Personal Jurisdiction and Lessons Learned: Warning Given Regarding Chancery Court Decision on Principal Liability for Portfolio Companies in, In re P3 Health Groups Holdings, LLC.

By Colin Patrick Dean

Introduction[1]

The Delaware Court of Chancery held that the principal of a private equity firm was subject to the jurisdiction of Delaware courts for the alleged actions taken on behalf of one of the private equity funds portfolio limited liability companies in In re P3 Health Groups Holdings, LLC.[2] The principal was not an officer nor a designated manager of the operating company, which are common principals under private equity firms.[3]

Background

Chicago Pacific Founders, L.P. (“Chicago Pacific”) is a private equity fund with Sameer Mathur being one of its principals.[4] Before the transaction challenged in this litigation, P3 Health Group Holdings, LLC (“P3”), was a privately held company controlled by Chicago Pacific.[5] Mathur was part of the Chicago Pacific team which oversaw the fund’s investment in P3 Health Group Holdings.[6]

Hudson Vegas Investment SPV, LLC (“Hudson”) was a minority investor in the P3.[7] Hudson challenged a transaction between P3, and a special purpose acquisition company (“SPAC”) named Foresight Acquisition Corp. (“Foresight”), and Chicago Pacific. Hudson asserts that Mathur, as part of the Chicago Pacific team that engineered the merger, tortuously interfered with the contractual rights under their limited liability company agreement with P3.[8] Mathur has moved for dismissal of the claims on the merits and under Rule 12(b)(2), stating the court cannot exercise personal jurisdiction over him.[9]

Chicago Pacific provided the initial capital for P3 and referred to itself as their founding investor.[10] Chicago Pacific enjoyed special governance rights under P3’s limited liability agreement.[11] This included the right to appoint members to the Company’s board of managers. Mathur, is a principal of Chicago Pacific.[12] There is no indication that Mathur has ever held any official role with P3; whether that be as a manager, officer, employee, or in any other role.[13] Although, there is a history of taking action and making decisions on behalf of P3.[14] Mathur led negotiations for P3 in the original investment by Hudson in P3; and Mathur circulated the proposed consent and explained the deal to the board.[15] Further, Mathur took lead for P3 when another investor acquired a member interest.[16] Finally, Mathur led the effort to determine whether P3 could qualify for a Paycheck Protection Program loan when Covid-19 hit, including, what needed to be altered in the LLC agreement for P3 to receive the funds.[17]

In August 2020, P3 began to explore new ways to raise capital by accessing public markets.[18] On September 1, representatives of P3 held a Zoom meeting to review the strategies they would take, Mathur was not a member of the board, but was present and received materials for the meeting.[19] The strategy offered was that P3 would combine with another Chicago Pacific portfolio company, MyCare, thus giving them access to public markets through the de-SPAC merger.[20] This involved Greg Wasson, former CEO of Walgreens who sponsored the SPAC, through his family office. By December 2020, P3, Chicago Pacific, and Wasson were ready to move forward with the deal, of which Mathur was involved in discussions.[21] Although, details of the merger were not shared with Hudson.[22] Hudson believed the original deal structure was too generous for Chicago Pacific, Hudson withheld their consent per the rights they enjoyed through their LLC agreement.[23]

With the original deal blocked, P3, Chicago Pacific, and Foresight, the SPAC formed by Wasson, Chicago Pacific began to pursue a new merger that would only involve P3 and Foresight, thus not requiring consent from Hudson.[24] As P3 pursued the new deal, Mathur continued to be involved significantly despite having no official role within P3.[25] Mathur led negotiations between Foresight and P3, interacted with JPMorgan Chase and Co. (“JPMorgan”) P3’s financial advisor, and legal advisor, Latham & Watkins LLP (“Latham”).[26] Further, Mathur instructed JPMorgan and Latham on tasks to perform regarding Hudson’s LLC rights, and how to move forward in face of objections from Hudson.[27] After reaching agreement with Foresight on the letter of intent, P3 sent it to Hudson.[28] When Hudson objected, P3 and Foresight worked on how to characterize the transaction to avoid triggering Hudson’s consent right.[29] P3, Chicago Pacific and Foresight then moved forward with the new deal which excluded Hudson from the process, but included Mathur.[30] Mathur was further involved in duties such as constructing the capitalization table, tax guidance, distribution of proceeds, and raising additional capital for the merger.[31]

On May 25, 2021, the Board for P3 approved the merger.[32] The Hudson managers abstained, based on their objections to the transaction.[33] Further, Mathur was present at the meetings in regards to the approval of the merger.[34]

