Justia.com Opinion Summary: This appeal arose out of a contest for control of Trans-Resources, Inc., a Delaware corporation, where plaintiffs brought a Court of Chancery action under 8 Del. C. 225 against defendant to determine which stockholder group possessed the majority voting interest entitled to elect the Trans-Resources board of directors. The court affirmed the judgment of the Court of Chancery in so far as it embodied and implemented the rulings in the Merits and Spoliation Opinions; and reversed to the extent it adjudicated the beneficial ownership of the Orly Trust Shares and the Genger Shares based on the determinations made in its August 9, 2010 Side Letter Opinion and August 18, 2010 Final Judgment Order.
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IN THE SUPREME COURT OF THE STATE OF DELAWARE
ARIE GENGER,
§
§
Defendant/Counterclaim
§
Plaintiff-Below,
§
Appellant,
§
§
V.
§
§
TR INVESTORS, LLC,
§
GLENCLOVA INVESTMENT CO., §
NEW TR EQUITY I, LLC,
§
NEW TR EQUITY II, LLC, and
§
TRANS-RESOURCES, INC.,
§
§
Plaintiffs/Counterclaim
§
Defendants-Below,
§
Appellees.
§
No. 592, 2010
Court Below: Court of Chancery of
the State of Delaware
C.A. No. 3994
Submitted: May 25, 2011
Decided: July 18, 2011
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and
RIDGELY, Justices, constituting the Court en Banc.
Upon Appeal from the Court of Chancery. AFFIRMED IN PART and
REVERSED IN PART.
Stephen P. Lamb, Esquire (argued), of Paul, Weiss, Rifkind, Wharton &
Garrison LLP, Wilmington, Delaware; Of Counsel: Eric Alan Stone and Jaren
Elizabeth Janghorbani, Esquires, of Paul, Weiss, Rifkind, Wharton & Garrison
LLP, New York, New York; for Appellant.
Thomas J. Allingham II (argued), Anthony W. Clark and Robert A. Weber,
Esquires, of Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware;
for Appellees.
Kevin F. Brady, Esquire, of Connolly Bove Lodge & Hutz LLP,
Wilmington, Delaware; Of Counsel: Daniel B. Garrie, Esquire, of Focused
Solution Recourse Delivery Group, LLC, Bellevue, Washington; for Amici Curiae
Focused Solution Resource Delivery Group, the Organization of Legal
Professionals, and Security Mentors, LLC.
JACOBS, Justice:
This appeal arises out of a contest for control of Trans-Resources, Inc.
(“Trans-Resources”), a Delaware corporation. The Trump Group, whose members
are the plaintiffs-below appellees,1 brought a Court of Chancery action under 8
Del. C. § 2252 against Arie Genger (“Genger”), the defendant-below appellant,3 to
determine which stockholder group possessed the majority voting interest entitled
to elect the Trans-Resources board of directors. In two separate opinions and a
final judgment order, the Court of Chancery concluded that the Trump Group
collectively owned 67.7477% of the Trans-Resources shares, and that the Trump
Group’s majority vote would determine the lawful membership of the
corporation’s board.4 The Court of Chancery also determined that Genger had
violated a status quo court order prohibiting the destruction of certain
electronically stored documents and materials pending the litigation, and
1
The Trump Group, who are also counter-claim defendants, include TR Investors, LLC
(“Investors”), Glenclova Investment Co. (“Glenclova”), New TR Equity I, LLC, and New TR
Equity II, LLC (collectively, the “Trump Group”).
2
8 Del. C. § 225 (authorizing the Court of Chancery to “determine the validity of any election,
appointment, removal, or resignation of any director or officer of any corporation, and the right
of any person to hold or continue to hold such office. . . .”).
3
4
Genger is also a counterclaim-defendant below.
Final Judgment Order at ¶ 7, C.A. 3994 (Del. Ch. Aug. 18, 2010) (the “Final Judgment
Order”); TR Investors, LLC v. Genger, 2010 WL 3279385 (Del. Ch. Aug. 9, 2010) (the “Side
Letter Op.”); TR Investors, LLC v. Genger, 2010 WL 2901704, at *22 (Del. Ch. July 23, 2010)
(the “Merits Op.”).
sanctioned Genger for those violations.5 For the reasons discussed below, we
affirm in part and reverse in part the judgment of the Court of Chancery.
FACTUAL AND PROCEDURAL BACKGROUND6
A. The Stockholders Agreement
In 1985, Genger7 formed Trans-Resources, a Delaware corporation that
specializes in manufacturing fertilizer and producing chemicals for agricultural
use. Trans-Resources was wholly owned by TPR Investment Associates, Inc.
(“TPR”), an entity that in turn was wholly owned by Genger, his wife, and his
family trusts.
As TPR’s majority shareholder, Genger also controlled Trans-
Resources. Genger’s wife, Dalia, and their two children, Orly and Sagi, held
minority shareholder interests in TPR. The children’s TPR shares were held in two
separate trusts, the “Orly Trust” and the “Sagi Trust,” respectively.
Although initially successful, by 2001 Trans-Resources was nearly
insolvent. Its bonds were trading at a fraction of their $230 million face value.
Genger attempted to negotiate a resolution with Trans-Resources’ bondholders, but
those negotiations were unsuccessful and Trans-Resources faced the prospect of
5
TR Investors, LLC v. Genger, 2009 WL 4696062, at *12, 16 (Del. Ch. Dec. 9, 2009)
(hereinafter “Spoliation Op.”).
6
The facts recited are based on the Court of Chancery’s post-trial findings of fact.
7
Because the Genger family members all share the same last name, we refer to Sagi, Orly, and
Dalia Genger by their first names to avoid confusion with Arie.
2
bankruptcy. Jules Trump (“Jules”),8 a close friend of Genger for nearly 25 years,
viewed this state of affairs as a valuable business opportunity and caused two
Trump Group members, Glenclova and Investors, to purchase $220 million (face
value) of Trans-Resources’ bonds for $25 million.
Glenclova and Investors then entered into an agreement with TransResources and TPR to convert their bond holdings into an equity interest in TransResources (the “Stockholders Agreement”). Under the Stockholders Agreement,
Genger’s equity ownership interest in Trans-Resources (through TPR) was reduced
from 100% to 52.85%, and Glenclova and Investors owned the remaining 47.15%.
In exchange for agreeing to become minority shareholders, Glenclova and
Investors extracted certain protections, including significant board representation
and veto rights. Those protections were embodied in the Stockholders Agreement.
Glenclova and Investors also sought to ensure that TPR (or some other
acceptable Genger-controlled entity) would be the only other Trans-Resources
stockholder.
To accomplish that, the Stockholders Agreement restricted the
transfer of Trans-Resources shares to any persons or entities except those that were
designated therein as “Permitted Transferees.” If a party to the agreement wished
to transfer or sell its shares to a non-Permitted Transferee, the selling party must
8
As with the Genger family, the Trump family members all share the same last name. We refer
to Jules and Eddie Trump by their first names to avoid confusion.
3
first give written notice to the other Trans-Resources shareholders, who would then
have a right of first refusal. A transfer that failed to comply with those restrictions
and the prior notice requirement would automatically be deemed invalid and void,
and would trigger the non-selling shareholders’ right to purchase the invalidlytransferred shares (the “Purchase Rights”).9
B. The 2004 Transfers
On October 26, 2004, Arie and Dalia Genger divorced. In the Gengers’
divorce settlement agreement, Arie Genger represented that “[e]xcept for the
Consent of TPR . . . no consent, approval or similar action of any person is
required in connection with the transfer of [Trans-Resources] Stock as
contemplated hereby. . . .” That representation was false. In fact, the prior consent
of the Trump Group signatories to the Stockholders Agreement (i.e., Glenclova
and Investors) was required.
