In Ryan v. Gifford, C.A. No. 2213-CC (Del. Ch. Nov. 21, 2007), the Delaware Chancery Court ruled that it could not exercise personal jurisdiction over certain nonresident officers of a Delaware corporation pursuant to 10 Del. C. § 3114(b). That statute authorizes the exercise of jurisdiction in Delaware over a nonresident officer of a Delaware corporation if the cause of action arises out of the allegedly wrongful conduct of that officer accrued after January 1, 2004 (Section 3114(b)’s effective date) and if the officer’s conduct was in his official capacity. The decision is noteworthy because of the court’s fairly narrow reading of Section 3114(b). Ryan stands for the proposition that passively receiving, holding and allowing to vest allegedly backdated stock options does not constitute a continuing wrong that might satisfy the post-January 1, 2004 conduct requirement of Section 3114(b).
In this shareholder derivative action, plaintiffs alleged that current and former directors and officers of Maxim Integrated Products, Inc. breached their fiduciary duties by granting backdated options to the former chief executive officer and chairman of the board, John F. Gifford. Plaintiffs contended that defendants were subject to the jurisdiction of the court under Section 3114(b) “because they received and held allegedly backdated options, allowed them to vest, and (in some cases) exercised these options after January 1, 2004, the operative date of § 3114(b), and because they were able to do so only by virtue of being officers of Maxim.”
Defendants argued that they were not subject to the jurisdiction of the court under Section 3114(b) because only active misconduct in an official capacity commencing after January 1, 2004 triggered application of the statute. Furthermore, defendants asserted that “ownership or exercise of stock options alone, as an independent basis of personal jurisdiction, is constitutionally infirm because ownership or exercise constitute[d] neither sufficient minimum contacts with Delaware nor reasonable notice of susceptibility to suit in Delaware.” Thus, defendants asserted that Section 3114(b) did not provide a sufficient basis for the court’s exercise of personal jurisdiction over them.
The court granted four of the seven defendants’ motions to dismiss because plaintiffs had not alleged that these particular defendants engaged in any post-January 1, 2004 conduct that rose above the mere passive holding of allegedly backdated options. With respect to three of the defendants (Frederick G. Beck, Richard C. Hood and Carl W. Jasper), plaintiffs had alleged more than just mere passive conduct because the complaint alleged that these defendants had exercised allegedly backdated options and that these exercises occurred after January 1, 2004. Plaintiffs had argued that these defendants were able to hold options, allow them to vest and exercise the options only because they were officers of Maxim and that this conduct alone constituted acts performed in their official capacities.
The court held that “the exercise of allegedly backdated options without any additional allegation of knowledge that the options were wrongfully granted is not a breach of fiduciary duty.” The court, therefore, concluded that defendants Beck and Hood did not act in their official capacities. Plaintiffs had not averred that Beck or Hood were even aware that the exercised options were backdated such that they acted in their official capacities by exercising their stock options. Therefore, Section 3114(b) did not provide a sufficient basis for the court’s exercise of personal jurisdiction over Beck or Hood.
The court denied defendant Jasper’s motion to dismiss for lack of personal jurisdiction because from all of plaintiff’s allegations, it was reasonable to infer that Jasper not only knew of the backdating, but also concealed his knowledge in order to escape detection. This, according to the court, was a breach of Jasper’s fiduciary duties. Because Jasper had acted in his official capacity in doing so, Section 3114(b) did provide a sufficient basis for the court’s exercise of personal jurisdiction over him. Finally, having determined that Section 3114(b) authorized jurisdiction over Jasper, the court held that Jasper did have minimum contacts with Delaware such that its exercise of jurisdiction satisfied due process. As chief financial officer of a Delaware corporation, the court reasoned, Jasper availed himself of Delaware law such that he should have reasonably anticipated being haled into Delaware’s courts.
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