Analysis

Mathur has moved for dismissal of the claim by Hudson that Mathur tortuously interfered with Hudson’s rights under the LLC agreement.[35] Hudson has moved for dismissal under Rule 12(b)(2) for lack of personal jurisdiction by the Delaware courts.[36] Personal jurisdiction has two requirements under Delaware Law; (1) the plaintiff must identify a valid method of service of process, (2) the exercise of personal jurisdiction must rely on sufficient minimum contacts between the defendant and Delaware such that the exercise of personal jurisdiction does not offend the traditional notions of fair play and substantial justice.[37]

Hudson relied on Section 18-109(a) of the LLC act in establishing the method of service of process.[38] This provision of the act defines a manager as, one who has been officially named as managers in or designated pursuant to the entity’s governing documents, (a formal manager) or, as one who is not named as a formal manager, but participates materially in the management of the limited liability company (an acting manager).[39] Mathur argued that the court could not establish personal jurisdiction because he was not a formal manager. Based on this argument, the court stated, “[t]aken as a whole, Mathur’s actions easily clear the bar for playing a significant role in [P3]’s management.”[40] Moreover, the court further explained,

Mathur was a central player in the year-long transaction process that lead to the de-SPAC merger. He participated in the initial evaluation of a de-SPAC merger and attended the Board meeting at which the concept was vetted…[h]e participated in the discussions with Hudson about the Original Deal Structure…[a]fter Hudson withheld its consent Mathur led the negotiations with Foresight over the letter of intent for the New Deal Structure. [41]

The court found this was sufficient evidence to show that Mathur qualified as an acting manager based on his significant participation in directing and carrying out P3’s strategy in regard to the de-SPAC merger.[42] Therefore, he qualified as an acting manager and can be served with process under Section 18-109.[43]

Mathur stated that he lacked any official position at the company in his argument against the exercise of personal jurisdiction under Section 18-109.[44] The court relied on multiple Delaware decisions that have been inconsistent with this argument and have shown that a defendant can act as a de facto manager.[45] This being the case when a defendant makes decisions for or takes action on behalf of an LLC; although, they do not hold a formal position.[46] The showing necessary to establish liability on the defendant as a de facto manager resembles the showing necessary to serve process on the defendant. As shown above by the actions taken by Mathur, this standard is met.[47] The court further determined that outside of the Section 18-109 context of a manager, a party does not have to hold an official title with an LLC to be deemed a manager.[48]

In their last point, the court analyzed whether Mathur had made sufficient minimum contacts with Delaware in order to establish personal jurisdiction.[49] The court stated that, “[w]hen Mathur involved himself in the planning, negotiation, and execution of the merger, he took actions on behalf of the company that were akin to what formal managers would do.”[50] Thus, the court stated that Mathur subjected himself to suit in the court of Delaware for claims relating to his actions.[51] Further, Hudson sued Mathur in courts of the jurisdiction that allowed for P3 to be formed. Therefore, the state of Delaware has a powerful interest in providing a forum for the litigation involving its entity citizens.[52] The court established there were sufficient minimum contacts between the defendant and Delaware such that the exercise of personal jurisdiction does not offend the traditional notions of fair play and substantial justice.[53]

Key Takeaways

The major takeaway from this decision is that private equity companies can be forced to answer for the decisions they make for or on the behalf of their portfolio companies when it can be shown that a principal acted in a similar capacity to that of a LLC manager or officer.[54] This being true even when the principal is not listed as an official manager, or executive for the company.[55]

[1] Editor’s Note: A companion opinion to this one was published in Volume 47 Issue 1 of the Delaware Journal of Corporate Law. In re P3 Health Group Holdings, LLC, 47 Del. J. Corp. L. 123 (Del. Ch. 2022). The opinion likewise dealt with personal jurisdiction over an individual with management capacity if not a management title. Id. For a brief summary please see, Shira Freiman, In re P3 Health Group Holdings, LLC Case Summary, 47 Del. J. Corp. L. 121 (2022).

[2] See Tyler Wilson, Christopher Chuff & Taylor Bartholomew, A Cautionary Tale About PE Principal Liability for Portfolio Company Operations, Troutman Pepper, (Dec. 12, 2022), https://www.troutman.com/insights/a-cautionary-tale-about-pe-principal-liability-for-portfolio-company-operations.html.

[3] Id.

[4] In re P3 Health Group Holdings, LLC, 285 A.3d 143, at 145 (Del. Ch. Oct. 26, 2022).

[5] Id.

[6] Id.

[7] Id.

[8] In re P3 Health Group Holdings, 285 A.3d at 146.

[9] Id.

[10] Id. at 147.

[11] Id.

[12] In re P3 Health Group Holdings, 285 A.3d at 147.

[13] Id.