Three days later, on October 29, 2004, Genger transferred his controlling
stock interest in TPR to Dalia. Simultaneously, he caused TPR to transfer its
52.85% ownership in Trans-Resources as follows: (i) to himself, approximately
13.9% of those shares; and (ii) to each of the Orly Trust and the Sagi Trust,
approximately 19.5% of those shares. Those transfers are collectively referred to
in this Opinion as the “2004 Transfers.” Under the agreement that documented the
9
Under the Stockholders Agreement, a non-selling shareholder’s Purchase Rights would also be
triggered if the improper transfer resulted in a change of control of the selling party.
4
2004 Transfers, the trustees of both Trusts purported to give irrevocable lifetime
proxies to Genger to vote the Trans-Resources shares held by each Trust (the
“Irrevocable Proxies” or “Proxies”).
C. The Funding Agreement and The 2008 Purchase Agreement
When he effectuated the 2004 Transfers, Genger knew that neither Trust was
a “Permitted Transferee” of the Trans-Resources shares under the Stockholders
Agreement. Despite that, Genger did not notify Glenclova or Investors of the 2004
Transfers, nor did he provide to those Trump Group entities copies of the
Irrevocable Proxies or his divorce settlement agreement.
Genger claims,
nonetheless, that Glenclova and Investors had actual notice of the 2004 Transfers,
because he (Genger) orally told Jules about them on several occasions. In both the
trial court and this Court, the Trump Group (and Jules) disputed that claim, and
steadfastly insisted that Genger never told them of the 2004 Transfers. All parties
agree that Genger never formally or specifically disclosed the 2004 Transfers to
Glenclova or Investors until June 2008—four years after those transactions took
place. That disclosure was made in the circumstances next described.
During the spring of 2008, Trans-Resources again ran into financial
difficulty and was facing foreclosure on an overdue bank debt. Again, the Trump
Group stepped in and offered to provide Trams-Resources the additional funding
needed for repayment—this time, however, in exchange for additional equity that
5
would give Glenclova and Investors majority voting control. Genger agreed to
those terms, which were documented in the “2008 Funding Agreement.” On June
13, 2008, Genger met with Eddie Trump (“Eddie”) and Mark Hirsch, the Trump
Group’s general counsel (“Hirsch”), to discuss the Funding Agreement. At that
meeting, Hirsch handed Genger—and asked him to verify—a document that
identified and listed the Trans-Resources stockholders as TPR, Glenclova, and
Investors. Confronted with that verification request, Genger had no choice but to
disclose that: (i) TPR was no longer a stockholder of Trans-Resources, and (ii)
TPR’s shares in Trans-Resources had been transferred to himself and to the Orly
and Sagi Trusts four years earlier, in the 2004 Transfers.
Genger claims,
nonetheless, that at that meeting and thereafter, the Trump Group “ratified” the
2004 Transfers. The Trump Group assiduously contest that claim as well.
On June 25, 2008, the Trans-Resources board and stockholders met to
consider and approve the 2008 Funding Agreement. At that meeting, the Trump
Group representatives expressed their frustration over Genger’s (hitherto
undisclosed) violation of the Stockholders Agreement. At no point during that
meeting or thereafter did the Trump Group tell Genger or anyone else that they
approved the 2004 Transfers.
To induce the Trump Group to enter into the
Funding Agreement, Genger assured them that Glenclova and Investors would
obtain majority voting control of Trans-Resources. Genger also promised that the
6
Trump Group would not encounter any objection from Sagi, Genger’s thenestranged son, to Genger voting the Sagi Trust’s Trans-Resources shares under the
Irrevocable Proxy. Based on those representations, the Trump Group decided to
proceed with the Funding Agreement.
All that turned out to be wasted effort, however, because shortly thereafter
Genger backed out of the 2008 Funding Agreement, having devised a solution that
would avoid relinquishing his control of Trans-Resources. That solution was to
“upstream” sufficient funds from a Trans-Resources subsidiary to pay TransResources’ overdue bank debt. The end result was that Trans-Resources no longer
needed the additional capital promised by the 2008 Funding Agreement, and the
Trump Group did not obtain their promised majority voting control.
Having
backed away from the 2008 Funding Agreement, Genger then threatened, at an
August 1, 2008 meeting, to sue the Trump Group if they challenged the legal
validity of the 2004 Transfers.
In response to Genger’s litigation threat, on August 8, 2008, Glenclova
invoked its Purchase Rights, conferred by the Stockholders Agreement, to acquire
all the Trans-Resources shares purportedly covered by the 2004 Transfers.10
10
Specifically, the Trump Group claims that its Purchase Rights were triggered by two
independent events, to which the Trump Group never consented: (1) when the Trump Group
was not given the opportunity to exercise its first refusal rights as to the 2004 Transfers; and (2)
when Genger transferred his majority ownership interest in TPR to Dalia as a result of their
divorce settlement agreement, which resulted in a change of control of TPR. See Complaint at
¶ 2-3, Case No. 08-CIV-7140 (JFK) (S.D.N.Y. Aug. 11, 2008).
7
Genger rejected that Purchase Rights invocation, claiming that he had previously
informed Jules of the 2004 Transfers at the time of his divorce, and, thus, whatever
Purchase Rights Glenclova may have obtained under the Stockholders Agreement
had long expired. In response to Genger’s refusal to honor its claimed Purchase
Rights, Glenclova filed a lawsuit in the United States District Court for the
Southern District of New York (the “New York litigation”) to enforce the
Stockholders Agreement, including its Purchase Rights provision.11 The New
York litigation is still pending.
Aware that the New York litigation would be lengthy and perhaps take years
to resolve, the Trump Group decided upon a more efficient and expedited course of
action: to acquire the Trans-Resources shares that TPR purportedly transferred to
the Sagi Trust in the 2004 Transfers (the “Sagi Trust Shares”). Because the Sagi
Trust Shares represented a 19.5% stock interest, their acquisition would enlarge the
Trump Group’s equity interest in Trans-Resources to one of absolute majority
control—approximately 67% of the company’s voting power. On August 22,
2008, the Trump Group, TPR, and the Sagi Trust reached, and formally entered
into, an agreement (the “2008 Purchase Agreement”) under which the Trump
Group purchased the Sagi Trust Shares.
Section 10 of the 2008 Purchase
Agreement provided that if the 2004 Transfers were determined to be legally
11
Glenclova Inv. Co. v. Trans-Resources, Inc., Docket No. 08-CIV-7140 (JFK) (S.D.N.Y.).
8
void—as the Trump Group claimed they were—then the Sagi Trust Shares would
be deemed—and treated as if they had been—transferred to the Trump Group
directly by TPR (now controlled by Sagi),12 and not by the Sagi Trust. The
purpose of Section 10 was to enable the Trump Group to “cover all its bases,”
regardless of the outcome of the legal dispute with Genger over the validity of the
2004 Transfers.
That same day, the Trump Group entered into a separate agreement (the
“Side Letter Agreement”) with TPR (represented by its controller, Sagi), wherein
the Trump Group acquired an option to purchase the Trans-Resources shares
purportedly transferred to Genger and to the Orly Trust in the 2004 Transfers.13
The Side Letter Agreement would be triggered only if the 2004 Transfers were
judicially determined to be legally void. In that event, the legal and beneficial
ownership of those shares would be deemed to have remained with TPR. The only
signatories to the Side Letter Agreement were the Trump Group and TPR.14 The
Orly Trust was not a signatory, nor was Genger.
12
Sagi and Dalia serve as the directors of the TPR board, and Sagi is the chief executive officer
of TPR.
13
Specifically, the Side Letter Agreement required that TPR, “upon written request from the
[Trump Group] . . . take all necessary action to effect the transfer of [the disputed TransResources] Shares. . . .”
