Opinion ID: 2321828
Heading Depth: 2
Heading Rank: 3

Heading: The Side Letter Opinion

Text: Genger's third and final claim of error is that the Court of Chancery exceeded its authority by deciding the issues addressed in its August 9, 2010 Side Letter Opinion. That opinion (to reiterate) invalidated the 2004 Transfers of Trans-Resources shares to the Orly Trust and to Genger himself, and adjudicated the Trump Group as the lawful record and beneficial owner of those transferred shares. [73] In its Merits Opinion, the trial court initially declined to reach the ownership issues relating to the Orly Trust and the Genger Shares, because those issues were unnecessary to resolve the Section 225 voting control dispute. [74] Later, however, in its supplemental Side Letter Opinion, the court noted that: (i) in deciding the Section 225 issues, it had overlooked the 2008 Side Letter Agreement, and (ii) it was necessary to determine who owned the Orly Trust Shares and the Genger Shares, because the right to elect two of the Trans-Resources' six directors would arguably depend upon that determination. [75] The trial court justified adjudicating the ownership of the Genger Shares at that late stage, because Genger himself sought to have this court declare who was the rightful owner of the [Genger] and Orly [Trust] Shares. [76] In its Final Judgment Order, the court ultimately determined that neither Genger nor the Orly Trust were the record or beneficial owners of any Trans-Resources shares, [77] and that TPR was the record and beneficial owner of all Trans-Resources shares not presently owned by the [Trump Group]. [78] In an about-face, Genger now claims that the Court of Chancery lacked the power to determine that the Trump Group lawfully purchased the Orly Trust Shares and the Genger Shares from TPR. He first argues that the trial court lacked in personam jurisdiction over the Orly Trust and TPR, because neither stockholder was made a party to the Section 225 action in any capacity. Second, he claims that all the Side Letter Agreement gave the Trump Group was an option to purchase the Genger and Orly Trust Sharesan option which was never exercised. Finally, Genger contends that adjudicating the validity of the 2004 Transfers under the Side Letter Agreement exceeded the Court of Chancery's jurisdiction, because the Trump Group's right to buy, and TPR's right to sell, the Genger Shares and the Orly Trust Shares were collateral issues, i.e., unnecessary to resolve the merits of the Section 225 claims. We agree with Genger's first claim, do not reach the second, and reject the third. [79] The purpose of a Section 225 action is to provide a quick method for review of the corporate election process to prevent a Delaware corporation from being immobilized by controversies about whether a given officer or director is properly holding office. [80] A Section 225 proceeding is summary in character, and its scope is limited to determining those issues that pertain to the validity of actions to elect or remove a director or officer. [81] In determining what claims are cognizable in a [Section] 225 action, the most important question that must be answered is whether the claims, if meritorious, would help the court decide the proper composition of the corporation's board or management team. [82] If not, then those claims are said to be `collateral' to the purpose of a [Section] 225 action and must be raised in a [separate] plenary action. [83] A Section 225 proceeding is not an in personam action. Rather, it is in the nature of an in rem proceeding, [84] where the defendants are before the court, not individually, but rather, as respondents being invited to litigate their claims to the res (here, the disputed corporate office) or forever be barred from doing so. The one exception is the corporation itself, which is the entity that embodies the  res,  and is only party before the Court in its individual capacity. The in rem character of a Section 225 action imposes important limits on the scope of [a] court's remedial powers even as to claims bearing on whether a person lawfully holds corporate office. [85] For example, in a Section 225 action, a plaintiff may claim that a director-respondent does not validly hold corporate office because that director obtained the office through fraud, deceit, or breach of contract. [86] The Court of Chancery may adjudicate that claim in a Section 225 proceeding, but only for the limited purpose of determining the corporation's de jure directors and officers. In a Section 225 proceeding the court cannot go further and actually rescind a transaction procured through such unlawful behavior or award money damages to those harmed by that behavior. [87] That type of ultimate relief can only be obtained in a plenary action in a court that has in personam jurisdiction over any necessary or indispensable parties. [88] Given the jurisdictional limitations that inhere in a Section 225 action, we affirm the judgment of the Court of Chancery insofar as it determines the record ownership of the disputed Trans-Resources shares in the Side Letter Opinion and the Final Judgment Order. All parties agree that the adjudication of record ownership was necessary to determine which side was lawfully entitled to elect the remaining two directors of the Trans-Resources board. We so conclude, even though initially the scope of the Section 225 action was limited to which sidethe Trump Group or Gengerhad the lawful power to