Sorenson Input Foundation v. Continental Stock Transfer & Trust Company

• Court: Court of Chancery of Delaware
• Decided: November 17, 2022
• Docket: CA No. 2021-0413-SG
• Status: Published

Opinion

COURT OF CHANCERY OF THE SAM GLASSCOCK III VICE CHANCELLOR STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE 34 THE CIRCLE GEORGETOWN, DELAWARE 19947

Date Submitted: August 23, 2022 Date Decided: November 17, 2022

Eric D. Selden, Esquire P. Clarkson Collins, Jr., Esquire Anthony M. Calvano, Esquire K. Tyler O’Connell, Esquire Ross Aronstam & Moritz LLP Samuel E. Bashman, Esquire 1313 North Market Street, Suite 1001 Morris James LLP Wilmington, Delaware 19801 500 Delaware Avenue, Suite 1500 Wilmington, Delaware 19801

RE: Sorenson Impact Foundation v. Continental Stock Transfer & Trust Company, C.A. No. 2021-0413-SG

Dear Counsel:

This matter involves the diversion of merger consideration by third-party

hacker/fraudsters. Those parties are, presumably, beyond the reach of justice, at

least in this mortal plane. The parties to the merger transaction, therefore, are left to

contest who among them must bear the loss.

In the merger, Defendant Tassel Parent Inc. acquired Defendant Graduation

Alliance, Inc. (together, the “Company Defendants”). The Plaintiff, Sorenson

Impact Foundation, is a former stockholder of Graduation Alliance, Inc., and is the

entity whose consideration was purloined. The details of the transaction are

adequately, I think, laid out in a prior Memorandum Opinion in this matter (“Sorenson I”), 1 where I dismissed then-Defendant Continental Stock Transfer &

Trust (“CST”) for lack of personal jurisdiction. 2 The Plaintiff seeks to recover under

theories of breach of contract and unjust enrichment. Pending before me is the

Company Defendants’ motion to dismiss both counts for failure to join the transfer

agent contractually bound to facilitate the transaction, CST, as well as the legal

advisor for the transaction, Holland & Knight (“H&K”). Both, per Company

Defendants, are necessary and indispensable parties under Rule 19. Generally, it

appears that CST and/or H&K were the entities directly fooled by the third-party

fraudsters.

The Company Defendants are thus correct that this case is a quadripartite

dispute shoehorned into a bilateral contract action. As I suggested at oral argument,3

the most elegant solution to this dispute would be for the Company Defendants to

waive the forum selection clause (“FSC”) in the merger agreement, which provides

for Delaware jurisdiction.4 The Plaintiff is bound by both the FSC and my ruling

that this Court lacks personal jurisdiction over CST; CST does business in New York

and its duties in this matter stem from a contract with a New York forum selection

1 Sorenson Impact Found. v. Cont'l Stock Transfer & Tr. Co., 2022 WL 986322, at **2-6 (Del. Ch. Apr. 1, 2022). 2 In the interests of judicial economy, this opinion incorporates by reference the facts of Sorenson I. 3 Tr. of 8-23-2022 Oral Arg. on Defs.’ Mot. to Dismiss at 14:4-15, Dkt. No. 62. 4 Verified Am. Compl., Ex. A. § 13.8, Dkt. No. 6. 2 clause.5 Consequently, the Plaintiff is unable to get all possible defendants into one

forum. By waiving the FSC, the Company Defendants would mitigate both parties’

fears of prejudice and costly multi-forum litigation. 6 However, that decision

ultimately rests with the Company Defendants, and they stand on their contractual

right to this forum.

This Court may dismiss a claim under Rule 12(b)(7) for failure to join a

necessary and indispensable party in accordance with Rule 19.7 This determination

requires a two-part inquiry. Under Rule 19(a), the Court determines whether an

absent party is necessary.8 Necessary parties should be joined if feasible.9 When an

absent party is necessary but joinder is not feasible, the Court weighs the four factors

of 19(b) to determine that party’s indispensability.10

Rule 19(a) requires the joinder of parties necessary to a just adjudication.11

Under this rule, the Court examines whether an absent party has an interest in the

action that would be impaired or impeded in its absence.12 The Court also looks to

whether a party’s absence would subject it to a substantial risk of multiple or

5 Id., Ex. B. § 4.11. 6 In re Coinmint, LLC, 261 A.3d 867, 893 (Del. Ch. 2021) (“It is well settled in Delaware that contractual requirements or conditions may be waived.”) (citing AeroGlobal Cap. Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 444 (Del. 2005)). 7 Ct. Ch. R. 12(b)(7). 8 NuVasive, Inc. v. Lanx, Inc., 2012 WL 2866004, at *1 (Del. Ch. July 11, 2012). 9 Id. at *2. 10 Id. (citing Ct. Ch. R. 19(b)). 11 Ct. Ch. R. 19(a). 12 Id. 3 inconsistent obligations related to the action.13 If a party is necessary, it must be

joined if feasible. 14 For the purposes of this analysis, I assume that both CST and

