In a departure from two prior decisions on the same exact issue, United States District Judge Timothy J. Savage recently held that GlaxoSmithKline LLC’s corporate “nerve center” is Pennsylvania for diversity purposes, even though the company had reconstituted itself as a Delaware LLC with only Delaware members. In Brewer v. SmithKline Beacham Corp., 2011 WL 1103627 (E.D. Pa. Mar. 24, 2011), defendants removed eight products liability actions to federal court on diversity grounds under 28 U.S.C. § 1441. Plaintiffs moved to remand the cases back to the Philadelphia Court of Common Pleas, arguing that defendant GlaxoSmithKline LLC (“GSK LLC”), despite being a Delaware limited liability company, was actually a citizen of Pennsylvania. Applying the “nerve center” test recently enunciated by the Supreme Court in Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010), Judge Savage agreed with plaintiffs and remanded the cases.
While the approach taken by the District Court in Brewer may not ultimately prevail when seemingly conflicting authorities are resolved, companies that are concerned that the state of organization also be considered the state of citizenship for jurisdictional purposes should take steps to enhance their contacts with the state of organization in advance of any litigation in which this might present an issue.
Judge Savage found the facts to be as follows: until October 2009, GlaxoSmithKline conducted its business in the United States through SmithKlineBeecham Corporation (“SKB”), a Pennsylvania corporation headquartered in Philadelphia. Brewer, 2011 WL 1103627, at *2. “In October 2009, SKB was converted from a Pennsylvania corporation to a Delaware limited liability company to accomplish a joint venture between Pfizer and GSK.” Id. SKB was first converted from a Pennsylvania to a Delaware corporation and its assets were then transferred to the newly created Delaware limited liability company. Id. SKB was formerly “a wholly-owned corporate subsidiary” of GlaxoSmithKline Holdings (Americas) Inc. (“Holdings”). Id. at *3. Holdings is now the “sole member” of GSK LLC. Id. at *2. Holdings is a Delaware corporation with its headquarters in Delaware. Id. at *1.
The citizenship of a limited liability company is determined by the citizenship of its members. Since Holdings is GSK LLC’s only member, GSK LLC’s citizenship for diversity purposes is determined by Holdings’s citizenship—i.e., Holdings’s principal place of business.
“Nerve Center” Test
The Supreme Court recently adopted the “nerve center” test for determining the principal place of business of a corporation for diversity purposes. Hertz, 130 S.Ct. at 1192. Under this test, a corporation’s principal place of business is “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities”—its “nerve center.” Id. The “nerve center” is not the state where the bulk of the corporation’s activities can be measured, but rather the “center of overall direction, control and coordination.” Id. at 1194. In practice, the “nerve center” “should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination[.]” Id. at 1192. The Supreme Court emphasized that a corporation’s “nerve center” “is not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion).” Id.
The court concluded GSK LLC’s “nerve center” is Pennsylvania, even though its sole member, Holdings, is a Delaware corporation. There was no dispute that Holdings is headquartered in Delaware and conducts various business activities there. Holdings’s board of directors meets in Delaware on a quarterly basis. Corporate decisions, including voting on financial issues, review and approval of financial statements, determinations regarding payment of dividends, approval of restructuring, and strategic decisions regarding investments, are all made in Delaware. Holdings maintains an office in Delaware and stores meeting minutes and secretarial papers there. But none of these factors was deemed sufficient under Judge Savage’s application of the “nerve center” test. The Brewer court viewed the activities conducted in Delaware as nothing more than “mere formalities to ratify decisions made elsewhere” or the bare minimum required to “comply with Delaware law . . . and to preserve [Holdings’s] corporate status as a Delaware corporation.” Brewer, 2011 WL 1103627, at *7. Instead, the court focused on the following factors to reach its conclusion that the “operations are directed, controlled, and coordinated” in Pennsylvania, not Delaware:
Two of three board members work in Philadel-phia, typically prepare for board meetings in Philadelphia, and generally attend board meet-ings via telephone.
The agenda for the board meetings is prepared in Philadelphia, and financial statements are pre-pared in London.
Board meetings typically last between 15 and 30 minutes and consist of ratifying decisions that have been previously made elsewhere.
Board meetings are held at the offices of a Wil-mington bank instead of Holdings’s own office.