14
Sagi signed the Side Letter Agreement on behalf of TPR, in his capacity as president of TPR.
9
D. The Section 225 Chancery Action
By purchasing the Sagi Trust Shares, the Trump Group now owned (through
its affiliated entities) the majority equity position in Trans-Resources. On August
25, 2008, the Trump Group exercised its newly-acquired voting control by
executing and delivering a written shareholder consent that: (1) removed Genger
as a Trans-Resources director, (2) elected Eddie and Hirsch to the Trans-Resources
board, and (3) confirmed the prior election of Jules and of Robert Smith to that
board. Genger refused to recognize the Trump Group’s written consent, claiming
that it was invalid and of no legal effect.
The next day, August 26, 2008, the Trump Group filed a Delaware Court of
Chancery action under 8 Del. C. § 225, for a determination that as TransResources’ majority stockholder, the Trump Group was entitled to designate and
elect a majority of the members of the Trans-Resources board.15 The Trump
Group’s central claim was that the 2004 Transfers were void ab initio because: (i)
they did not comply with the notice and consent requirements of the Stockholders
Agreement, and (ii) therefore, the Trump Group was contractually entitled, under
its Purchase Rights, to acquire all of the Trans-Resources shares transferred by
15
As discussed in infra, Part III, the Trump Group initially sought a determination of which
stockholder group was entitled to elect four of the six Trans-Resources directors. By the time
this case was appealed to this Court, however, the scope of the Section 225 action had been
expanded, by agreement of all parties, to encompass a determination of which group was entitled
to elect the remaining two directors, as well.
10
TPR in 2004. In response, Genger counterclaimed for a determination that the
2004 Transfers were valid, because he had given Jules oral notice of the 2004
Transfers at the time that transaction occurred, and that Jules did not object.
Alternatively, Genger claimed, and asked the Court of Chancery to declare, that: (i)
the Trump Group’s purchase of the Sagi Trust Shares in 2008 operated to “ratify”
the 2004 Transfers, and (ii) as a consequence, Genger continued to control TransResources and was entitled to elect a majority of its board.
On September 26, 2008, one month after the Trump Group commenced the
Section 225 action, the parties settled their dispute and entered into a stipulated
final judgment, which the Court of Chancery approved. That stipulated judgment
declared that the Trump Group’s designees constituted a lawful majority of the
Trans-Resources board.
E. The Re-Opening of the Section 225
Action and The Spoliation Opinion
Unfortunately, that did not end the dispute. Two weeks after the entry of the
stipulated final judgment, the Trump Group moved for relief from that judgment
and to re-open the Section 225 proceeding. The Trump Group claimed that, after
taking control of Trans-Resources, they discovered that Genger had destroyed
documents relevant to the Section 225 action in violation of a document
preservation order entered by the Court of Chancery on August 29, 2008 (the
“Status Quo Order”). The Vice Chancellor granted the Trump Group’s motion and
11
re-opened the case. After conducting a trial in September 2009, the trial court
concluded that Genger had violated, and was in contempt of, the Status Quo Order,
because he had caused the deletion of files stored on his work computer at TransResources.16 The trial court further found that after deleting those computer files,
Genger directed an employee to use special software that “wiped” the unallocated
free space on both his computer’s hard drive and on a Trans-Resources computer
server. That made it impossible, even by use of computer forensic techniques, to
recover any deleted files that were stored in those computers’ unallocated free
space.17
As a sanction for those acts of spoliation, the Court of Chancery raised
Genger’s evidentiary burden by one level. That is, on any issue in which Genger
had the burden of proof, he would have to satisfy that burden by clear and
convincing evidence, rather than by a preponderance of the evidence.18 Because
Genger’s conduct called his credibility into question, the trial court also ruled that
Genger’s uncorroborated testimony would not be sufficient to establish any
material fact.19 Finally, the trial court awarded the Trump Group $750,000 of the
16
Spoliation Op., 2009 WL 4696062, at *12, 16 (Del. Ch. Dec. 9, 2009).
17
Id. at *16-17.
18
Id. at *18-19.
19
Id.
12
attorneys’ fees they incurred to investigate and litigate Genger’s spoliation of
computer documents.20
The parties later agreed that Genger would pay an
additional $3.2 million fee to the Trump Group, an amount that the court also
awarded.21
F. The Merits Opinion and The Side Letter Opinion
In December 2009, the Court of Chancery conducted a separate trial on the
merits of the Section 225 claims. In its Merits Opinion, handed down on July 23,
2010, the trial court determined that the Trump Group lawfully possessed a
majority voting interest and the resulting right to elect the majority of TransResources’ board.22 Specifically, the Court of Chancery found that Genger never
notified the Trump Group of the 2004 Transfers until June 13, 2008.23 Nor did the
Trump Group ever “ratify” the 2004 Transfers after that disclosure, for two
separate reasons. First, the Trump Group repeatedly and steadfastly took the
position that the 2004 Transfers had occurred in violation of the Stockholders
20
Id. at *19.
21
The $3.2 million represented the additional reasonable expert fees, technology consultant fees,
special master fees, and other unreimbursed expenses incurred in investigating and litigating
Genger’s spoliation of evidence. Final Judgment Order at ¶ 16, C.A. 3994 (Del. Ch. Aug. 18,
2010); see also TR Investors, LLC v. Genger, 2010 WL 541687 (Del. Ch. Feb. 3, 2010)
(distinguishing between the attorneys’ fees, and the expert and technology consultant fees
incurred during the investigation of Genger’s spoliation).
22
Merits Op., 2010 WL 2901704, at *22 (Del. Ch. July 23, 2010).
23
Id. at *13.
13
Agreement.24 Second, Genger failed to prove that the Trump Group had “benefited
in any way that suggests ratification,” especially given Genger’s repudiation of the
2008 Funding Agreement before it was ever signed.25
Finally, the Court of
Chancery held that even if the Trump Group had implicitly ratified the 2004
Transfers, the Trump Group still had lawful voting control of Trans-Resources,
because they acquired the Sagi Trust Shares free of the Irrevocable Proxy.26 The
Trump Group, therefore, owned the Sagi Trust Shares by virtue of the 2008
Purchase Agreement, unburdened by any right of Genger to vote those Shares.
That 2008 acquisition gave the Trump Group majority voting control of TransResources and the concomitant right to designate and elect four of the company’s
six directors.
Two weeks later, after issuing its Merits Opinion, the Court of Chancery
issued a supplemental opinion (the “Side Letter Opinion”) on August 9, 2010.27
The Side Letter Opinion addressed the ownership of the Trans-Resources shares
purportedly transferred to the Orly Trust (the “Orly Trust Shares”) and to Genger
(the “Genger Shares”) in the 2004 Transfers. In the Side Letter Opinion, the Vice
24
Id. at *16.
25
Id.
26
Id. at *20-21.
27
Side Letter Op., 2010 WL 3279385 (Del. Ch. Aug. 9, 2010).
14
Chancellor acknowledged that the Orly Trust “was not formally before the court”
in any capacity.28 The court determined, nonetheless, that neither Genger nor the
Orly Trust beneficially owned any Trans-Resources shares.29 Rather, the Genger
Shares and the Orly Trust Shares continued to be owned by TPR, with the result
that Trans-Resources “need not recognize Genger or the Orly Trust as
stockholders.”30 Therefore, under the Side Letter Agreement, the Trump Group
was entitled to vote both the Genger Shares and the Orly Trust Shares, and thereby
elect the remaining two members of the six-person Trans-Resources board.31
Genger has appealed from the final judgment that flows from all three of
these opinions—the Spoliation, the Merits, and the Side Letter Opinions.
