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Limited v. FSAR Holdings, Inc.

Court of Chancery of Delaware

November 30, 2017

ZOHAR II 2005-1, LIMITED and ZOHAR III, LIMITED, Plaintiffs,
v.
FSAR HOLDINGS, INC., GLENOIT UNIVERSAL LTD., UI ACQUISITION HOLDING CO., LYNN TILTON and MICHAEL RICCIARELLI, Defendants. LYNN TILTON, Counterclaim and Third-Party Plaintiff,
v.
ZOHAR II 2005-1, LIMITED and ZOHAR III, LIMITED, Counterclaim Defendants, and ALVAREZ & MARSAL ZOHAR MANAGEMENT, LLC and MBIA INSURANCE CORPORATION, Third-Party Defendants.

          Submitted: October 27, 2017

          Kenneth J. Nachbar, Esquire, Megan Ward Cascio, Esquire, Lauren Neal Bennett, Esquire, and Thomas P. Will, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Michael Carlinsky, Esquire, Jonathan Pickhardt, Esquire, Ellison Ward Merkel, Esquire, Blair Adams, Esquire of Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, Attorneys for Plaintiffs.

          Kevin G. Abrams, Esquire, J. Peter Shindel Jr., Esquire, and Daniel R. Ciarrocki, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware and Edward J. Bennett, Esquire and Ava V. Baker, Esquire of Williams & Connolly LLP, Washington, DC, Attorneys for Defendants FSAR Holdings, Inc., Glenoit Universal Ltd., and UI Acquisition Holding Co.

          Kevin G. Abrams, Esquire, J. Peter Shindel, Jr., Esquire, and Daniel R. Ciarrocki, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware; Randy M. Mastro, Esquire, Mark A. Kirsch, Esquire, and Robert F. Serio, Esquire of Gibson, Dunn & Crutcher LLP, New York, New York; and Susan E. Brune, Esquire and Erin C. Dougherty, Esquire of Brune Law P.C., New York, New York, Attorneys for Defendant Lynn Tilton.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor

          The words parties use to bind themselves together in a contractual relationship matter. This is especially so when sophisticated parties have engaged in extensive negotiations that produce a bespoke contract. And it is so even when one of those parties later swears that all involved in the relationship intended the contract to say something other than what is captured in its clear and unambiguous terms. This is black letter contract law-both in Delaware and in New York (the law that governs the contracts at issue in this case). Yet even the most vivid legal doctrine can, at times, be obscured by complex facts and impassioned pleas to the court's sense of fairness in the midst of a potentially harsh result. That dynamic is very much at work in this case. Nevertheless, New York's contract law, like Delaware's, is not prone to outcome-driven variability. With this in mind, the result of this otherwise complicated case was cast the moment the ink was dry on the parties' contracts.

         Lynn Tilton designed a unique model for investing in distressed loans through collateralized loan obligations ("CLOs")-notes issued by a special purpose entity ("SPE") and secured by a pool of loan receivables acquired by the SPE with proceeds from the note issuance. In Tilton's model, the SPE's notes would be secured by a pool of distressed loan receivables, acquired at a discount, along with substantial accompanying equity stakes in the loan obligors. The model contemplated that a Tilton-controlled entity would select the loan receivables to be acquired by the SPE and manage both the collateral and the loan obligors themselves. The SPE's substantial equity holdings in the obligor companies allowed Tilton, through her "collateral manager" entities, to install herself as a director of those companies and to control the composition of their directorship and management more generally. As a director-or, otherwise, as ultimate controller-Tilton then sought to turn around the obligor companies, such that they could repay their loan obligations in full and on time. Successful turnaround efforts inured to the benefit of the SPE's noteholders and Tilton herself; if the collateral loan receivables "overperformed," all the SPE's notes could be (and would be) paid in full and on time, and any upside would go to Tilton (who indirectly owned all of the SPE's preferred equity). Tilton's first ventures utilizing this model, Ark I and Ark II (the "Ark funds"),[1] were by all measures very successful.