The office space maintained by Holdings in Wil-mington consists of one 10’ x 10’ room that contains a desk, file cabinets, and an unused computer.
Calls to Holdings’ Wilmington office are rerouted to GSK LLC’s corporate headquarters in Philadel-phia.
Most mail is also forwarded to GSK LLC’s Phila-delphia offices.
Corporate books and records have not been moved from Philadelphia to Delaware.
Corporate business address had not been promptly changed to Delaware.
The court also focused on the extent to which Holdings exerted operational control over GSK LLC, and found that “Holdings has delegated the decision-making affecting the direction, control, and coordination of [GSK LLC] to those actually running the [GSK LLC] operation in Philadelphia . . . the operational and business decisions affecting [GSK LLC] are not made by Holdings or its board of directors, but are made and directed by the officers and directors of [GSK LLC].” Id. at *6. This delegation of authority from Holdings to GSK LLC’s Philadelphia-based management was a critical factor in determining that Holdings was a citizen of Pennsylvania.
Although “Holdings’s board of directors and officers are solely responsible for directing some of Holdings’s limited business activities, such as its investment decisions,” the court found that these decisions, which are made in Delaware, “comprise a minor part of Holdings’s overall business.” Id. at *7. Thus, Judge Savage concluded that “Holdings has effectively transplanted the vast majority of its ‘brain’ or ‘nerve center’ to its managers in Philadelphia, leaving only a small part of its ‘brain’ in Delaware, Philadelphia and London, where its investment decisions and strategy are made.” Id.
It deserves notice that while Judge Savage acknowl-edged that “[GSK LLC] was formed to accomplish a legitimate business purpose and not to manipulate jurisdiction for litigation purposes,” he opined that “post-discovery conduct in these cases smacks of jurisdictional manipulation.” Id. at *8. In particular, the court referred to Holdings’s amendment of its by-laws to change its general place of business and location of its books and records from Philadelphia to Wilmington, and GSK LLC’s request that the government alter certain contracts to list a Wilmington address for Holdings as opposed tobeen identified. The court viewed these moves as a litigation tactic, stating that “[t]he only conceivable purpose of these belated actions can be to bolster [GSK LLC’s] contention, in this and later cases, that Holdings’s principal place of business is in Wil-mington.” Id.
Significantly, the decision in Brewer stands at odds with two other cases that considered the same exact issue. In White v. SmithKlineBeecham Corp., 2010 WL 3119926 (E.D. Pa. Aug. 5, 2010), another Eastern District of Pennsylvania judge concluded that there was “ample evidence” that Holdings’s “high level officers direct, control, and coordinate the corporation’s activities” from Delaware. Id. at *8-9. In Hoch v. Eli Lilly and Co., 736 F. Supp. 2d 219 (D.D.C. 2010), the court reached a similar conclusion, ruling that Holdings’s principal place of business is Delaware because “[i]t is headquartered there, its officers and directors make and ratify signifi-cant decisions there, and its board meetings take place there.” Id. at 221. But as Judge Savage explained, the factual record in Brewer was different than White and Hoch. While there appears to have been little discovery in White and Hoch, plaintiffs in Brewer conducted extensive jurisdictional discovery, including depositions of GSK LLC executives. These depositions formed the basis for the court’s decision, and were cited throughout the court’s opinion. Simply put, the jurisdictional discovery changed the outcome.
Although the possibility of jurisdictional discovery has always been looming, Brewer inspires litigants to pursue more extensive and intrusive discovery to fight removal and obtain remand. Corporations should approach such discovery cautiously to avoid development of unfortu-nate facts. Additionally, Brewer demonstrates that the “nerve center” test is anything but a bright-line rule; rather, it is a sliding scale. Corporations will have to take steps to ensure that sufficient parts of their “brain” are present at their preferred principal place of busi-ness. In addition to jurisdictional concerns in litigation, clearly establishing a principal place of business may be important when a Delaware entity is used for tax purposes, as a holding company for intellectual property or other assets, or for other corporate purposes. Steps to follow include, for example, maintaining reasonably large and functional offices to house employees and documents, and requiring that key decision-makers work from the new “nerve center.” Some companies, as part of their state tax planning, have already migrated trademarks and other intellectual property to jurisdic-tions such as Delaware. While it may not be dispositive, combining intellectual property management with other corporate functions would undoubtedly be helpful in asserting that the “nerve center” is in the state of incorporation.