Case of the Day: Germaninvestments AG v. Allomet Corp.

The case of the day is Germaninvestments AG v. Allomet Corp. (Del. Ch. 2019). Allomet is a Delaware corporation in the business of manufacturing metal powders for coating industrial products. Fobio Enterprises, Ltd., a Hong Kong company, owned the majority of Allomet’s shares. In 2016, it became the sole owner by purchasing shares from the Estate of Richard Toth. Fobio’s beneficial owner was Hannjörg Hereth, a Swiss national.

Allomet was facing financial difficulties. In 2017, it had a debt of more than $40 million to Fobio and more than $20 million in net operating loss carryforwards. Hereth met with Richard Herrling, a German national residing in Switzerland, about the possibility of forming a joint venture to raise capital for Allomet. (Germaninvestments, one of the plaintiffs, was a Swiss company that managed the assets of Herrling and his family). The plan was to create an Austrian holding company that would own Allomet’s IP and also own the outstanding stock of Allomet and Yanchep LLC, a Delaware company owned by a relative of Hereth whose sole asset was the real property Allomet leased for its headquarters. There was discussion about whether Fobio would assign its claims against Allomet to the joint venture. During the negotiations, Herrling loaned Allomet $850,000 to keep it afloat. The parties entered into an agreement that provided for funding for Allomet while the parties worked out the joint venture. It provided that it was governed by Austrian law and that the “place of jurisdiction” was Vienna. The agreement provided that Herrling would own a 50% stake in the holding company that would own the shares of Allomet. Later, the parties organized the Austrian holding company, AHMR. They continued to negotiate the terms of the joint venture. But the negotiations broke down, and Herrling walked away from the deal. The question was whether Herrling had made loans to Allomet (Hereth’s preferred outcome), or whether he had made an equity investment (Herrling’s preferred view).

Herrling brought an action to compel Allomet to reissue its stock certificates in AHMR’s name under § 168 of the Delaware General Corporations Law. Hereth moved to dismiss, on the grounds that the case should be heard in Vienna per the parties’ agreement. Herrling denied that the agreement was a forum selection agreement and asserted that in an case it was unenforceable with respect to his Delaware law claims.

The first question was whether the clause should be read as a mandatory choice of forum clause. But to answer that question, the court first had to decide which law governed the contract, because under Delaware precedent, “When a contract contains a forum selection clause, this court will interpret the forum selection clause in accordance with the law chosen to govern the contract.” Because the parties chose Austrian law to govern, and because Austrian law bore a reasonable relationship with the contract, the court held that Austrian law should apply. So the question was how to construe the choice of forum clause under Austrian law, i.e., the Brussels I recast. Article 25 provides:

If the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise

The European default rule is that a choice of forum is exclusive. The Delaware default rule, and the typical American default rule, is to the contrary: a choice of forum is merely permissive. So on the face of it, the clause should be read as exclusive, and the case should be heard in Vienna. Herrling, however, pointed to some of the recitals in Brussels I, claiming they showed that the regulation did not apply when one of the parties was not domiciled in the EU, but the court correctly rejected this argument, holding that Article 25 itself made it clear that the regulation applied regardless of the parties’ domicile—a result the Austrian courts had already reached.

The court also rejected Herrling’s public policy argument. Herrling argued that only a Delaware court should decide an issue arising under § 168 of the DGCL. But the court held that the dispute did not really arise under § 168 at all. That section dealt with situations where stock certificates had been lost or stolen and had to be reissued. The issue here was an issue of contract law, and did not really arise under the DGCL at all. On a similar note, the court rejected Herrling’s argument that the forum selection agreement itself was contrary to Delaware law. It is true that Delaware law forbids a Delaware corporation to include certain choice of forum clauses in the corporation’s articles of organization, but the statute does not reach contracts between shareholders.

The court therefore dismissed the suit, with the caveat that it could be brought again should the Austrian courts refuse to hear the dispute.

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