ANALYSIS
Genger raises three claims of error on this appeal. First, as to the Spoliation
Opinion, he contends that the Court of Chancery erroneously concluded that he
destroyed evidence in violation of the Status Quo Order; consequently, the court
abused its discretion by finding him in contempt and by awarding sanctions
28
Id. at *1.
29
Id. at *3; see also Final Judgment Order at ¶ 9, C.A. 3994 (Del. Ch. Aug. 18, 2010) (“Arie
Genger and the Orly Genger Trust are not . . . the record or beneficial owners of any TransResources shares.”).
30
Side Letter Op. at *3; see also Final Judgment Order at ¶ 8 (“TPR is the record and beneficial
owner of all Trans-Resources shares not presently owned by [the Trump Group].”).
31
Side Letter Op. at *3 (“[T]he Trump Group may purchase the [Genger] and Orly [Trust]
Shares per the terms of the [Side] Letter Agreement, may vote those shares. . . .”)
15
entirely disproportionate to any violation.
Second, as to the Merits Opinion,
Genger claims that the Court of Chancery erred by concluding that: (i) the Trump
Group never ratified his transfer of Trans-Resources shares to the Sagi Trust (as
part of the 2004 Transfers), and (ii) the Irrevocable Proxy associated with the Sagi
Trust Shares was invalid and unenforceable. Third, Genger argues that the trial
court exceeded its jurisdiction by adjudicating, in the Side Letter Opinion, the
beneficial ownership of the Orly Trust Shares and the Genger Shares, because
neither the Orly Trust nor TPR—both indispensable parties to any such
adjudication—were properly before the trial court or subject to its in personam
jurisdiction.
Genger’s claims rest, in whole or in part, on the premise that the trial court
erred as a matter of law. We review a trial court’s formulation and application of
legal principles de novo.32 To the extent that Genger attacks the trial court’s
factual findings, we will not disturb those findings unless they are clearly
erroneous and not supported by the record.33
I. The Spoliation Opinion
Genger’s first claims that because the Court of Chancery erroneously found
that he caused material evidence to be spoliated, it abused its discretion by holding
32
Oberly v. Kirby, 592 A.2d 445, 462 (Del. 1991).
33
Osborn v. Kemp, 991 A.2d 1153, 1158 (Del. 2010).
16
him in contempt of the August 29, 2008 Status Quo Order. Alternatively, Genger
argues that even if the trial court’s contempt and spoliation findings are correct, the
resulting sanctions were an abuse of the court’s discretion, because the $3.2
million expert and attorneys’ fee award was disproportionate and excessive.
A trial court has broad discretion to fashion and impose discovery
sanctions.34 In exercising appellate review, this Court “will not disturb a trial
judge’s decision regarding sanctions imposed for discovery violations absent an
abuse of discretion.”35 “Although we may not substitute our own notions of what
is right for those of the trial judge, the trial judge’s decision to impose sanctions
must be just and reasonable.”36 To the extent a decision to impose sanctions is
factually based, we accept the trial court’s factual findings so long as they are
sufficiently supported by the record, are the product of an orderly and logical
reasoning process, and are not clearly erroneous.37 Moreover, “[where] factual
findings are based on determinations regarding the credibility of witnesses . . . the
34
Lehman Capital v. Lofland, 906 A.2d 122, 131 (Del. 2006).
35
Id. (internal quotation marks and alteration omitted); see also Cabrera v. State, 840 A.2d 1256,
1263 (Del. 2004) (“We review for abuse of discretion the sanction imposed by a trial court
because of a discovery violation.”).
36
Lehman Capital, 906 A.2d at 131 (quoting Chavin v. Cope, 243 A.2d 694, 695 (Del. 1968) and
In re Rinehardt, 575 A.2d 1079, 1082 (Del. 1990)) (internal quotation marks and alteration
marks omitted).
37
Stegemeier v. Magness, 728 A.2d 557, 561 (Del. 1999).
17
deference already required by the clearly erroneous standard of appellate review is
enhanced.”38
For the reasons that follow, we conclude that Genger’s arguments are
without factual or legal merit. We therefore uphold the Court of Chancery’s
spoliation and contempt findings and the resulting sanctions imposed.
A. Was There A Basis For The Trial Court To
Find Spoliation And Adjudicate Contempt?
Genger first claims that the evidence was insufficient to establish that he had
destroyed relevant documents or that the Trump Group was thereby prejudiced.
Because there can be no spoliation without a factually-grounded determination that
documents were destroyed, Genger argues, the trial court’s spoliation finding lacks
record support. Moreover, because the Status Quo Order did not expressly require
the unallocated free space on his computer’s hard drive to be preserved, no
spoliation or contempt finding would be proper.39 That Order directed only that
38
Cede & Co. v. Technicolor, Inc., 758 A.2d 485, 491 (Del. 2000).
39
In computing terms, “unallocated space” refers to the logical (as opposed to physical) space on
a hard drive that the computer’s operating system, such as Microsoft Windows, can write to,
because it is considered empty or “free.” Unallocated space is the opposite of “allocated” space,
which is the space on the hard drive where the operating system has already written data files to.
Normally, files can only be written to the unallocated “free” space. See, e.g., What is
unallocated
space?,
WHERE
IS
YOUR
DATA?
(Oct.
3,
2008),
http://
whereismydata.wordpress.com/ (hereinafter “Unallocated Space”).
On a new (or newly-formatted) hard drive, virtually all of the hard drive space is
unallocated space. That unallocated space is normally filled with zeros (as opposed to ones). As
the computer writes files to the hard drive, the zeros are overwritten with the file data. When a
file is deleted from a computer, the computer’s operating system marks the previously allocated
18
the parties refrain from “tampering with, destroying or in any way disposing of any
[Trans-Resources]-related documents, books or records.” Because no provision in
the Status Quo Order expressly addressed his computer’s unallocated free space,
Genger claims that the trial court erred by adjudicating him in contempt.
Genger also urges us to reverse on a broader ground—namely, that requiring
a party-litigant to preserve a computer’s unallocated free space whenever a
document-retention policy is in place, would impossibly burden a company-litigant
by effectively requiring the company to refrain from using its computers entirely.
Genger argues that in the course of a computer’s normal operation, its operating
space as unallocated. The data from the file itself, however, remains on the hard drive. See, e.g.,
Nucor Corp. v. Bell, 251 F.R.D. 191, 198 (D.S.C. 2008) (explaining unallocated space as it
relates to deleted files). For example, assume that a user saves a 10GB movie file onto a new
500GB hard drive. Once the movie file’s data is written to the hard drive, the computer’s
operating system recognizes that the hard drive is 2% allocated space (i.e., the movie file), and
98% unallocated space. If the user now deletes the movie file, the operating system updates the
hard drive status to show that there is 100% unallocated space. Of the 500GB of unallocated
space, 10GB of that would be the old movie file data, while the remaining 490GB would be
zeros. See, e.g., Unallocated Space. With normal computer usage, until new files are written to
the hard drive, the movie file data will remain deleted but still be recoverable from the hard
drive. Even if new files are written to the hard drive, those new files must overwrite the same
unallocated space as the movie file data, before the movie file is destroyed and becomes
unrecoverable. See, e.g., Nucor, 251 F.R.D. at 198; MMI Products, Inc. v. Long, 231 F.R.D.
215, 216 (D. Md. 2005).
By using special software, computer forensic experts can recover the 10GB movie data file,
even though that file has already been deleted by the user. This recovery process, however, can
be performed only if the unallocated free space has not been “wiped”—i.e., overwritten with
zeros—or written over with new data files. In the example above, wiping the unallocated free
space would result in overwriting the old movie data with zeros, thereby making recovery of that
movie file impossible. See, e.g., Leon v. IDX Sys. Corp., 464 F.3d 951, 956 (9th Cir. 2006)
(affirming district court’s finding that the unallocated free space on a user’s computer had been
intentionally wiped, thereby making recovery of any files in that space impossible); Krumwiede
v. Brighton Assoc., L.L.C., 2006 WL 1308629, at *5 (N.D. Ill. May 8, 2006) (explaining how
defragmentation will overwrite existing unallocated space).
