In Re Carvana Co. Stockholders Litigation ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CARVANA CO. ) CONSOLIDATED
STOCKHOLDERS LITIGATION ) C.A. No. 2020-0415-KSJM
MEMORANDUM OPINION
Date Submitted: March 14, 2022
Date Decided: August 31, 2022
Christine M. Mackintosh, Rebecca A. Musarra, GRANT & EISENHOFER P.A.,
Wilmington, Delaware; Ned Weinberger, LABATON SUCHAROW LLP, Wilmington,
Delaware; Jason M. Leviton, Joel A. Fleming, Lauren Godles Milgroom, Amanda R.
Crawford, BLOCK & LEVITON LLP, Boston, Massachusetts; Domenico Minerva, John
Vielandi, David MacIsaac, LABATON SUCHAROW LLP, New York, New York;
Counsel for Co-Lead Plaintiffs Anthony Franchi, Construction Industry and Laborers
Joint Pension Trust for Southern Nevada, St. Paul Electrical Construction Pension Plan,
St. Paul Electrical Construction Workers Supplemental Pension Plan (2014 Restatement),
and Retirement Medical Funding Plan for the St. Paul Electrical Workers.
David E. Ross, Adam D. Gold, R. Garrett Rice, ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Brian M. Lutz, GIBSON, DUNN & CRUTCHER LLP, San
Francisco, California; Colin B. Davis, Katie Beaudin, GIBSON, DUNN & CRUTCHER
LLP, Irvine, California; Counsel for Nominal Defendant Carvana Co.
John L. Reed, Ronald N. Brown, III, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP
(US), Wilmington, Delaware; Counsel for Defendants Ernest Garcia III and Ernest
Garcia II.
McCORMICK, C.
The plaintiff, a stockholder of Carvana Co. (“Carvana” or the “Company”), asserts
derivative claims challenging a $600 million sale of common stock to handpicked
participants at a time when the trading price of Carvana’s stock was depressed (the “Direct
Offering”). The Direct Offering was orchestrated by Carvana’s controller, Ernest Garcia
II (“Garcia Senior”) and his son, Ernest Garcia III (“Garcia Junior”). The Garcias selected
investors to participate in the Direct Offering and participated themselves. The public
stockholders were excluded.
In a prior decision, the court denied Garcia Junior’s motion to dismiss for failure to
state a claim and failure to plead demand futility. This decision resolves Garcia Senior’s
motion to dismiss for lack of personal jurisdiction.
As the basis for this court’s exercise of personal jurisdiction over Garcia Senior, the
plaintiff relies on a provision in Carvana’s certificate of incorporation that designates
Delaware courts as the exclusive forum for litigating claims for breach of fiduciary duties
against stockholders (the “Forum Provision”). Garcia Senior caused Carvana to adopt the
Forum Provision by executing a written stockholder consent. The written consent
approved an amendment to the certificate of incorporation to add the Forum Provision. By
approving the amendment adding the Forum Provision, Garcia Senior implicitly consented
to this court’s exercise of jurisdiction over him as to claims described in the Forum
Provision. Accordingly, Garcia Senior’s motion to dismiss for lack of personal jurisdiction
is denied.
I. FACTUAL BACKGROUND
This decision incorporates the Factual Background of the court’s Memorandum
Opinion dated June 30, 2022,1 and includes additional facts relevant to the personal
jurisdiction issues.
The Garcias co-founded Carvana in 2012. They took Carvana public in 2017.
Garcia Junior has served as Carvana’s President, Chief Executive, and Chairman since
Carvana’s formation.
Garcia Senior is permanently barred from membership, employment, or association
with any NYSE member and holds no official position at Carvana. Garcia Senior has
owned a majority of Carvana’s voting stock since its formation. His voting power derives
primarily from his ownership of super-voting Class B shares.
In connection with the initial public offering, Carvana amended and restated its
certificate of incorporation. Carvana’s stockholders executed a written consent approving
and adopting the amended and restated certificate of incorporation.2 The amendments
added Article Twelve containing the Forum Provision. The text of the Forum Provision
appears below in the Legal Analysis.
