This article was published on May 15, 2019 in the Harvard Law School Forum on Corporate Governance and Financial Regulation blog.
In In re Pilgrim’s Pride Corporation Derivative Litigation, the Delaware Court of Chancery held that a foreign controlling stockholder impliedly consented to personal jurisdiction in Delaware because the controller’s designees (who also had ties to the controller) approved a bylaw selecting the Delaware Court of Chancery as the exclusive forum for fiduciary duty litigation concurrently with their approval of an interested transaction. While the court expressly limited its holding to the facts of the case, the opinion provides helpful guidance to non-Delaware private equity firms as it relates to the control of their Delaware-based portfolio companies.
Prior to the disputed transaction, JBS S.A., an entity organized under Brazilian law, sought to quickly raise cash because of a $3.2 billion fine due to the Brazilian government. To do so, JBS orchestrated the sale of an entity it controlled — Moy Park, Ltd. — to Pilgrim’s Pride Corporation, a Delaware corporation, for $1.3 billion.
JBS controlled Pilgrim’s Pride through its ownership of 78 percent of the company’s common stock and its ability to designate a majority of Pilgrim’s Pride’s board of directors. Four of JBS’s designees served as officers of JBS or its subsidiaries and another designee served as the Pilgrim’s Pride’s CEO and president. The Pilgrim’s Pride minority stockholders appointed the remaining directors. Soon after learning of the opportunity to acquire Moy Park, the Pilgrim’s Pride board formed a special committee consisting of the minority-appointed directors to negotiate and decide whether to have the company proceed with an acquisition of Moy Park. Following months of deliberations, including negotiations with JBS, the special committee approved the acquisition and the definitive transaction agreements. Separately, the board also approved the acquisition for purposes of a contractual requirement in an indenture to which Pilgrim’s Pride was a party. On the same day, the board also adopted a forum selection bylaw selecting the Delaware Court of Chancery as the exclusive forum for fiduciary duty litigation.
Following the board’s approval of the acquisition, the Pilgrim’s Pride minority stockholders filed suit in Delaware, alleging that JBS and its board designees breached their fiduciary duties to the minority stockholders. JBS moved to dismiss the complaint for lack of personal jurisdiction. JBS’s designees moved to dismiss the complaint for failure to state a claim, arguing that they had not been sufficiently involved in the negotiation of the acquisition to face liability.
The Delaware Court of Chancery held that JBS impliedly consented to personal jurisdiction in Delaware when the Pilgrim’s Pride board approved the forum selection bylaw. The court reasoned that JBS “as the controlling stockholder and counterparty in the Acquisition, was the obvious stockholder defendant in any action asserting a claim for breach of fiduciary action,” and that JBS, in addition to designating a majority of the Pilgrim’s Pride board (a majority of whom were executive officers of JBS or its subsidiaries), held a super-majority of Pilgrim’s Pride’s voting power. Therefore, according to the court, personal jurisdiction existed.
The court also held that it was reasonably conceivable that JBS’s designees had facilitated the interested acquisition sufficient to potentially face liability, pointing to the Pilgrim’s Pride board’s approval of the acquisition for purposes of the indenture, as well as two designees who had either participated in substantive discussions over the pricing of the transaction or actually attended the meetings of the special committee to recommend that its members approve the transaction.
Delaware law generally holds that merely owning shares of stock in a corporation — whatever the amount — is insufficient to confer personal jurisdiction over non-Delaware defendants. However, while the court’s analysis makes clear that its holding was limited to the specific facts of the case, Pilgrim’s Pride suggests that non-Delaware private equity firms that have no ties to Delaware other than their equity ownership in a portfolio company may nonetheless be subject to personal jurisdiction based on the adoption of an exclusive forum selection bylaw by a portfolio company’s board that is composed predominantly of the private equity firm’s designees.
Delaware law also generally provides that a director can avoid liability in the context of an interested transaction by completely abstaining from participation in the transaction. However, as was shown in Pilgrim’s Pride, this is not a rule without exception. Although it should be noted that Pilgrim’s Pride was decided on a motion to dismiss and, therefore, the court did not have the benefit of a full trial record, the court’s opinion suggests that merely approving an interested transaction could be enough to expose interested directors to litigation risk in Delaware.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.