         Following the success of the Ark funds, Tilton worked with several constituencies to create new CLO investment vehicles utilizing the core elements of the Ark funds. These new CLO vehicles, known as Zohar I, Zohar II and Zohar III,[2]each acquired distressed loan receivables and equity in a new portfolio of companies.[3] Tilton managed the assets in the Zohar funds as "collateral manager" through separate entities she controlled. She also served in management and on the board of directors of several of the portfolio companies, including the three companies at issue in this litigation: FSAR Holdings, Inc. ("FSAR"), Glenoit Universal Ltd. ("Glenoit") and UI Acquisition Holding Co. ("UI") (collectively, the "Portfolio Companies").[4]

         As with the Ark funds, the plan for the Zohar funds was that Tilton and her team would work to turn the portfolio companies around. It was projected that these efforts would enable a sufficient number of the portfolio companies to repay their loans, such that the sale of the Zohar funds' remaining assets (including portfolio company equity) would generate sufficient cash proceeds to pay their respective noteholders in full. Once noteholders and other deal participants received what was promised to them through a detailed distribution waterfall, Tilton (through other entities she controls) stood to earn a substantial return on the back-end as the Zohar funds' "preference shareholder."[5]

          Unfortunately, the Zohar funds have not performed nearly as well as the Ark funds. After Zohar I suffered substantial losses, litigation between various stakeholders ensued in the state and federal courts of New York.[6] Soon after, the Securities and Exchange Commission ("SEC") commenced an administrative enforcement proceeding against Tilton and several of her collateral manager entities.[7] Additionally, the Zohar funds and their former collateral managers litigated a books and records dispute in this Court.[8]

         As the other Zohar funds began to underperform, the various stakeholders again began to circle the wagons. For her part, sensing that she might be replaced as collateral manager, and thereby lose control over the enterprise, in September 2015, Tilton caused Zohar II and Zohar III (together the "Zohar Funds") to grant irrevocable proxies (without consideration) for shares of the Portfolio Companies' common stock (the "Proxies") to entities under her control-Patriarch Partners XIV and Ark II. She admittedly granted the Proxies to "make certain" that she would retain control of the Zohar Funds-and their Portfolio Companies-even if her managing entities, Patriarch Partners XIV and Patriarch Partners XV, no longer served as collateral manager.[9] With the Proxies in hand, Tilton caused her Patriarch entities to resign from their collateral manager positions in March 2016.

         In November 2016, the successor collateral manager, Third-Party Defendant, Alvarez & Marsal Zohar Management ("AMZM"), acting on behalf of the Zohar Funds, executed written consents that purported to remove Tilton from the boards of the Portfolio Companies and elect new directors (the "Consents"). The Portfolio Companies refused to honor the Consents-hardly surprising given that Tilton managed and controlled them.[10] This, in turn, prompted the Zohar Funds to initiate this action under Section 225 of the Delaware General Corporation Law ("DGCL"),[11] in which they seek declarations that their Consents are valid and effective and the Proxies are invalid and ineffective.

         Tilton maintains that the Proxies granted to Patriarch Partners XIV and Ark II comply with the formal requirements of Section 212(e) of the DGCL[12] and that the Court cannot invoke equity to invalidate them. The Consents executed by AMZM, on the other hand, are invalid, Tilton argues, because the Zohar Funds cannot and do not own equity in the Portfolio Companies and, therefore, do not possess voting rights attendant to that equity. According to Tilton, everyone involved in these deals knew that she would own the equity in the Portfolio Companies through separate entities under her control. Tilton maintains that she executed the Proxies simply to "memorialize" the deal that the parties had struck at the outset of their relationship.[13]

          The Zohar Funds, in riposte, argue that the clear and unambiguous terms of the parties' various contracts tell another story. According to the Zohar Funds, these contracts make clear that the Zohar Funds not only could but would acquire and then own equity in their portfolio companies. The "common understanding" with respect to equity ownership upon which Tilton rests her defense is nowhere captured in any of the highly negotiated contracts the parties entered into to create and structure the Zohar Funds. Nor has Tilton offered any other legally cognizable basis to ignore the clear evidence that the Zohar Funds acquired the equity in the Portfolio Companies at issue here. This equity ownership, in turn, entitled the Zohar Funds to vote their shares to remove Tilton from the Companies' boards and to replace her with the Zohar Funds' designees.