The amended and restated certificate of incorporation specifically names the
Garcias and provides them with benefits that other stockholders do not enjoy. For example,
1
C.A. No. 2020-0415-KSJM, Docket (“Dkt.”) 92.
2
See Dkt. 78, Co-lead Plaintiffs’ Omnibus Answering Brief in Opposition to Defendants’
Motion to Dismiss (“Pl.’s Answering Br.”), Ex. B (Amended and Restated Certificate of
Incorporation of Carvana Co.).
2
it provides that the Class B shares will be entitled to 10 votes only so long as the Garcias
hold 25% of the Class A common stock.3 It also provides the Garcias with special rights
concerning competition and corporate opportunities.4
Because Garcia Senior held a majority of the Company’s voting power at the time,
his written consent was necessary for the Company to adopt the amended and restated
certificate of incorporation, including the Forum Provision.
In connection with the initial public offering, the Garcias also executed an exchange
agreement and an LLC agreement. Both documents contain Delaware-exclusive forum
provisions.
II. LEGAL ANALYSIS
“When a defendant moves to dismiss a complaint pursuant to Court of Chancery
Rule 12(b)(2), the plaintiff bears the burden of showing a basis for the court’s exercise of
jurisdiction over the defendant.”5 “In ruling on a Rule 12(b)(2) motion, the court may
consider pleadings, affidavits, and any discovery of record.”6 If there is no discovery of
record or evidentiary hearing, “plaintiffs need only make a prima facie showing of personal
jurisdiction and ‘the record is construed in the light most favorable to the plaintiff.’” 7
3
Id. at 2.
4
Id. at 7–9.
5
Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007).
6
Id.7
Id. (footnote omitted) (quoting Cornerstone Techs., LLC v. Conrad, 2003 WL 1787959,
at *3 (Del. Ch. Mar. 31, 2003)).
3
Typically, Delaware courts resolve questions of personal jurisdiction using a two-
step analysis, determining first whether service of process was authorized by statute, and
second, whether the defendant had minimum contacts with Delaware sufficient to satisfy
due process concerns.8
The requirement that a court have personal jurisdiction, however, is a waivable
right.9 “A defendant can agree to the court’s exercise of personal jurisdiction.”10 That
agreement can be express or implied.11 When a party agrees to litigate in a forum, the party
is considered to have implicitly consented to personal jurisdiction in that forum.12 When a
party has consented to jurisdiction, the court can forego the typical two-step analysis.13
In this case, the plaintiff argues that Garcia Senior consented to the exercise of
personal jurisdiction by Delaware courts when he caused Carvana to adopt the Forum
Provision.
8
Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. 2012) (quoting Int’l Shoe Co.
v. Washington, 326 U.S. 310, 316 (1945)).
9
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 n.14 (1985).
10
In re Pilgrim’s Pride Corp. Deriv. Litig., 2019 WL 1224556, at *10 (Del. Ch. Mar. 15,
2019) (collecting cases).
11
Id. at *11.
12
Id.; Solae, LLC v. Hershey Canada, Inc., 557 F. Supp. 2d 452, 456 (D. Del. 2008) (citing
Res. Ventures, Inc. v. Res. Mgmt. Int’l, Inc., 42 F. Supp. 2d 423, 431 (D. Del. 1999)).
13
Neurvana Med., LLC v. Balt USA, LLC, 2019 WL 4464268, at *3 (Del. Ch. Sept. 18,
2019); R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations &
Business Organizations, §13.4 (3d ed. 2019) (“Consent to personal jurisdiction is
considered a waiver of any objection on due process grounds and an analysis under
minimum contacts is considered unnecessary.”).
4
The Forum Provision selects this court as the exclusive forum for certain disputes.