19
system is constantly overwriting the unallocated free space by creating and
deleting temporary files.40 Given that technological reality, to expand the scope of
a routine document-retention order so as to require preservation of unallocated free
space would impose an unworkable standard.41
We do not read the Court of Chancery’s Spoliation Opinion to hold that as a
matter of routine document-retention procedures, a computer hard drive’s
unallocated free space must always be preserved.
The trial court rested its
spoliation and contempt findings on more specific and narrow factual grounds—
that Genger, despite knowing he had a duty to preserve documents, intentionally
took affirmative actions to destroy several relevant documents on his work
computer.
These actions prevented the Trump Group from recovering those
deleted documents for use in the Section 225 and the New York litigations.42 The
40
For example, every time a user powers on a computer, the computer’s operating system will
write temporary files to the unallocated hard drive space. Those temporary files are then deleted
when the computer is shut down. See, e.g., Mintel Int’l Group, Ltd. v. Neergheen, 2010 WL
145786, at *8 (N.D. Ill. Jan. 12, 2010) (finding that even non-user initiated software may have
destroyed data); Antioch Co. v. Scrapbook Borders Inc., 210 F.R.D. 645, 652 (D. Minn. 2002)
(discussing how normal computer usage may destroy data); see also Schedule Disk
Defragmenter to run regularly, http://windows.microsoft.com/en-US/windows-vista/ScheduleDisk-Defragmenter-to-run-regularly (indicating that Windows automatically schedules disk
defragmentation actions to occur at least once a week to improve computer performance).
41
The amici curiae, Focused Solution Recourse Delivery Group, LLC, The Organization of
Legal Professionals, and Security Mentors LLC, have also filed a brief in support of Genger’s
position on broader contention.
42
Spoliation Op., 2009 WL 4696062, at *7, 16 (Del. Ch. Dec. 9, 2009); see also id. at *10 (“I do
conclude that [Genger] intended to limit the ability of the Trump Group to find additional
documents that might aid it in its litigation battles with him.”).
20
record establishes that Genger acted furtively, by (among other things) directing an
employee to wipe his computer’s unallocated free space using a program called
“SecureClean” at around 1:00 a.m. on September 8, 2008.43 Thereafter, that same
employee ran SecureClean on the Trans-Resources company server on September
10, 2008.44 At no point did Genger ever consult with the Trump Group or its
counsel before directing that those actions be taken.
The Trump Group remained unaware of the impact of Genger’s covert
conduct until weeks later, when the Trump Group found itself unable to locate
copies of documents that should have been available on Genger’s work computer.45
Specifically, copies of eight separate documents and/or emails should have been—
but were not—found on either the Trans-Resources company server or Genger’s
work computer.46
The absence of those documents was determined to have
prejudiced the Trump Group, because “[d]ifferent versions of documents or e-mail
43
Id. at *7. The record shows that Genger’s technology advisor, Oren Ohana, had run
SecureClean on the “DeepClean” option, which was the most thorough. The DeepClean option
permanently overwrote the unallocated free space on the hard drive with new strings of
unintelligible data. Id.
44
Id.
45
Id. at *11-13.
46
Id. at *11 (explaining that under the established protocol, where Genger would have saved the
relevant files on the Trans-Resources server); id. at *12 (identifying eight relevant emails, some
with attachments, that were not found on the computer image of Genger’s hard drive, and noting
that Genger “was not a routine ‘deleter’” and had accumulated thousands of e-mails in his
inbox).
21
chains can take on material importance if there are alterations or additions to them.
And who received what and when can be crucial.”47
From those missing
documents the trial court inferred that other relevant documents would likely have
been stored on Genger’s computer and/or the Trans-Resources server, and had
been permanently deleted and were now unrecoverable.48 It was on that specific,
narrow factual basis that the trial court: (i) found that Genger had spoliated
evidence by intentionally destroying documents, (ii) sanctioned him for that
spoliation, and (iii) adjudicated him in contempt of the August 29, 2008 Status Quo
Order.
We affirm the Court of Chancery’s findings and resulting sanctions, because
the trial court did not abuse its discretion or commit any erroneous finding of law
or fact. Our affirmance should not be viewed as extending beyond the confines of
this setting—i.e., where a party is found intentionally to have taken affirmative
steps to destroy or conceal information to prevent its discovery at a time that party
is under an affirmative obligation to preserve that information. It is noteworthy
that there is no evidence or claim in this case, that the use of the SecureClean
47
Id. at *12.
48
Id.
22
program fell within Trans-Resources’ ordinary and routine data retention and
deletion procedures.49
To avoid future repetitions of the “unallocated free space” issue presented
here, we suggest that the parties and the trial court address any unallocated free
space question that might arise before a document retention and preservation order
is put in place. We recognize that instances may arise where a party-litigant will
have a legitimate reason to preserve unallocated free space on a computer’s hard
drive. In addressing that issue, the parties must be mindful that court-ordered
discovery of electronically-stored information should be limited to what is
49
For example, the outcome perhaps might be different if Trans-Resources had a data retention
policy whereby SecureClean was run on employees’ computers and the company’s servers every
three months, and coincidentally, that scheduled run was to occur on September 8, 2008. See
Sears, Roebuck & Co. v. Midcap, 893 A.2d 542, 548 (Del. 2006) (recognizing that the rationale
for giving an adverse inference instruction would not necessarily apply where evidence was
destroyed “accidentally or where records are purged under a routine document destruction
policy.”). We also note that other state and federal courts have differed in their approach to
determining whether destruction of evidence due to routine document destruction policies
warrants sanctions such as an adverse inference instruction. Compare, e.g., Reish v. Penn. State
Univ., 2011 WL 2015350, at *7 (M.D. Pa. May 24, 2011) (finding no spoliation where document
destruction was a function of routine company policy) with R.F.M.A.S., Inc. v. So, 271 F.R.D. 13,
24 (S.D.N.Y. 2010) (noting that failure to suspend “any routine document destruction or other
processes involved in the ordinary course of business that might result in the destruction of
potentially relevant evidence” may result in sanctions); see also Victor Stanley Inc. v. Creative
Pipe, Inc., 269 F.R.D. 497, 542-553 (D. Md. 2010) (comparing the various approaches taken by
the United States Circuit Courts of Appeal).
23
“reasonably accessible.”50 That determination, by its very nature, must be made on
a case-by-case basis.51
B. Was the $3.2 Million Fee Award An Abuse of Discretion?
Genger next claims that even if the Court of Chancery’s spoliation and
contempt findings were correct, the court abused its discretion by awarding the
Trump Group an additional $3.2 million in fees as a sanction for those violations.
He argues that that fee award was disproportionate to any violations, particularly
since the trial court had earlier imposed as sanctions a heightened burden of proof
and a prior $750,000 attorneys’ fees award.
Assuming without deciding that $3.2 million falls on the higher end of the
range of a reasonable fee, the record establishes that Genger expressly waived his
right to challenge the reasonableness of that award. The Court of Chancery’s Final
Judgment Order expressly recites that Genger “agree[d] that he w[ould] not
challenge the reasonableness of the amount of such fee award (whether on appeal
or otherwise), except on the ground that it was improper to award any sanction . . .
