in Burger King Corp., the Court reiterated its long-standing position that the personal jurisdiction requirement is a waivable right. Burger King Corp. v. Rudzewicz, 471 U.S. at 472 n. 14, 105 S.Ct. at 2182 n. 14. 11 Therefore, the Court held that “[w]here a forum seeks to assert specific jurisdiction over an out-of-state defendant who has not consented to suit there,” due process is satisfied if the defendant has minimum contacts with the forum. Id. at 472, 105 S.Ct. at 2182 (emphasis added). Thus, in Burger King Corp., as in Perkins, the Supreme Court found that in the absence of express consent, due process requires minimum contacts for a finding of implied consent to a forum’s jurisdiction. Id. Conversely, due process is satisfied by express consent, since express consent constitutes a waiver of all other personal jurisdiction requirements. See id.

Statutory Consent Remains a Valid Basis for Jurisdiction

We also find continuing support for the recognition of statutory consent as a basis for general jurisdiction in the Supreme Court’s very recent decision in Bendix Autolite Corp. v. Midwesco Enterprises, - U.S. -, 108 S.Ct. 2218, 100 L.Ed.2d 896 (1988). The issue in Bendix Autolite Corp., as in Perkins, involved an unregistered foreign corporation and an attempted assertion of jurisdiction over the foreign corporation by the state of Ohio. In Bendix Autolite Corp., the Court appeared to accept the rationale, explicitly stated in the Ohio statute, that the appointment of an agent for service of process would operate as a consent to general jurisdiction in any cause of action, “including those in which it did not have minimum contacts necessary for supporting personal jurisdiction,” without offending the requirements of due process. Id. 108 S.Ct. at 2221. In a preamble to its ultimate holding, the Court stated:

[ Designation of an agent subjects the foreign corporation to the general jurisdiction of the Ohio courts in matters to which Ohio’s tenuous relation would not otherwise extend. Cf. World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 [100 S.Ct. 559, 62 L.Ed.2d 490] (1980). The Ohio statutory scheme thus forces a corporation to choose between exposure to the general jurisdiction of Ohio courts or forfeiture of the limitations defense, remaining subject to suit in Ohio and perpetuity. Requiring a foreign corporation to appoint an agent for service in all cases and to defend itself with reference to all transactions, including those in which it did not have the minimum contacts necessary for support *1113 ing personal jurisdiction, is a significant burden.

Id.

In our opinion, the holdings of the United States Supreme Court which involved foreign corporations, following International Shoe, are entirely consistent with the continued viability of its earlier holding in Pennsylvania Fire Ins. Co.. If a foreign corporation has not expressly consented to a state’s jurisdiction by registration, “minimum contacts” with that state can provide a due process basis for finding an implied consent to the state’s jurisdiction. International Shoe Co. v. Washington, 326 U.S. at 316-18, 66 S.Ct. at 158-59; Burger King Corp. v. Rudzewicz, 471 U.S. at 474-76, 105 S.Ct. at 2183-84; Perkins v. Benguet Consol. Mining Co., 342 U.S. at 446, 72 S.Ct. at 418. If a foreign coloration has expressly consented to the jurisdiction of a state by registration, due process is satisfied and an examination of “minimum contacts” to find implied consent is unnecessary. Pennsylvania Fire Ins. Co. v. Gold Issue Mining & Milling Co., 243 U.S. at 95, 37 S.Ct. at 344; See Bendix Autolite Corp. v. Midwesco Enterprises, 108 S.Ct. at 2221; Burger King Corp. v. Rudzewicz, 471 U.S. at 472, 105 S.Ct. at 2182. Cf. Perkins v. Benguet Consol. Mining Co., 342 U.S. at 445-46, 72 S.Ct. at 418. However, these due process conclusions do not mean that foreign corporations are without any federal constitutional protection from the registration requirements of fifty different states and the District of Columbia.

Statutory Consent to Jurisdiction and the Commerce Clause

In Bendix Autolite Corp., the Court held that “[s]tate interests that are legitimate for equal protection or due process purposes may be insufficient to withstand Commerce Clause scrutiny.” 108 S.Ct. at 2222. 12 Therefore, in the present case, although GenCorp’s consent to the general personal jurisdiction of Delaware courts by qualifying as a foreign corporation satisfies due process, we must also determine if the Delaware statute places an unreasonable burden on interstate commerce. Id.