H&K are necessary parties under 19(a). CST’s joinder is not feasible, for the reasons

explained in Sorenson I. 15

If joinder is not feasible, the Court then determines if the necessary party is

also indispensable under 19(b) by weighing the following factors: (1) to what extent

a judgment might be prejudicial to the absent person or the parties; (2) the extent to

which provisions in the judgment can lessen or avoid prejudice; (3) whether the

person's absence will render the judgment inadequate; and (4), whether the plaintiff

will have an adequate remedy if the action is dismissed for non-joinder. 16 If the

absent party is both necessary and indispensable, the Court will dismiss the action.17

I hold that CST is not indispensable. Starting from the first factor, the

Company Defendants contend that they will be prejudiced by CST’s absence.18 The

alleged prejudice includes costly third-party discovery and the risk of relitigating the

13 S’holder Representative Servs. LLC v. RSI Holdco, LLC, 2019 WL 2207452, at *4 (Del. Ch. May 22, 2019); see also NAMA Holdings, LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 436 (citing Ct. Ch. R. 19(a)). 14 Ct. Ch. R. 19(a). 15 Sorenson, 2022 WL 986322, at **13-22. 16 Ct. Ch. R. 19(b); see Makitka v. New Castle Cty. Council, 2011 WL 6880676, at *4 (Del. Ch. Dec. 23, 2011) (reasoning the 19(b) factors are interdependent and must be considered in relation to each other and the facts of the case). 17 Makitka at *4. (“[the Court shall] determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable.”). 18 Defs.’ Opening Br. in Supp. of Mot. to Dismiss at 16-17, Dkt. No. 14. 4 same facts and circumstances in a contribution action, if the Company Defendants

lose here. 19 These arguments fall short when viewed in light of the causes of action

alleged in the amended complaint, which narrowly concern performance under the

merger agreement.20 CST is not a signatory to the merger agreement.21 There may

be a need for third-party discovery, but third-party discovery is common and likely

insufficiently prejudicial to invoke dismissal under the Rule.

Regarding the second factor, this Court has broad discretion to fashion a

suitable remedy.22 At this stage, it is reasonable to infer that I could craft relief that

mitigates the purported prejudice discussed above.

Under the third 19(b) factor, if the Plaintiff prevails at trial on its contract

claims, CST’s absence will not impact the judgment’s adequacy. The Company

Defendants would be free to bring a suit for contribution against CST or H&K.

CST’s absence would also have no impact on a judgment favorable to the Company

Defendants. Thus, while it would be efficient to have all parties present, judgments

in their absence would not be inadequate on these narrow contract claims.

19(b)’s fourth factor, which addresses a plaintiff’s prejudice should a motion

to dismiss be granted, presents the largest prejudicial risk. If the Plaintiff’s claims

19 Id. 20 See Verified Am. Compl., Dkt. No. 6. 21 See Id., Ex. A. 22 See Reserves Dev. LLC v. Severn Sav. Bank, FSB, 961 A.2d 521, 525 (Del. 2008); see also Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 176 (Del. 2002). 5 were dismissed, it would be constructively barred from litigating its breach of

contract claim against the Company Defendants. This is because the FSC restricts

any causes of action arising from the merger agreement to Delaware courts.23

Balancing any potential prejudice to the Company Defendants against the clear

prejudice to the Plaintiff, I find that dismissal would be inequitable and that this

narrow action must proceed.

With respect to H&K, to the extent that it is a necessary party, there has been

no showing that it may not be joined here.

For the foregoing reasons, I deny the Defendants’ 12(b)(7) Motion to Dismiss.

To the extent the foregoing requires an Order to take effect, IT IS SO

ORDERED.

Sincerely,

/s/ Sam Glasscock III Vice Chancellor

23 Verified Am. Compl., Ex. A. § 13.8, Dkt. No. 6. 6