50
See FED. R. CIV. P. 26(b)(2)(B) (limiting discovery of electronically-stored information to that
which is “reasonably accessible”); Rimkus Consult. Grp. v. Cammarata, 688 F.Supp.2d 598, 612
(S.D. Tex. 2010) (analyzing the duty to preserve by focusing on proportionality and
reasonableness); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216-18 (S.D.N.Y. 2003)
(recognizing that a corporation does not have a duty to preserve “every” data source, because
such a rule would “cripple large corporations . . . [that] are almost always involved in
litigation”).
51
Rimkus Consult. Grp., 688 F.Supp.2d at 613.
24
for [the Court of Chancery’s] contempt finding. . . .”52 Therefore, this issue was
not properly preserved for appeal and, at most, is reviewable only for plain error.53
We find no plain error.
The $3.2 million figure was not arbitrarily
determined. The amount of attorneys, expert, and technology consultant fees was
hotly contested, and that $3.2 million figure was the result of the parties’
compromise.54 In these circumstances, the reasonableness of that fee award does
not, nor could it, constitute plain error. Consequently, that award must be upheld.
II. The Merits Opinion
Genger next claims that the Court of Chancery erroneously concluded, in its
Merits Opinion, that the Trump Group did not ratify the 2004 Transfer to the Sagi
Trust. Genger contends that the Trump Group, by its conduct, twice ratified those
transfers after the June 13, 2008 meeting at which the Trump Group was first told
about them. Genger also attacks, as legally erroneous, the Vice Chancellor’s
determination that the Irrevocable Proxy associated with the Sagi Trust Shares was
invalid under New York law and that, in any event, the Proxy did not run with the
Sagi Trust Shares after those shares were sold to the Trump Group.
52
Final Judgment Order at ¶ 16, C.A. 3994 (Del. Ch. Aug. 18, 2010).
53
Beebe Med. Ctr., Inc. v. Bailey, 913 A.2d 543, 550 (Del. 2006) (noting that “waiver occurs
where a party fails to object or raise that issue on appeal, unless the error is plain.”).
54
See Final Judgment Order at ¶ 16.
25
Both arguments fail because they ignore the trial court’s factual findings and
lack legal merit. Our reasons follow.
A. Did the Trump Group Ratify The
2004 Transfer To the Sagi Trust?
Genger claims that the undisputed facts establish that the Trump Group
twice ratified the 2004 Transfers to the Sagi Trust. The first ratification, Genger
argues, occurred at the June 25, 2008 meeting when the Trump Group solicited and
accepted Genger’s vote of the Sagi Trust Shares to approve the (later repudiated)
2008 Funding Agreement. Genger claims that by recognizing his right to vote the
Sagi Trust Shares, the Trump Group necessarily ratified the disputed 2004
Transfers. The second ratification is said to have occurred when the Trump Group
purchased the disputed Trans-Resources shares from the Sagi Trust under the 2008
Purchase Agreement. Without the 2004 Transfers, Genger insists, the Sagi Trust
would have had no Trans-Resources shares to sell to the Trump Group. Therefore,
the 2004 Transfers were necessarily ratified if the 2008 Purchase Agreement was
to have any legal force. Neither argument, in our view, has merit.
Ratification is an equitable defense55 that precludes a party “who [has]
accept[ed] the benefits of a transaction from thereafter attacking it.”56 Ratification
55
Frank v. Wilson & Co., 32 A.2d 277, 283 (Del. 1943).
56
Giammalvo v. Sunshine Min. Co., 1994 WL 30547 at *10 (Del. Ch. Jan. 31, 1994) (citing
Kahn v. Household Acq. Corp., 591 A.2d 166, 177 (Del. 1991)), aff’d 651 A.2d 787 (Del. 1994).
26
may be either express or implied through a party’s conduct, but it is always a
“voluntary and positive act.”57
It is undisputed that the Trump Group never
expressly or formally ratified the 2004 Transfers.
The Court of Chancery
explicitly found that “[a]t no point did the Trump Group tell Genger that it [had]
accepted the 2004 Transfers.”58 The sole issue, then, becomes whether the Trump
Group, by its post-June 13, 2008 conduct,59 implicitly ratified the 2004 Transfers.
The record establishes that no implied ratification of the 2004 Transfers by the
Trump Group ever took place.
Implied ratification occurs “[w]here the conduct of a complainant,
subsequent to the transaction objected to, is such as reasonably to warrant the
conclusion that he has accepted or adopted it, [and] his ratification is implied
through his acquiescence.”60 Ratification of an unauthorized act may be found
from conduct “which can be rationally explained only if there were an election to
treat a supposedly unauthorized act as in fact authorized.”61 Ratification may also
be found where a party “receives and retains the benefit of [that transaction]
57
Frank, 32 A.2d at 283.
58
Merits Op., 2010 WL 2901704, at *16 (Del. Ch. July 23, 2010).
59
The relevant date is June 13, 2008, because that was when Genger had first informed the
Trump Group of the 2004 Transfers. Id. at *13-14.
60
Frank, 32 A.2d at 283.
61
Dannley v. Murray, 1980 WL 268061, at *4 (Del. Ch. July 3, 1980) (emphasis added).
27
without objection, [] thereby ratify[ing] the unauthorized act and estop[ping] itself
from repudiating it. . . .”62
The Court of Chancery found “no basis to conclude that the Trump Group
assented to the 2004 Transfers by accepting Genger’s vote on behalf of the Sagi
and Orly Trust[s] in favor of the [2008] Funding Agreement.”63
The record
evidence fully supports that finding. The Trump Group never received or retained
any benefit from the 2008 Funding Agreement, and ratification is not the only
rational explanation for the Trump Group’s conduct. The uncontroverted evidence
shows that the Trump Group was reluctant to invest additional risk capital into
Trans-Resources, and would do that only if given majority voting control. The
Trump Group agreed to enter into the 2008 Funding Agreement with Genger,
because Genger represented that he “would rectify [his] violation of the
Stockholders Agreement by ensuring that the Trump Group had voting control.”64
Moreover—and of critical importance—the parties never performed or even
executed the 2008 Funding Agreement, because Genger repudiated it.65 In these
62
Hannigan v. Italo Petroleum Corp. of Am., 47 A.2d 169, 172-73 (Del. 1945) (quoting 3
THOMPSON ON CORPS., § 2121 (3d ed.)); Dannley, 1980 WL 268061, at *4 (noting that implicit
ratification “may arise by the retention of benefits with knowledge of the unauthorized acts”);
see also Frank, 32 A.2d at 282; Giammalvo, 1994 WL 30547, at *10.
63
Merits Op., 2010 WL 2901704, at *16.
64
Id. at *17.
65
Id. at *16.
28
circumstances, the Trump Group’s willingness to accept Genger’s vote on behalf
of the Sagi and Orly Trusts in favor of the 2008 Funding Agreement cannot be
fairly viewed as acquiescing in the 2004 Transfers. That is because the Trump
Group never received the negotiated benefit (i.e., voting control) that was to be the
quid pro quo for the Trump Group’s alleged willingness to accept and recognize
Genger’s vote on those Trusts’ behalf.66
Nor can the Trump Group’s conduct after the June 13, 2008 meeting be
“fairly viewed only as evincing an intent to approve the unauthorized acts”67 (here,
the 2004 Transfers). Contrary to Genger’s assertion, the 2008 Purchase Agreement
did not implicitly ratify the 2004 Transfers, because in that 2008 Agreement, the
Sagi Trust and TPR expressly conveyed only such interest as they may have had in
the disputed Trans-Resources shares.
Moreover, in Section 10 of the 2008
Purchase Agreement, both the purported transferor (TPR) and the purported
transferee (the Sagi Trust) agreed on a mechanism whereby the Trump Group’s
share acquisition would be fully protected if the 2004 Transfers were determined to
be void. Thus, the 2008 Purchase Agreement itself fatally undermines any claim
that the Trump Group intended, by its conduct, to “ratify” the 2004 Transfers.
