Delaware Court of Chancery Rules Controlling Stockholder Gave Implied Consent to Personal Jurisdiction in Delaware on Basis of Controlled Board’s Adoption of a Forum-Selection Bylaw

Key Takeaways

• A controlling entity gave implied consent to personal jurisdiction in Delaware because its representatives on the subsidiary’s board of directors voted to adopt a Delaware forum-selection bylaw.
• Court suggests in dicta that when disinterested directors are chosen exclusively by disinterested stockholders and those directors have control over a self-dealing transaction, approval of the transaction by a majority of the minority stockholders may not be necessary for the business judgment rule to apply.
• Mere approval of a self-dealing transaction constituted sufficient involvement in the transaction by the approving directors for the Court to reject their motion to dismiss a claim for breach of fiduciary duties.

In a decision with potentially far-reaching implications for private equity sponsors and other controlling stockholders, the Delaware Court of Chancery expanded the potential for liability for foreign-based controllers by holding that a controlling stockholder gave its implied consent to personal jurisdiction in Delaware when its designees on a subsidiary board participated in the board’s adoption of a Delaware forum-selection bylaw. The decision in Pilgrim’s Pride also expands directors’ potential exposure to liability by holding that the mere act of voting in favor of a resolution to approve a self-dealing transaction, with no other action taken by such directors, represented enough involvement in the deal for the Court to allow the suit against the directors to continue.

At the same time, the Chancery Court signaled an openness to deferring to directors’ business judgment in deals that would ordinarily be subject to entire fairness review if “enhanced-independence” directors have approved the challenged transaction. The new approach, if established as Delaware law, would allow controlling stockholders and directors to qualify for the presumptions of the business judgment rule in self-dealing transactions even when the transaction is not conditioned on approval by a majority of the minority stockholders.

Background

The case arose from an acquisition engineered by the Batista family of Brazil, whose investment-holding company agreed in May 2017 to pay a fine of US$3.2 billion to the Brazilian government. To raise the necessary funds, JBS S.A., a large Brazilian meat-processing company controlled by the Batista holding company, was alleged to have caused its subsidiary Pilgrim’s Pride Corporation, a Nasdaq-quoted Delaware corporation that sells chicken in the United States, to acquire a separate, wholly owned subsidiary of JBS, Moy Park, Ltd., for a purchase price of US$1.3 billion.

At the time of the acquisition, JBS owned 78% of the common stock of Pilgrim’s Pride and controlled the company through its right to appoint six of the board’s nine members. The remaining three seats on the board were designated for the holders of the company’s remaining equity. A special committee of those three directors (whom the Court considered independent for pleading purposes) was formed to consider, negotiate and decide on the proposed acquisition of Moy Park. Over the course of several weeks, the special committee and JBS negotiated price and timing, eventually coming to terms on price and on an agreement for exclusivity while the deal documents were negotiated. Soon after, JBS breached the exclusivity agreement and discussed a competing bid for Moy Park with a third party, which JBS used to raise Pilgrim’s Pride’s offer. The special committee ultimately agreed to a higher price and approved the acquisition and deal documents.

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