In Bendix Autolite Corp., the Court was called upon to review an Ohio registration statute which tolled the statute of limitations for any period of time that the foreign corporation was not “present” in the state. To be present in Ohio, a foreign corporation had to appoint an agent for service of process which, by statute, made the corporation subject to the general jurisdiction of the Ohio courts. Id. at 2221 n. 2. Thus, the Ohio tolling statute forced a foreign corporation to choose between exposure to the general jurisdiction of the Ohio courts, if it appointed an agent to receive process, and forfeiture of the statute of limitations defense if it did not make the appointment. Id. at 2221. The Court concluded that the tolling provision placed an undue burden on interstate commerce and thus violated the Commerce Clause. Id. at 2222. Specifically, the Court found that the burdens imposed on interstate commerce by Ohio’s coercive statutory scheme were not outweigned by Ohio’s interest in protecting its citizens from out-of-state corporations. Id.

It is clear after Bendix Autolite Corp. that any statute which causes a foreign corporation to register and thereby consent to the general jurisdiction of a *1114 state, or in the absence of that registration and consent, to be subjected to regulations that are inconsistent with those for domestic corporations, is a burden that violates the federal commerce clause. 13 Id. However, the Delaware statutory scheme contains no coercive penalties or inconsistent regulations for foreign corporations that chose not to register. The penalty for failure to qualify as a foreign corporation in Delaware is set forth in 8 DeLC. § 383(a), which provides:

(a) A foreign corporation which is required to comply with [sections] 371 and 372 of this title and which has done business in this State without authority shall not maintain any action or special proceeding in this State unless and until such corporation has been authorized to do business in this State and has paid to the State all fees, penalties and franchise taxes for the years or parts thereof during which it did business in this State without authority. This prohibition shall not apply to any successor in interest of such foreign corporation.

Thus, a nonqualified foreign corporation which should have complied with Section 371 is simply prevented from maintaining any action in Delaware until it has complied. Farmers Bank v. Sinwellan Corp., Del.Supr., 367 A.2d 180, 182 (1976). More importantly, the same statute provides that the failure of a foreign corporation to obtain authority to do business in Delaware shall not impair the validity of any act or contract and shall not prevent the foreign corporation from defending an action in Delaware. See also Model Heating Co. v. Magarity, Del.Supr., 81 A. 394 (1911). 8 Del.C. § 383(b) states:

(b) The failure of a foreign corporation to obtain authority to do business in this State shall not impair the validity of any contract or act of the foreign corporation or the right of any other party to the contract to maintain any action or special proceeding thereon, and shall not prevent the foreign corporation from defending any action or special proceeding in this State.

The right of an unregistered foreign corporation to defend an action in Delaware and to raise a statute of limitations defense deserves particular attention in view of Bendix Autolite Corp. In Delaware, the statute of limitations continues to run even with respect to foreign corporations that transact business in this State and have not qualified to do business under Section 371. This Court has specifically held that there is no tolling effect on the applicable statute of limitations in any action when the nonresident defendant in the suit is subject to substituted service of process. Hurwitch v. Adams, Del.Supr., 155 A.2d 591, 593 (1959). Substituted service of process on nonqualifying foreign corporations is provided for in 8 Del.C. § 382(a). 14 Therefore, a foreign corporation which transacts business in this State and does not qualify to do business under Section 371, still has an absolute right to raise the statute of limitations as a defense in any action. Cf. Red Men’s Fraternal Accident Ass’n of America v. Merritt, Del.Super., 117 A. 284, 285 (1921). It is clear that, unlike Midwesco in Bendix Autolite Corp., GenCorp faced no Hobson’s choice *1115 in the Delaware statutory scheme which caused it to decide to qualify as a foreign corporation. In fact, GenCorp did not argue that it had been coerced into qualifying as a foreign corporation, even though, following the oral argument in this case, the parties were directed to address the implications for this appeal of the decision of Bendix Autolite Corp..

Scope of GenCorp’s Express Statutory Consent

GenCorp qualified as a foreign corporation in Delaware pursuant to 8 Del.C. § 371(b). 15 Service of process upon a foreign corporation which has qualified under Section 371 is made upon its registered agent. 16 8 Del.C § 376(a). 17 In its final legal memorandum, although GenCorp did not argue that Sections 371 and 376 were coercive, it did contend that those sections “simply provided a method for service of process, giving fair notice to a foreign corporation that an action had been filed against it, but reserving unto that foreign corporation all rights to contest jurisdiction on due process grounds.” GenCorp was also under the impression that Section 371 and 376 had never been construed to operate as consent to the general jurisdiction of Delaware courts.

However, we have found that similar arguments were rejected by the United States District Court for the District of Delaware more than a decade ago, in D’Angelo v. Petroleos Mexicanas, 378 F.Supp. 1034 (D.Del.1974), when it had occasion to address the scope of Section 376:

Section 376 does not in [its] terms limit the amenability of service of a qualified corporation to one which does business in Delaware or with respect to a cause of action arising in Delaware. By the generality of its terms, a foreign corporation qualified in Delaware is subject to service of process in Delaware on any transitory cause of action.

Id. at 1039. The District Court held that by qualifying as a foreign coloration,