          For the reasons set forth below, I have determined that Tilton's Proxies are invalid; they do not comply with Section 212(e)'s irrevocability requirements because they were not "coupled" with a valid interest, and their creation constituted a breach of the Zohar Funds' governing indentures. I have also determined that the Zohar Funds are the beneficial owners of the Portfolio Companies' equity. Their Consents are valid and they effectively removed Tilton from the boards of FSAR, Glenoit and UI. The Zohar Funds' designees are the rightful directors of the Portfolio Companies.

         I. FACTUAL BACKGROUND

         Trial lasted six days. The Court received over 1,400 exhibits in evidence and heard testimony from nineteen witnesses (some presented live and some by deposition), including four expert witnesses. Because I have found the relevant contracts to be clear and unambiguous, this post-trial decision relies most heavily on those contracts and, when appropriate, other contemporaneous documents. To the extent I have relied upon witness testimony, I have tried first to reconcile any conflicts, but when that was not possible, I accepted the testimony I found most believable and disregarded testimony that was not believable. I have also drawn heavily from the parties' extensive pre-trial stipulation, a rare moment of collaboration in this case for which I am most grateful. The following facts were proven by a preponderance of the evidence.

          A. Parties and Relevant Non-Parties[14]

         The Zohar Funds are Cayman Islands exempt companies.[15] They are CLO investment vehicles[16] that Tilton created to invest in distressed financial assets.[17]The Funds each raised approximately $1 billion of investment capital through the sale of notes to investors.[18]

         The Defendant Portfolio Companies, FSAR, Glenoit and UI, are Delaware corporations.[19] FSAR is a holding company; its wholly owned operating subsidiary is Performance Designed Products, LLC ("PDP").[20] PDP designs, engineers and manufactures video game accessories.[21] Glenoit is in the home goods manufacturing business; its principal wares are shower curtains and rugs.[22] UI is a holding company; it owns 100% of the stock of UI Holding Company ("UIHC") which, in turn, owns 100% of the stock of Universal Instruments Corporation ("UIC").[23] UIC is in the business of supplying circuit board assembly equipment and technologies.[24]

         Defendant, Tilton, is the founder and CEO of non-party Patriarch Partners, LLC ("Patriarch").[25] She is also the principal and owner of several affiliated entities, including non-parties Patriarch Partners XIV and Patriarch Partners XV (together the "Patriarch Managers"), both of which are Delaware limited liability companies.[26]

         Tilton's affiliates, non-parties Octaluna II, LLC and Octaluna III, LLC, are Delaware limited liability companies. They hold 100% of the preference shares of Zohar II and Zohar III, respectively.[27] Octaluna II is owned by non-parties Patriarch XIV, LLC and Ark CLO 2001, Ltd.[28] Octaluna III is owned by non-parties Patriarch XV, LLC, Ark II, Phoenix VIII, LLC and another pass-through entity.[29]

         Third-Party Defendant, AMZM, is a Delaware limited liability company. On March 3, 2016, AMZM became the collateral manager of the Zohar Funds upon the resignation of the Patriarch Managers and continues in that role to this date.[30]

         Third-Party Defendant, MBIA, insured certain of Zohar II's notes as "Credit Enhancer" and is the "Controlling Party" of Zohar II.[31] According to Tilton, MBIA caused the Zohar Funds to bring this action as part of a larger plan to seize control of and sell the Portfolio Companies (or their assets) and, eventually, to liquidate Zohar II 's assets-all to recover money that MBIA was forced to pay out as Credit Enhancer when Zohar II defaulted in January of this year.[32]

         B. The Zohar Funds

         Zohar II and Zohar III are governed by separate indentures: the Zohar II Indenture is dated January 12, 2005, and the Zohar III Indenture is dated April 6, 2007.[33] The Zohar Funds are also parties to collateral management agreements ("CMAs").[34] Like the Indentures, the CMAs are integral to the Zohar Funds' structure in that they specify the roles, obligations and rights of the Funds' respective collateral managers.[35]

         The Zohar II and Zohar III Indentures contain substantially similar provisions. The same is true of the Zohar II and Zohar III CMAs. These similarities reflect the parties' intent that the Zohar Funds would share the same basic structure, the elements of which are as follows:

