In Re Carvana Co. Stockholders Litigation

Citation: Not availableDocket: C.A. No. 2020-0415-KSJM

Court: Court of Chancery of Delaware; August 31, 2022; Delaware; State Appellate Court

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A stockholder of Carvana Co. has filed derivative claims against the company concerning a $600 million Direct Offering of common stock, which was executed while Carvana's stock price was low. This offering was led by Carvana's controller, Ernest Garcia II, and his son, Ernest Garcia III, who selected participants for the offering, excluding public stockholders. The court previously denied Garcia Junior's motion to dismiss based on claims of failure to state a case and failure to plead demand futility. This ruling addresses Garcia Senior’s motion to dismiss for lack of personal jurisdiction. The court's jurisdiction over Garcia Senior is based on a forum provision in Carvana's certificate of incorporation, which he approved through written consent, thus consenting to jurisdiction regarding fiduciary duty breach claims. Consequently, Garcia Senior's motion to dismiss is denied. The decision also references facts from a prior opinion, noting the Garcias co-founded Carvana in 2012 and took it public in 2017. Garcia Junior serves as President, CEO, and Chairman, while Garcia Senior, despite being permanently barred from NYSE-related activities, retains majority voting power through super-voting Class B shares.

Carvana amended its certificate of incorporation in relation to an initial public offering, with stockholders, including the Garcias, providing written consent for the changes. A significant amendment, Article Twelve, introduced a Forum Provision, which designates the Delaware Court of Chancery as the exclusive forum for specific disputes. The amended document also grants the Garcias unique privileges, such as maintaining 10 votes per Class B share as long as they hold 25% of Class A common stock, and special rights regarding competition and corporate opportunities. As Garcia Senior held a majority of the voting power, his consent was crucial for adopting the amendments, including the Forum Provision.

The legal analysis details the process for establishing personal jurisdiction in Delaware courts under Court of Chancery Rule 12(b)(2). Plaintiffs must demonstrate a basis for jurisdiction, with courts considering pleadings and affidavits. Personal jurisdiction can be waived, and a defendant may implicitly consent by agreeing to litigate in a particular forum. In this case, the plaintiff contends that Garcia Senior consented to Delaware's jurisdiction by facilitating the Forum Provision's adoption. The provision outlines that, unless otherwise agreed, the designated court will handle certain claims, including derivative actions and breaches of fiduciary duty. The plaintiff’s claim fits within this framework, mandating that it be filed in the designated court.

Garcia Senior asserts that the Forum Provision binds the plaintiff but not himself, arguing that it lacks explicit language requiring stockholders to consent to the court's personal jurisdiction. The plaintiff, however, contends that Garcia Senior's consent can be inferred implicitly, drawing on the court's reasoning in In re Pilgrim’s Pride Corporation Derivative Litigation. In that case, stockholders filed derivative claims against JBS S.A., the controlling stockholder of Pilgrim's Pride, which is a Delaware corporation. JBS challenged personal jurisdiction, but the court found implicit consent based on the adoption of a forum-selection bylaw by the company’s board on the same day it approved a significant acquisition. The bylaw designated the Delaware Court of Chancery as the exclusive venue for claims of fiduciary duty breaches by stockholders. The court highlighted that the board members, primarily appointed by JBS, were aware that the bylaw would apply to potential claims involving the acquisition, indicating JBS's implicit consent to jurisdiction. The Vice Chancellor identified two categories of factors supporting this finding: the intent behind the forum-selection provision aimed at directing fiduciary duty claims against controllers to Delaware courts, and the specific language of the provision, which only applies to controlling stockholders, thus making JBS the evident defendant in such claims.

The timing of the board's adoption of the forum-selection bylaw coincided with a committee's approval of a contested acquisition, suggesting intent. The Vice Chancellor highlighted JBS’s significant influence, noting that while JBS did not directly adopt the bylaw, it appointed six out of nine board members—five of whom were JBS executives—indicating a board largely beholden to JBS. Additionally, JBS controlled a super-majority of the company's voting power, allowing it to amend the bylaw if desired. This was crucial for assessing personal jurisdiction based on the forum selection clause, as JBS's ability to impact board decisions implied consent to the bylaw's adoption.

In the case of Carvana, Garcia Senior’s direct involvement in the adoption of the Forum Provision was evident. He held the majority voting power and approved an amendment to the certificate of incorporation that included the Forum Provision. It is reasonable to assume that he reviewed the amendment, which conferred specific benefits to the Garcias. The Garcias had also entered agreements requiring claims to be adjudicated in Delaware courts, further indicating recognition of Delaware’s interest in these matters. Although Garcia Senior argued that the timing of the Forum Provision's adoption differed from Pilgrim’s Pride, where the bylaw was adopted on the same day as a committee's recommendation, this distinction was deemed insignificant. Garcia Senior's implicit consent to the Forum Provision was established irrespective of whether he anticipated specific future transactions leading to claims against him.

Forum selection provisions in corporate charters and bylaws, allowed by Section 115 of the Delaware General Corporation Law, aim to consolidate internal affairs cases within Delaware courts. The case of Boilermakers Local 154 Retirement Fund v. Chevron Corp. highlights the rationale for such provisions, emphasizing their role in managing potential chaos from multiple derivative lawsuits against corporations and their directors. Garcia Senior's involvement in adopting a forum selection provision for Carvana implies his awareness of its purpose, and his agents’ knowledge can be attributed to him. It is argued that requiring transaction-specific consent for personal jurisdiction would undermine the effectiveness of these provisions, presenting stockholder plaintiffs with a dilemma.

Garcia Senior executed a stockholder consent mandating that any suit against him for breach of fiduciary duties be filed in a specific court, thereby implicitly consenting to personal jurisdiction in connection with such claims. Although Garcia Senior references precedent indicating that mere stock ownership does not suffice for personal jurisdiction in Delaware, this case differs as it involves active consent through the adoption of the forum provision. Previous cases, such as Pilgrim’s Pride, have left open questions regarding jurisdiction based solely on board-adopted provisions; however, those concerns do not apply here due to Garcia Senior's direct involvement in the provision's adoption, which strengthens the inference of consent. Consequently, Garcia Senior's motions to dismiss for lack of personal jurisdiction and other grounds are denied.