It states:
Unless this Corporation consents in writing to the selection of
an alternative forum, the Court of Chancery of the State of
Delaware (or, if the Court of Chancery does not have
jurisdiction, the United States District Court for the District of
Delaware) shall, to the fullest extent permitted by law, be the
sole and exclusive forum for (i) any derivative action or
proceeding brought on behalf of the Corporation, (ii) any
action asserting a claim of breach of a fiduciary duty owed by
any director, officer, employee or stockholder of the
Corporation to the Corporation or the Corporation’s
stockholders, (iii) any action asserting a claim arising pursuant
to any provision of the DGCL or as to which the DGCL confers
jurisdiction on the Court of Chancery of the State of Delaware,
the Certificate of Incorporation or the Bylaws or (iv) any action
asserting a claim governed by the internal affairs doctrine. As
used in this Certificate of Incorporation, the term “Claim”
means the actions, proceedings or claims referred to in clauses
(i) through (iv) on this Section 1.14
The Forum Provision clearly applies to this litigation. Among other things, the
plaintiff asserts a claim of breach of a fiduciary duty owed by “a stockholder of the
14
Pl.’s Answering Br., Ex. B, at 14. A court may take judicial notice of the contents of a
certificate of incorporation in deciding a motion to dismiss under Rule 12(b)(6). See In re
Wheelabrator Techs. Inc. S'holders Litig., 1992 WL 212595, at *12 (Del. Ch. Sept. 1, 1992)
(“The Court is not barred from taking judicial notice of a Delaware corporation’s certificate
of incorporation simply because the procedural setting is a motion to dismiss under Rule
12(b)(6).”). The sources the court can consider on a Rule 12(b)(2) motion are even broader
than those that can be considered on a 12(b)(6) motion. See Sample v. Morgan, 935 A.2d
1046, 1055 (Del. Ch. 2007) (“In considering a motion to dismiss for lack of personal
jurisdiction under Court of Chancery Rule 12(b)(2), I am not limited to the pleadings.”). It
follows that the court can take judicial notice of a certificate of incorporation on a Rule
12(b)(2) motion.
5
Corporation to the Corporation.” Accordingly, the plaintiff was obligated to file his claims
in this court.
In Garcia Senior’s view, the Forum Provision binds the plaintiff but not him. As
Garcia Senior points out, nothing about the Forum Provision expressly provides that
stockholders, such as Garcia Senior himself, consent to this court’s exercise of personal
jurisdiction for claims described in the provision. The plaintiff, however, does not argue
that Garcia Senior expressly consented. Rather, the plaintiff relies on a theory of implicit
consent.
In support of his implicit-consent theory, the plaintiff draws heavily on this court’s
analysis in In re Pilgrim’s Pride Corporation Derivative Litigation.15 There, stockholders
of Pilgrim’s Pride brought derivative claims against the company’s controlling
stockholder, JBS S.A. Pilgrim’s Pride was a Delaware corporation and JBS was an entity
organized under the laws of Brazil. The plaintiffs sued JBS for breaching its fiduciary
duties as a controller by causing Pilgrim’s Pride to buy one of JBS’s other subsidiaries.
JBS moved to dismiss the complaint for lack of personal jurisdiction.16
As the sole basis for this court’s exercise of personal jurisdiction over JBS, the
plaintiffs argued that the controller implicitly consented to the court’s exercise of personal
jurisdiction when its representatives on the company’s board adopted a forum-selection
bylaw. Vice Chancellor Laster agreed with the plaintiffs’ arguments, citing a number of
15
2019 WL 1224556 (Del. Ch. Mar. 15, 2019).
16
Id. at *1.
