Delaware Court to Hear Historic Appeal

WILMINGTON, Del., April 30, 2013 /PRNewswire/ -- For the first time, the Delaware Supreme Court, one of the most influential corporate jurisdictions in the United States, will consider whether an investment contract marketed, negotiated and signed in Kuwait and involving foreign investors retains jurisdiction in that country or instead should be subject to U.S. law.

In a case with broad implications for the rights of foreign entities investing with U.S.-based firms, the Delaware Supreme Court has set a May 1 hearing on a Kuwaiti firm's appeal of a Delaware Court of Chancery ruling denying it the protection of Kuwaiti law over an investment contract that was marketed to foreign investors by a U.S. firm as being subject to Kuwaiti law.

"The case will either demonstrate that foreign contracts are legitimate and subject to the sovereign laws of nations or that a U.S. firm – in this case the private-equity giant Carlyle Group – can simply change jurisdictions when it violates the terms of the foreign contract," NIG said in a statement. "The end result will have a significant and potentially chilling impact on the willingness of international entities to invest with U.S. firms."

The Delaware Supreme Court has agreed to hear the appeal en banc, meaning that all five justices will participate in the hearing. The en banc treatment, highly unusual in a civil case, signifies an important issue of law. Delaware Court of Chancery rulings have broad influence because the state is one of the most favored jurisdictions for U.S. corporations and other business entities.

In the disputed ruling, a Court of Chancery judge last October refused to allow National Industries Group (NIG), a prominent Kuwaiti holding company, to pursue a Kuwaiti lawsuit alleging fraud and deceit against units of the Carlyle Group. The lawsuit stems from Carlyle's sale of shares in a supposedly safe fixed-income fund that collapsed in 2008, wiping out NIG's $25-million investment.

Not only did Carlyle salespeople allegedly misrepresent the safety of the underlying investments and the conservative parameters for managing the fund, according to NIG, but they allegedly failed to disclose that Carlyle, which bills itself as a Middle East expert, lacked the necessary license to even legally offer the investments in Kuwait.

Under Kuwaiti law, selling securities without a license nullifies a transaction, meaning that NIG should be entitled to the return of its entire $25-million investment. Facing such an outcome, Carlyle has fought to avoid Kuwaiti jurisdiction.

NIG contends, in the appeal to be heard May 1, that the Court of Chancery improperly upheld terms of the investment contract requiring that any disputes be heard in the Delaware Court of Chancery. NIG contends that such contract language is impermissible as a matter of Delaware legislative authority and Delaware common law.

The judge also improperly disregarded Kuwaiti law by not giving due deference to the opinions of a Kuwaiti legal expert who testified in Delaware, NIG contends in its appeal.

If NIG prevails before the Delaware Supreme Court and the dispute is returned to Kuwait, NIG is not the only plaintiff that Carlyle will face there. Carlyle allegedly marketed and sold a similar investment to at least one other Middle-East based entity, which intends to pursue a claim that Carlyle was unlicensed and fraudulently marketed the investment.

SOURCE National Industries Group