designate the four directors who would comprise the Trans-Resources board majority. [89] This procedural posture was altered, however, after the Court of Chancery issued its Merits Opinion. At that point, all parties agreed that the scope of the Section 225 action should be expanded to encompass which side had the right to designate and elect the two remaining Trans-Resources directors. That additional question arose because the parties disputed whether the Trump Group was entitled, under its Purchase Rights conferred by the Stockholders Agreement, to acquire the Trans-Resources shares transferred to Genger and the Orly Trust in the 2004 Transfers. [90] If the Trump Group was so entitled, then as a legal matter those shares would continue to be held by TPR, and Genger and the Orly Trust would have no Trans-Resources shares to vote to elect the remaining two directors. If, however, the Trump Group had no contractual right to purchase the Genger and the Orly Trust Shares, then under the Stockholders Agreement, Genger would be entitled to designate the remaining two Trans-Resources directors. [91] Consequently, despite having earlier concluded that it was unnecessary to address these issues, the Court of Chancery, at the urging of all parties, now decided that it was necessary, and that it had the power to decide which party was entitled to vote the Genger and the Orly Trust Shares in the Section 225 action. If the only new issue decided at this late stage was who constituted the lawful record owners of the Genger and Orly Trust shares, the Court of Chancery's Side Letter Opinion and subsequent Final Judgment Order would pose no problem. The trial court determined that TPR was the record owner and entitled to vote. But, the trial court went furtherundoubtedly motivated by a desire to promote litigation efficiencyand adjudicated questions of ultimate beneficial ownership as well. In doing that, however, the Court of Chancery crossed a jurisdictional line and exceeded its powers under Section 225. An adjudication of who has the right to vote disputed corporate shares for Section 225 purposes cannot constitute a binding adjudication of who beneficially owns those shares, because a Section 225 action is by its nature an in rem, not a plenary, proceeding. Only in a plenary proceeding before a court that has in personam jurisdiction over the litigants may the court adjudicate the litigants' property interest in disputed corporate shares. [92] Here, the Orly Trust and TPR were never made parties to a plenary proceeding where the trial court had in personam jurisdiction over them. [93] In this case, Genger voluntarily asked the trial court to determine that he beneficially owned 13.99%, and that the Orly Trust beneficially owned 19.43%, of the Trans-Resources shares. To be sure, Genger and the Trump Group were legally free to consent to the Court of Chancery exercising plenary in personam jurisdiction over themselves personally. What Genger and the Trump Group could not do, however, was consent to that court's exercising personal jurisdiction over anyone elsein this case the Orly Trust or TPRwithout valid authorization. Only those entities, through their authorized representatives, were legally empowered to give their consent. The Court of Chancery never obtained consensual in personam jurisdiction over TPR, which was a party to the 2004 Transfers. Without having consented-to personal jurisdiction over TPR, the trial court could not enlarge the Section 225 proceeding into a concurrent plenary action that would empower the court to determine the ultimate beneficial ownership of the Genger and the Orly Trust Shares. Nor could the trial court exercise personal jurisdiction over the Orly Trust. Although not altogether clear, it appears that personal jurisdiction was exercised on the basis that Orly Genger, a trust beneficiary, had voluntarily appeared as a non-party witness at the Section 225 trial. That trial did not implicate the beneficial ownership of the Orly Trust Shares, [94] and the Court of Chancery itself acknowledged that the Orly Trust was not formally before the court. [95] The trial transcript shows that Orly's testimony related only to whether her father, Genger, had verbally informed Jules of the 2004 Transfers either at the time Genger and Dalia divorced or at some point thereafter, before the parties' June 13, 2008 meeting. Orly's willingness to testify before the trial court in her individual capacity as Genger's daughter did not constitute legal consent to the Court of Chancery's exercising in personam jurisdiction over the Orly Trust. [96] A separate consent, by an authorized representative of the Orly Trust, was required to accomplish that, and there is no evidence or claim that such consent was ever obtained. To summarize, the trial court lacked personal jurisdiction over either the Orly Trust or TPR, which was required for a binding adjudication of the beneficial ownership of their respective stock ownership interests. [97] Without personal jurisdiction over these entities, the Court of Chancery lacked the power to augment TPR's beneficial ownership interest, or diminish the Orly Trust's beneficial ownership interest, in Trans-Resources by adjudicating that TPR beneficially owned the Genger Shares and Orly Trust Shares. [98] Therefore, the beneficial ownership determinations that flow from the Court of Chancery's August 9, 2010 Side Letter Opinion and its August 18, 2010 Final Judgment Order must be reversed.