6
case-specific factors as prima facie evidence that the controller implicitly consented to this
court’s exercise of personal jurisdiction. The following passage contains the meat of the
Vice Chancellor’s analysis:
In this case, the facts alleged in the complaint support a finding
of implicit consent. The Board adopted the Forum-Selection
Bylaw on the same day that the Committee gave its final
approval for the Acquisition. It is reasonable to infer that the
Board adopted the Forum-Selection Bylaw intending that it
would apply to any Delaware law claims that a stockholder
plaintiff might bring challenging the Acquisition. The Forum-
Selection Bylaw selects the Delaware Court of Chancery as the
sole and exclusive forum for “any action asserting a claim of
breach of fiduciary duty owed by any . . . stockholder of the
Corporation to the Corporation or the Corporation's
stockholders.” Parent, 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. Through its power to select the Parent
Directors, Parent designated six of the nine members of the
Board. Five of those six were executive officers of Parent or
its controlled subsidiaries. Parent also controlled a super-
majority of the Company's voting power. If it did not like the
Forum-Selection Bylaw, it could amend it using that authority.
In my view, under these facts, Parent consented implicitly to
the existence of personal jurisdiction in Delaware when its
representatives on the Board participated in the vote to adopt
the Forum-Selection Bylaw. This is a case governed by
Delaware law in which the State of Delaware has a substantial
interest. As the Board necessarily recognized when it adopted
the Forum-Selection Bylaw, a case of this nature should be
heard in a Delaware court. That includes the dimension of this
case that relates to Parent’s involvement as the self-interested
controller.17
17
Id. at *13 (citations omitted).
7
Breaking it down, the factors identified by the Vice Chancellor as evidence of JBS’s
implicit consent fall into two categories.
The first category of factors suggested that the intent of the forum selection
provision was to funnel claims for breach of fiduciary duty against the controller into the
Delaware courts. This intent was evident from the provision’s language, which covered
actions for breach of fiduciary duties owed by “any stockholder of the corporation.”18 Only
controlling stockholders owe fiduciary obligations under Delaware law.19 Thus, JBS was
the “obvious stockholder defendant” in any action brought under that bylaw.20 This intent
was also inferred by the timing of the board’s adoption of the provision, which came on
the same day that a board committee approved the challenged acquisition.
The second category of factors tied the forum-selection bylaw to JBS specifically.
Toward this end, the Vice Chancellor focused on JBS’s influence over the process by which
the provision was adopted. The provision was adopted through a bylaw amendment
effected by a vote of the board, so JBS was not involved directly in its adoption. The Vice
Chancellor noted, however, that JBS appointed six of the nine members of Pilgrim’s
Pride’s board, and five of those six members were executives of JBS or a JBS subsidiary.
Thus, a majority of the board was beholden to JBS. Moreover, the Vice Chancellor
18
Id. at *12 (emphasis added).
19
Ivanhoe P’rs v. Newmont Min. Corp., 535 A.2d 1334, 1344 (Del. 1987) (“Under
Delaware Law a shareholder owes a fiduciary duty only if it owns a majority interest in or
exercises control over the business affairs of the corporation.”).
20
Pilgrim’s Pride, 2019 WL 1224556, at *13.
8
observed that JBS “controlled a super-majority of the Company’s voting power. If it did
not like the Forum-Selection Bylaw, it could amend it using that authority.”21
Because this court’s authority to exercise personal jurisdiction based on a forum
selection clause is rooted in the defendant’s consent, this second category of factors was
critical to the court’s analysis. That is, if JBS lacked any ability to direct or reverse the
result of the board’s process, then JBS could not be said to have implicitly consented to
that result.
In this case, the intent in adopting the Forum Provision is as clear as that in Pilgrim’s
Pride. The language of the Forum Provision captures claims for “breach of a fiduciary
duty owed by any . . . stockholder[.]”22 Again, only controlling stockholders of Delaware
corporations owe fiduciary obligations. Garcia Senior has held hard control over Carvana
since the Forum Provision was adopted, making him the obvious stockholder to whom this
language would apply.
More importantly, Garcia Senior’s involvement in adopting the provision was more
direct than in Pilgrim’s Pride. The Forum Provision appears in an amendment to the
certificate of incorporation, which was approved by written consent of the Carvana
stockholders. At that time, and at all relevant times, Garcia Senior held a majority of
Carvana’s voting power. Thus, Garcia Senior’s approval of the amended certificate of
21
Pilgrim’s Pride, 2019 WL 1224556, at *13.