66
See Hannigan, 47 A.2d at 172-73; Dannley, 1980 WL 268061, at *4.
67
Dannley, 1980 WL 268061, at *5.
29
At no point did the Trump Group ratify the 2004 Transfers, either expressly
or by implication. To the contrary, at all times the Trump Group acted consistently
with their position that the 2004 Transfers were void.68 Genger’s ratification
claim, therefore, fails on factual and legal grounds.
B. Were The Sagi Trust Shares Purchased
Subject To The Irrevocable Proxy?
Genger next claims that the Merits Opinion erroneously determined that the
Irrevocable Proxy was both legally invalid and, in any event, inapplicable to the
shares acquired in the 2008 Purchase Agreement. The Court of Chancery held that
even if the Trump Group did ratify the 2004 Transfer of the Trans-Resources
shares to the Sagi Trust, the Sagi Trust Shares, once acquired by the Trump Group
under the 2008 Purchase Agreement, were no longer subject to Genger’s
Irrevocable Proxy. The court so held for three reasons. First, the Irrevocable
Proxy did not explicitly provide that it was to run with the Sagi Trust Shares if
those shares were sold, nor did the Proxy explicitly reserve any voting powers to
Genger in the event of a sale or transfer.69 Second, even if the Proxy language was
ambiguous on that point, public policy considerations relating to the separation of
voting control from underlying economic stock ownership, which would result in
68
Merits Op., 2010 WL 2901704, at *16 (finding that “the clear and consistent message from the
Trump Group to Genger at all relevant times was that the Stockholders Agreement had been
violated.”).
69
Id. at *20.
30
“empty voting,” required construing the Proxy strictly against any implied
reservation of voting power.70
Third, and in any case, the Proxy was not
“irrevocable” under New York law, because neither Genger nor the Sagi Trust
were Trans-Resources shareholders, as Sections 609 and 620 of the New York
Business Corporation Law required that they be, at the time the Proxy was
executed.71
Genger challenges these conclusions. With respect to the third issue—
whether the Proxy was “irrevocable” under New York law—Genger claims that
both he and the Sagi Trust were, in fact, Trans-Resources shareholders at the time
the Proxy was executed. Genger asserts that the Proxy was executed on October
30, 2004, one day after he effectuated the 2004 Transfers to the Sagi Trust and to
himself.
Therefore, Genger tells us, the Proxy satisfied the requirements of
Sections 609 and 620 of the New York Business Corporation Law.
This argument suffers from two fatal flaws.
First, it was never fairly
presented to the trial court. Second, it is unsupported by the record. Genger
represented to the Vice Chancellor that “the Sagi Trust executed the Irrevocable
70
Id. at *20-21.
71
Id. at *21. The Court of Chancery found that New York law governed the Irrevocable Proxy.
The trial court’s choice of law has not been appealed. Under New York law, a proxy is
irrevocable where the proxy is held by “[a] person designed by or under paragraph (a) of section
620.” N.Y. BUS. CORP. LAW § 609(f). Section 620, paragraph (a), applies only to “[a]n
agreement between two or more shareholders. . . .” N.Y. BUS. CORP. LAW § 620(a).
31
Proxy on October 29, 2004,” the same day that the 2004 Transfers were executed.
At no point did Genger argue to the Court of Chancery (as he now argues to us)
that the Irrevocable Proxy was executed the day after the 2004 Transfers took
place. We therefore decline to consider Genger’s first argument, raised for the first
time on appeal, because it was never fully and fairly presented to the trial court, as
Supreme Court Rule 8 requires.72
On the second issue—the Irrevocable Proxy’s inapplicability—Genger
contends that the Court of Chancery read the Proxy language too narrowly, by
incorrectly applying a new, uncharted form of “heightened scrutiny” and thereby
concluding that the Proxy created “empty voting” concerns.
That was error,
Genger argues, because the only legal principle applicable here is that a purchaser
that buys shares with notice of an irrevocable proxy takes those shares subject to
that proxy. Because the Trump Group knew of the existence of the Proxy at the
time it negotiated the 2008 Purchase Agreement, Genger claims, that fact alone
triggered the Proxy’s applicability.
That the Proxy contained no language
explicitly binding subsequent transferees is of no relevance.
This argument cannot withstand scrutiny either. First, as a matter of law, the
Proxy was not “irrevocable,” because it did not satisfy the applicable New York
72
DEL. SUP. CT. R. 8; see also Russell v. State, 5 A.3d 622, 627 (Del. 2010) (“Under Supreme
Court Rule 8 and general appellate practice, this Court may not consider questions on appeal
unless they were first fairly presented to the trial court for consideration.”).
32
statutory requirements. Whether or not the Trump Group knew of the Proxy at the
time they purchased the Sagi Trust Shares is immaterial, because a contracting
party’s knowledge of a proxy’s existence cannot cure that proxy’s non-compliance
with controlling statutory requirements, or transmute a terminable proxy into one
that is irrevocable under New York statutory law.
Finally, and apart from its failure to satisfy applicable statutory
requirements, the Proxy’s plain language defeats Genger’s position. The Proxy
relevantly provided that:
The [Sagi Trust] . . . does hereby constitute and appoint Arie Genger
. . . to vote as its proxy, all shares of common stock of [TransResources] which are now or hereafter owned by the Trust, at any and
all meetings of the stockholders of Trans-Resources. . . .
Contrary to Genger’s claim, the Court of Chancery did not interpret that Proxy
language too narrowly. By its plain terms, the Proxy language applied only to the
Trans-Resources shares “owned” by the Sagi Trust. That is, the Proxy would
attach only to those Trans-Resources shares that were “now or hereafter owned by
the Trust.” The Proxy contains no provision that would bind any subsequent
owner of those shares. Once sold or transferred to a subsequent owner, those
shares were no longer “owned by the [Sagi] Trust” and therefore, were no longer
subject to the Proxy. Genger cannot complain that the trial court erroneously
interpreted the Proxy where its plain language compels that interpretation.
33
For these reasons, we uphold the judgment of the Court of Chancery insofar
as it adjudicates the merits of the Trump Group’s Section 225 claims.
III. The Side Letter Opinion
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 TransResources 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
73
Side Letter Op., 2010 WL 3279385 (Del. Ch. Aug. 9, 2010).
74
Merits Op., 2010 WL 2901704, at *19 (“I do not issue any ruling as to [the Orly Trust] shares,
because that is unnecessary in this § 225 action.”); see also id. (finding that requiring Genger to
transfer all of his Trans-Resources shares to TPR to be “unnecessary to this control dispute and
therefore this § 225 action.”).
34
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
75
Side Letter Op., 2010 WL 3279385, at *1.
76
Id.
77
Final Judgment Order at ¶ 9, C.A. 3994 (Del. Ch. Aug. 18, 2010).
78
Id. at ¶ 8 (emphasis added).
35
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
79
Because our disposition of the issues relating to the Court of Chancery’s Side Letter Opinion
rests on jurisdictional grounds, we do not reach or address Genger’s argument that the Side
Letter Agreement conferred only an option to purchase the Genger Shares and the Orly Trust
Shares, and that the Trump Group never exercised that contractual option.
80
Box v. Box, 697 A.2d 395, 398 (Del. 1997).
81
See id.; Nevins v. Bryan, 885 A.2d 233, 244 n.34 (Del. Ch. 2005); Adlerstein v. Wertheimer,
2002 WL 205684, at *7 (Del. Ch. Jan. 25, 2002) (“Because it is summary in nature, a Section
225 proceeding is limited to those issues that must necessarily be considered in order to resolve a
disputed corporate election process.”); Arbitrium (Cayman Islands) Handels AG v. Johnston,
1997 WL 589030, at *3 (Del. Ch. Sept. 17, 1997) (explaining that a Section 225 proceeding has
the limited scope of determining “the validity of a corporate election or to determine the right of
a person to hold a corporate office in the event that such office is claimed by more than one
person.” (citation omitted)).
