In an important recent decision, Genger v. TR Investors, LLC, No. 592, 2010 (Del. Supr., July 18, 2011), the Delaware Supreme Court determined which claims can properly be asserted through a Section 225 action to contest director elections, and confirmed that claims which are “collateral” to the purpose of a Section 225 action may not be adjudicated by the Delaware Court of Chancery in such summary proceedings.

For a previous discussion of Section 225 of the DGCL, click here.

Background

In Genger, appellees TR Investors, LLC, et al. (the “Trump Group”) brought an action under Section 225 against Arie Genger to determine which stockholder group possessed the majority voting interest entitled to elect the Trans-Resources, Inc. 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.  

Analysis

On appeal, the Supreme Court affirmed the Court of Chancery’s decision regarding the record ownership of the disputed Trans-Resources shares in the 225 action, but held that the issues of ultimate beneficial ownership of shares cannot be determined in a Section 225 action, given the jurisdictional limitations of such a summary proceeding.  Chancery’s determination of such issues exceeded its powers under a 225 action.

Specifically, the Delaware Supreme Court held that the determination of the right to vote shares can be adjudicated in a Section 225 action, but the determination of beneficial ownership of shares cannot be determined in a Section 225 action.  The Supreme Court noted that Section 225 is an in rem, not a plenary proceeding, and only in a plenary proceeding would the Court have in personam jurisdiction over litigants to adjudicate the litigant’s property interests in disputed corporate shares.  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.”  Box v. Box, 697 A.2d 395, 398 (Del. 1997).

The Delaware Supreme Court further noted:

  • Section 225 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.  See Box v. Box, Nevins v. Bryan, 885 A.2d 233, 244 n.34 (Del. Ch. 2005).
  • “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.”  Agranoff v. Miller, 1999 WL 219650, at *17 (Del. Ch. Apr. 12, 1999) (internal citations omitted), aff’d as modified, 737 A.2d 530 (Table), 1999 WL 636634 (Del. 1999).
  • 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.  Id.; see also Box, 697 A.2d at 398 (holding that a Section 225 action should not be used “for trying purely collateral issues”).

Applying this reasoning, the Delaware Supreme Court affirmed the decision of the Court of Chancery as to the record ownership of the disputed Trans-Resources shares, because such adjudication was necessary to determine which side was lawfully entitled to elect the remaining directors of the Trans-Resources board.  However, the Delaware Supreme Court reversed the Court of Chancery’s conclusions regarding the ultimate beneficial ownership of shares, in that such determination fell outside of the scope of a summary proceeding under Section 225 of the DGCL.

Conclusion

Genger serves to further supplement our previous discussion of Section 225 actions, posted here, and should be taken into account by shareholders who are considering to challenge director elections, appointments, removals or resignations under Section 225 of the DGCL.