• The Zohar Funds are SPEs; they may only engage in the following activities:
o "acquiring, managing and disposing of, and investing in, Collateral Debt Obligations . . . Equity Securities and [other specified assets]";[36]
o entering into the agreements specified in their respective Indentures, and performing their obligations under those agreements;[37]
o issuing and selling notes pursuant to their respective Indentures (and the note purchase and subscription agreements specified therein);[38]
o issuing and selling preference shares pursuant to their respective charters and the subscription agreements specified in their Indentures;[39]
o with regard to each Fund's obligations under its notes and Indenture (and certain other contracts to which it is party), pledging as security for those obligations virtually all property in which the obligor Fund has or acquires an ownership interest;[40]
o "owning equity interests of [certain special purpose affiliates]";[41]and o "such other activities [as] are necessary, suitable or convenient to accomplish the foregoing or [which] are incidental thereto or connected therewith."[42]
• At their inception, the Zohar Funds (each an "Issuer") raise investment capital by issuing notes (under their respective Indentures) and preference shares.[43]
• In turn, the Issuer's collateral manager uses the proceeds from the issuance to invest in certain financial assets-"Collateral Debt Obligations" and "Equity Securities"-in accordance with the Issuer's Indenture.[44]
• These financial assets then stand as collateral for the Issuer's obligations under its notes, its Indenture, its CMA and certain other agreements to which it is party (as provided in the Indenture).[45]
• The Indenture grants (to a trustee) a lien on virtually all property owned by the Issuer (including after-acquired property) for the security and benefit of the Issuer's noteholders and certain other defined parties.[46]
• The indenture trustee receives payments made on account of such collateral and deposits those funds into specified accounts (as provided in the Indenture).[47]
• Pending the maturation of the Issuer's notes, the trustee makes periodic distributions of available funds according to a "waterfall" set forth in the Indenture.[48]
• Under this "waterfall," available funds generally are distributed as follows:
o First, for the payment of certain fees and expenses, including the indenture trustee's fee and the collateral manager's fee;[49]
o Second, for interest and principal payments due to noteholders (subject to certain priority and allocation rules);[50] and
o Third, for limited distributions to the holder(s) of the Issuer's preference shares, subject to a cap.[51]
• This same "waterfall" also governs the distribution of proceeds from the remedial sale of collateral (by the trustee) following an Event of Default under the Issuer's Indenture (e.g., non-payment of the principal balance of the Issuer's notes at maturity).[52]

         A key feature of the Zohar Funds is that neither Fund is subject to U.S. tax liability for the equity held in the Fund. This feature was a major point of contention during the Ark I closing, and that deal almost fell through when the credit rating agencies announced they would not rate a CLO that potentially bore U.S. tax liability.[53] In modeling the Zohar Funds after the Ark funds, the parties recognized the tax problem upfront and structured the Zohar Funds to insulate them from potential U.S. tax liability.[54] Specifically, the parties structured the Zohar Funds as disregarded entities and, "solely for federal, state and local tax purposes," the preference shareholder of each Zohar Fund is "treated as . . . owning the assets of [that Fund] directly . . . ."[55]

          1. Zohar II

         Zohar II closed on January 12, 2005, raising approximately $1 billion in cash through the sale of its notes.[56] The notes issued by Zohar II are divided into tranches as follows:

         Zohar II Tranches[57]

Designation

Principal Amount

Note Interest Rate

Note Stated Maturity

Class A-1 Notes

$250,000,000

LIBOR Class A Applicable Margin (or CP Funding Rate)

January 20, 2017

Class A-2 Notes

$550,000,000

LIBOR Class A Applicable Margin

January 20, 2017

Class A-3 Notes

$200,000,000

LIBOR Class A Applicable Margin

January 20, 2017

Class B Notes

$200,000,000

LIBOR Class A Applicable Margin

January 20, 2020

          In addition to its issuance of notes, Zohar II also issued preference shares (in consideration of capital contributions totaling $78 million).[58]