22
Id. at *12; Pl.’s Answering Br., Ex. B at 14.
9
incorporation, including the Forum Provision, was a necessary and direct cause of its
adoption.
As an added factor, it is reasonable to infer that Garcia Senior read the amendment
to the certificate of incorporation before executing a written consent approving it; as
discussed above, the amended and restated certificate of incorporation expressly provides
the Garcias with benefits other stockholders do not enjoy. Moreover, the Garcias executed
an exchange agreement and an LLC agreement in connection with the IPO, both of which
require any claims to be brought in Delaware courts.23 The logical inference is that Garcia
Senior “necessarily recognized” the State of Delaware’s “substantial interest” in resolving
these Delaware law claims when he caused Carvana to adopt the Forum Provision.24
It is true, as Garcia Senior argues, that Pilgrim’s Pride is distinguishable in one—
albeit minor—way. There, the forum selection bylaw was adopted on the same day that a
board committee recommended the transaction at issue in the litigation. From this timing,
one can infer that the board intended that stockholder claims challenging that transaction
specifically be subject to the forum selection bylaw. In this case, nothing suggests that
Garcia Senior had the Direct Offering in mind when he caused Carvana to adopt the Forum
Provision, as Carvana adopted the Forum Provision three years before its board approved
the Direct Offering.
23
Dkt. 66, Verified Amended Derivative and Class Action Complaint ¶¶ 186–87.
24
Pilgrim’s Pride, 2019 WL 1224556, at *13.
10
This distinction is inconsequential. Garcia Senior did not need to foresee the
specific transaction that would give rise to the claims against him for the Forum Provision
to evidence his implicit consent. Consider the purpose of forum selection provisions in
corporate charters and bylaws. Expressly permitted by Section 115 of the Delaware
General Corporation Law,25 those provisions are intended to corral internal affairs cases so
they can be heard in the Delaware courts.26 Boilermakers Local 154 Retirement Fund v.
Chevron Corp. is the common law predecessor to § 115.27 Boilermakers specifically
identified reasons why defendants would want to include forum selection provisions in
governing documents.28 In upholding a board-adopted Delaware forum selection bylaw,
then-Chancellor Strine noted the benefits of “channeling internal affairs cases into the
courts of the state of incorporation,” which included “bring[ing] order to what the boards
of [the defendant corporations] say they perceive to be a chaotic filing of duplicate and
25
8 Del. C. § 115 (“The certificate of incorporation or the bylaws may require . . . that any
or all internal corporate claims shall be brought solely and exclusively in any or all of the
courts in this State.”).
26
See generally Andrew Holt, Protecting Delaware Corporate Law: Section 115 and Its
Underlying Ramifications, 5 Am. U. Bus. L. Rev. 209, 219 (2016) (“Exclusive forum
selection clauses were supposed to cure the plague that is multi-jurisdictional litigation
on Delaware corporations and their officers and directors.”); Verity Winship, Shareholder
Litigation by Contract, 96 B.U. L. Rev. 485 (2016) (“Faced with multiforum litigation,
courts, defense counsel, and commentators began to call for a way to consolidate the
litigation in the court of the state of incorporation, often Delaware. One way to do this was
for corporations to adopt an exclusive forum selection clause in their charter or bylaws.”).
27
See, e.g., Salzberg v. Sciabacucchi, 227 A.3d 102, 117 (Del. 2020) (“The 2015
amendments were intended, in part, to codify Boilermakers.”).
28
Boilermakers Loc. 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 952 (Del. Ch. 2013).
11
inefficient derivative and corporate suits against the directors and the corporations.”29 It is
fair to infer that Garcia Senior knew of the purpose of forum selection provisions when he
caused Carvana to adopt one. At a minimum, his agents (such as the counsel planning the
IPO) knew about them, and their knowledge can be imputed to Garcia Senior.
