On February 26, 2016, the Delaware Supreme Court ruled for the first time on a long-standing Delaware Court of Chancery decision regarding personal jurisdiction over nonresident directors and officers of Delaware corporations (Hazout v. Tsang Mun Ting, (Del. Feb. 26, 2016)). The decision involves the interpretation of Section 3114 of Title 10 of the Delaware Code, which provides that nonresident directors and officers of Delaware corporations implicitly accept personal jurisdiction in Delaware courts in two types of cases:

In a 1980 decision that had gone unchallenged in the Supreme Court, the Chancery Court read out of the statute the first grounds for personal jurisdiction, in which a nonresident director or officer can be made subject to Delaware jurisdiction for civil actions not having to do with a breach of the individual's fiduciary duties (Hana Ranch, Inc. v. Lent, 424 A.2d 28 (Del. Ch. 1980)). In Hazout, the Supreme Court held the Chancery Court's interpretation to be erroneous and ruled that Delaware may exercise personal jurisdiction over a nonresident director or officer even if the claim does not allege a breach of a fiduciary or statutory duty.

The case in Hazout arose out of a negotiation between Silver Dragon Resources, Inc., a Delaware corporation with its principal place of business in Toronto, Canada, and a group of Hong Kong-based investors (including appellee Tsang Mun Hing) regarding a capital infusion to Silver Dragon. The negotiation for Silver Dragon was led by its CEO and director, appellant Marc Hazout, himself a Toronto resident. The investment, documented in five different agreements, contemplated a change of control that would require Hazout and three other directors to resign from the board in return for a loan from the investor group of $3.4 million. On Hazout's assurance that all necessary parties at Silver Dragon would sign the agreements, Tsang wired the first $1 million to Silver Dragon. However, one director ultimately refused to sign the relevant agreement. Though the investors demanded their money back, Hazout did not return the $1 million to Tsang and instead paid $250,000 to the company's creditor and caused the remaining $750,000 to be transferred to Travellers International, Inc., a corporation controlled by Hazout (and Silver Dragon's largest stockholder).

In response, Tsang filed suit in the Superior Court of Delaware against Silver Dragon, Hazout, and Travellers for unjust enrichment, fraud and fraudulent transfer. Because the underlying actions did not involve Tsang's capacity as a current stockholder, Tsang did not make any breach of fiduciary duty claims. Hazout filed a motion to dismiss, claiming no personal jurisdiction in Delaware under Section 3114(b) of Title 10 of the Delaware Code, because Tsang was not suing in his capacity as a stockholder for any breach of fiduciary or other duty owed to either the corporation or to Tsang as a stockholder, which the Hana Ranch decision had required for exercise of personal jurisdiction.

The Superior Court denied Hazout's motion, finding that it had personal jurisdiction under the "internal affairs claim" provision of Section 3114, despite no claim in this case of breach of fiduciary duty. The Superior Court reasoned that it was enough that the acts making up Tsang's claim could also form the foundation for a fiduciary duty claim by a disinterested stockholder. The Supreme Court accepted a certified interlocutory appeal on the personal jurisdiction question.

The Supreme Court conducted a de novo review of both the Superior Court's denial of the motion to dismiss and its interpretation of Section 3114. The Supreme Court affirmed the denial, but reached its conclusion based on the "necessary or proper party" provision.

Appellant Hazout relied in the main on the Chancery Court's 1980 decision in Hana Ranch, Inc. v. Lent, which held that Delaware could only exercise personal jurisdiction over nonresident officers or directors in suits involving a claim of a breach of fiduciary duty. The Chancery Court had read out the "necessary or proper party" provision out of concern that it would be susceptible to overbroad reach. Hazout argued that the court's interpretation was correct, as evidenced by decades of adherence in subsequent Chancery Court decisions. (The Superior Court itself, out of deference to the holding in Hana Ranch, attempted to locate personal jurisdiction under the "internal affairs claim" provision, though its finding required a strained analysis in which Hazout's actions, committed in his capacity as an officer, could form the basis of a future fiduciary claim by a disinterested stockholder).

Tsang challenged the Hana Ranch court's interpretation of Section 3114, claiming that it went beyond its proper judicial role when it excised a plain provision of a statute. Tsang argued that the Chancery Court did not need to read out the "necessary or proper party" provision, because any claim brought under that provision must also be consistent with the principles of due process—specifically, by applying the established minimum-contacts test from International Shoe and its progeny (Int'l Shoe Co. v. Wash., Office of Unemployment Comp. & Placement, 326 U.S. 310 (1945)).

The Supreme Court agreed with Tsang that the "necessary or proper party" provision is valid and an appropriate basis for exercising personal jurisdiction. The Supreme Court reasoned that:

Having upheld the validity of the "necessary or proper party" provision, the Supreme Court addressed whether the state had personal jurisdiction over Hazout under either the "necessary or proper party" or "internal affairs claim" provisions. The Supreme Court concluded that the Superior Court's approach, in an attempt to preserve Hana Ranch, had led to an overbroad reading of the "internal affairs claim" provision. The Supreme Court held that the "internal affairs claim" provision is limited to claims of a breach of a statutory or fiduciary duty owed to the corporation or its stockholders, the scope of which Tsang's claims clearly fell outside.

However, the Supreme Court found that Hazout was "obviously a proper party" to Silver Dragon's actions. Hazout had a tangible interest separate from the corporation's interest, Hazout's acts were committed in his capacity as an officer, and Tsang's claims against the company stemmed from those acts. The requirements under Section 3114(b)'s "necessary or proper party" provision were therefore met.

The Supreme Court also held that the due process requirements had been met and were not a "close question." The court highlighted that Hazout:

The Supreme Court concluded that Hazout should have reasonably foreseen that he could be party to a lawsuit in Delaware in connection with his actions relating to the capital infusion negotiations, and his due process expectations were not violated.

The Delaware Supreme Court's decision in Hazout reinstates the broader scope of claims originally envisioned by Section 3114 that may be brought against nonresident directors and officers of a Delaware corporation. By rejecting Hana Ranch, the court reads back in the "necessary or proper party" provision that the Chancery Court had rejected. This exposes nonresident directors and officers to claims that they were previously protected against, including quasi-contract claims, as long as:

For the "necessary or proper party" provision to apply, it does not matter whether the claim is brought by a stockholder in his capacity as a stockholder or if the claim has no fiduciary duty element, as long as the requirements of due process are met. It also seems apparent that while the minimum-contacts test must be met to prevent overreach by the statute, the test will almost certainly be met if the director or officer otherwise meets the test for being a necessary or proper party to the claim.