36
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
82
Agranoff v. Miller, 1999 WL 219650, at *17 (Del. Ch. Apr. 12, 1999) (internal citation
omitted), aff’d as modified, 737 A.2d 530 (Table), 1999 WL 636634 (Del. 1999).
83
Id. (internal citation omitted); see also Box, 697 A.2d at 398 (holding that a Section 225 action
should not be used “for trying purely collateral issues”).
84
Arbitrium, 1997 WL 589030, at *4.
85
Agranoff, 1999 WL 219650, at *18.
37
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
86
See, e.g., Kahn Bros. & Co. v. Fischbach Corp., 1988 WL 122517, at *5 (Del. Ch. Nov. 15,
1988) (examining whether director obtained position via fraud); Garrett v. Brown, 1986 WL
6708, at *2, 6-11 (Del. Ch. June 13, 1986), aff’d, 511 A.2d 1044 (Del. 1986) (addressing whether
a stockholder’s right of first refusal had been violated in a Section 225 proceeding); Schroder v.
Scotten, Dillon Co., 299 A.2d 431, 435-36 (Del. Ch. 1972) (deciding whether, under Section
225, the failure to give certain board members notice of special meetings voided the subsequent
director elections that occurred at those meetings).
87
Agranoff, 1999 WL 219650, at *18; Marks v. Menoutis, 1992 WL 22248, at *5 (Del. Ch. Feb.
3, 1992) (“This Court cannot directly order a transaction to be rescinded in a § 225
proceeding.”).
88
Agranoff, 1999 WL 219650, at *18. The New York litigation is an example of such a plenary
proceeding.
38
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,
89
The Trump Group’s complaint initially sought a determination that the Trump Group “ha[d]
the right, as majority stockholders, to designate and cause the election of their two new designees
to the board and to continue the directorships of their two existing designees.” And, in a letter to
the trial court, the Trump Group represented that “[t]his summary proceeding concerns a dispute
between two groups over which is entitled to elect a majority of the board of directors of TransResources. . . .” Even after the stipulated settlement agreement fell through, resulting in the
Section 225 action being re-opened and litigated to a conclusion, the Trump Group’s position
was that “[t]he section 225 action is . . . to resolve a dispute over the composition of [TransResources’] board and who is entitled to elect a majority of the directors.” Similarly, Genger’s
counterclaim sought a Court of Chancery declaration that he, as majority stockholder, had the
sole right to designate and elect four of the six Trans-Resources directors.
90
Side Letter Op., 2010 WL 3279385, at *1 (Del. Ch. Aug. 9, 2010).
39
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
91
In that latter scenario, Genger would have a 13.9% stock ownership interest and the Orly Trust
would have a 19.5% stock ownership interest. Section 1.2(c) of the Stockholders Agreement
provides that:
If the TPR Stockholders own less than 50% of the outstanding Shares, the group
owning the greater number of Shares as between the TPR Stockholders and the
Non-TPR Stockholders shall designate four directors and the other group shall, so
long as it owns a number of Shares equal to at least 15% of the [] Shares [initially
purchased], designate two directors.
Under the Stockholders Agreement, a non-Permitted Transferee stockholder is designated as a
TPR Stockholder or a Non-TPR Stockholder depending upon which of the two groups it
acquired its shares from.
40
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
92
See Staar Surgical Co. v. Waggoner, 588 A.2d 1130, 1131 (Del. 1991) (holding that under
Section 225’s predecessor statute, the Court of Chancery could not adjudicate equitable
ownership of the disputed voting shares). See also Rosenfield v. Standard Elec. Equip. Corp., 83
A.2d 843, 845 (Del. Ch. 1951) (“Where conflicting stock claims arise in connection with the
review of an election under [Section 225’s predecessor statute,] this court has the power, even
though the claimants be not parties, to decide who had the right to vote the stock in dispute. This
does not of course constitute a binding determination of ownership as between the conflicting
claimants unless they are parties who have been served with effective process.”); Technicorp
Int’l II, Inc. v. Johnston, 1997 WL 538671, at *7 (Del. Ch. Aug. 25, 1997) (acknowledging that
even a narrow reading of Rosenfield holds that “an adjudication of ultimate title to (or voiding
of) a party’s stock is not a remedy available in a § 225 proceeding.”).
93
To be more precise, the record contains no evidence that the Orly Trust and TPR were
formally summoned or given an opportunity to be heard even in the Section 225 action. Despite
that, we affirm the Court of Chancery’s record ownership determinations for limited Section 225
purposes, because the Orly Trust’s and TPR’s interests in the board election were adequately
represented by Genger and the Trump Group, respectively, and no party to the Section 225
action has objected to the trial court determining the record ownership of, and right to vote, the
TPR and Orly Trust Shares.
41
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 nonparty witness at the Section 225 trial. That trial did not implicate the beneficial
42
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
94
Cf. Shaffer v. Heitner, 433 U.S. 186, 213 (1977) (explaining that mere ownership of stock in a
Delaware corporation, without more, was insufficient to form a constitutionally sufficient basis
for the court to exercise in personam jurisdiction over the stockholder, because the stock
sequestered was “not the subject matter of [the] litigation,” and that “the underlying cause of
action [was not] related to the [stock]”).
95
Side Letter Op., 2010 WL 3279385, at *1.
96
See India S.S. Co. Ltd. v. Kobil Petroleum Ltd., 620 F.3d 160, 161-62 (2d Cir. 2010)
(“Jurisdiction over a person is conceptually distinct from jurisdiction over the person’s
property. . . . The validity of an attachment order [over the person’s property] therefore is not
settled by a court’s attainment of in personam jurisdiction over the property owner. Consent to
one does not imply or effect consent to the other.”). Cf. In re Real Estate Title & Settlement
Servs. Antitrust Litig., 869 F.2d 760, 770-71 (3d Cir. 1989), cert. denied, 493 U.S. 821 (1989)
(concluding that a school board’s appearance in federal district court to move to opt out of class
action, and appeal of denial of that motion, did not constitute consent to exercise of personal
jurisdiction by district court over the school board); Trans-Asiatic Oil Ltd., S.A. v. Apex Oil Co.,
804 F.2d 773, 778-79 (1st Cir. 1986) (recognizing that a party’s “initial entry of a restricted
appearance manifested its lack of consent to personal jurisdiction,” but that party’s subsequent
actions “constituted a waiver of its jurisdictional defenses.”).
Although we have recognized that “an individual may submit to the jurisdiction of the
court by appearance,” those appearances have occurred in the context of “legal arrangements”
such as a contractual forum selection clause, an arbitration agreement, or through a party’s
voluntary use of certain state procedures such as filing a lawsuit in state court. Massey v. Ball,
595 A.2d 390, 394 (Del. 1991) (quoting Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de
Guinee, 456 U.S. 694, 703-04 (1982)). None of those “legal arrangements” are implicated here.
43
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.
CONCLUSION
The judgment of the Court of Chancery is affirmed in so far as it embodies
and implements the rulings in the Merits and Spoliation Opinions; and is reversed
to the extent it adjudicates the beneficial ownership of the Orly Trust Shares and
97
Rosenfield v. Standard Elec. Equip. Corp., 83 A.2d 843, 845 (Del. Ch. 1951).
98
Such an adjudication of beneficial ownership can occur only by a court with personal
jurisdiction over all indispensable parties. The federal court in the New York litigation would be
such a court.
44
the Genger Shares based on the determinations made in its August 9, 2010 Side
Letter Opinion and August 18, 2010 Final Judgment Order.
45
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