As a matter of policy, the functioning of a forum provision would be dramatically
undermined if the law required transaction-specific consent to support personal jurisdiction
over a defendant. Garcia Senior cites no case in support of such a rule. Such a rule would
enable a controller to put stockholder plaintiffs in a no-win scenario: the forum provision
would force stockholders to sue in a particular court, yet the controller could claim not to
be subject to jurisdiction there.
Summing it up, Garcia Senior executed a written stockholder consent causing the
Company to adopt a requirement that any stockholder suing him for breach of fiduciary
duties file suit in this court. By taking that action, Garcia Senior consented implicitly to
this court’s exercise of personal jurisdiction over him in connection with stockholder
claims that he breached his fiduciary obligations.
Garcia Senior urges a different outcome based on “Delaware precedent [holding]
that purchasing or owning shares of stock in a Delaware corporation, standing alone, is not
enough to enable a Delaware court to exercise personal jurisdiction over a non-consenting
party, even in cases of sole ownership.”30 Garcia Senior correctly observes that it is “settled
29
Id.30
Pilgrim’s Pride, 2019 WL 1224556, at *14.
12
federal law that ownership of stock in a Delaware corporation is insufficient to satisfy due
process requirements.”31 Even “complete ownership of a Delaware subsidiary standing
alone is insufficient to confer personal jurisdiction.”32
This line of authorities is not implicated here. This is not a case of mere stock
ownership constituting consent to jurisdiction. This is a case where the controller caused
the Company to adopt a provision requiring that any plaintiff suing a stockholder for breach
of fiduciary duty do so in this court. The plaintiff simply seeks to enforce that requirement.
Garcia Senior also cites to a portion of Pilgrim’s Pride where the Vice Chancellor
limited his holdings to the facts of that case and identified differing fact patterns that might
raise distinguishable concerns.33 The Vice Chancellor expressly left open the question of
“whether a Delaware court could assert jurisdiction over a stockholder based solely on a
board-adopted forum-selection provision if the stockholder had no other ties to this state.”34
He also declined to “consider whether a Delaware court could assert jurisdiction over a
controller based solely on a board-adopted forum-selection provision if the controller had
31
Dkt. 74, Opening Brief in Support of Defendants Ernest Garcia III and Ernest Garcia II’s
Motion to Dismiss (“Defs.’ Opening Br.”) at 16; see, e.g., Monsanto Co. v. Syngenta Seeds,
Inc., 443 F. Supp. 2d 636, 647 (D. Del. 2006) (noting that “such a limited activity” is
insufficient to establish personal jurisdiction).
32
Defs.’ Opening Br. at 16; see Outokumpu Eng’g Enters., Inc. v. Kvaerner Enviropower,
Inc., 685 A.2d 724, 731 (“Mere ownership of a Delaware subsidiary will not support the
minimum contacts’ requirement of due process.”).
33
Pilgrim’s Pride, 2019 WL 1224556, at *15 (“This holding is limited to the facts of this
case.”).
34
Id.13
a less substantial presence on the corporation's board, or if the controller only was alleged
to wield effective control rather than possessing hard, mathematical control.”35
The limiting language of Pilgrim’s Pride does not affect the outcome of this
decision. The fact that Pilgrim’s Pride did not reach those issues does not foreshadow how
they would turn out. Nor are any of the open questions present in this case. The Pilgrim’s
Pride court identified two situations in which the controller had less involvement in the
adoption of the forum provision and less ability to remove it. In those settings, the
inference for implicit consent is weaker. In this setting, the basis for inferring consent is
stronger. In Pilgrim’s Pride, the controller inferably acted through director appointees and
accepted the bylaw by not removing it. Here, Garcia Senior approved it by executing a
written consent. Garcia Senior’s direct involvement in the Forum Provision’s adoption
makes this a stronger case for implicit consent, not a weaker one.
III. CONCLUSION
For the foregoing reasons, Garcia Senior’s motion to dismiss for lack of personal
jurisdiction is denied. For the same reasons set forth in the June 30, 2022 Memorandum
Opinion, Garcia Senior’s motion to dismiss under Rule 12(b)(6) and Rule 23.1 are also
denied.
35
Id.14