         Zohar II's obligations under its notes are secured pursuant to its Indenture.[59]As noted, the Zohar II Indenture grants (to a trustee) a lien on virtually all of Zohar II's property (including after-acquired property) for the security and benefit of its noteholders and certain other defined parties.[60]

         Additionally, Zohar II's "Class A" notes are guaranteed by MBIA (as "Credit Enhancer").[61] MBIA is also Zohar II's "Controlling Party" (pursuant to the Zohar II Indenture).[62] As Controlling Party, MBIA has certain rights, including: (1) the right to remove and replace Zohar II's collateral manager if "an Event of Default under the [Zohar II Indenture] has occurred and is continuing";[63] and (2) upon an Event of Default under the Zohar II Indenture, the right to cause the indenture trustee to sell any and all of the property subject to the lien of the Indenture.[64]

         Zohar II's Class B notes, by contrast, are not insured. Moreover, "[s]o long as any [of Zohar II's] Class A Notes [remain] [o]utstanding . . . the payment of principal of [its] Class B Notes . . . may only occur after principal of the Class A Notes has been paid in full . . . [and] is subordinated to the payment [at scheduled intervals] of the principal and interest due and payable on the Class A Notes . . . ."[65] All of Zohar II's Class B notes are held by Octaluna II.[66]

         Zohar II's preference shares represent a residual equity interest in Zohar II, meaning a right to receive whatever cash (if any) Zohar II retains after all of its notes have been paid in full.[67] Under Zohar II's waterfall, preference shareholders rank last in priority of payment.[68] On each distribution date, available funds generally must be distributed first for the payment of expenses and then for the payment of interest and principal on the notes (by seniority).[69] Insofar as those payments do not exhaust the funds then available for distribution, the excess funds are distributed to Zohar II's preference shareholders-subject to a $60 million cap until the notes are paid in full.[70] As with Zohar II's Class B notes, all of Zohar II's preference shares are held by Octaluna II.[71]

         2. Zohar III

         Zohar III closed on April 6, 2007, raising approximately $1 billion in cash through the sale of its notes.[72] The notes issued by Zohar III are divided into the following tranches:

         Zohar III Tranches[73]

Designation

Principal Amount

Note Interest Rate

Note Stated Maturity

Class A-1R Notes

$200,000,000

LIBOR Class A-1R Applicable Margin

April 15, 2019

Class A-1T Notes

$150,000,000

LIBOR Class A-1T Applicable Margin

April 15, 2019

Class A-1D Notes

$350,000,000

LIBOR Class A-1D Applicable Margin

April 15, 2019

Class A-2 Notes

$200,000,000

LIBOR Class A-2 Applicable Margin

April 15, 2019

Class A-3 Notes

$116,000,000

LIBOR Class A-3 Applicable Margin

April 15, 2019

Class B Notes

$196,000,000

N/A

April 15, 2019

         Zohar III also issued preference shares in consideration of capital contributions totaling $60 million.[74]

         As with Zohar II, Zohar III's notes are secured pursuant to its Indenture.[75]The Zohar III Indenture grants (to a trustee) a lien on virtually all of Zohar III's property (including after-acquired property) for the security and benefit of its noteholders and certain other defined parties.[76] Unlike Zohar II, however, Zohar III does not have a Credit Enhancer;[77] Zohar III's notes are not insured-whether by MBIA or any other third-party insurer.[78] Nor does Zohar III have a "Controlling Party"; instead, it has a "Controlling Class" comprised of a group of its Class A noteholders.[79]

         The contractual rights of Zohar III's Controlling Class generally track those of Zohar II's Controlling Party. Thus, Zohar III's Controlling Class may remove and replace Zohar III's collateral manager "upon the occurrence of any Event of Default under the [Zohar III Indenture] that consists of a default in the payment of principal of or interest on the Notes when due and payable . . . ."[80] And, upon an Event of Default under Zohar III's Indenture, the Controlling Class may cause the trustee to sell any and all of the property subject to the lien of the Indenture.[81]

         As with Zohar II, Zohar III's Class B notes are subordinated to its Class A notes.[82] Indeed, the relevant subordination provisions in the Zohar III Indenture track those in the Zohar II Indenture.[83] And, as with Zohar II, all of Zohar III's Class B notes (and preference shares) are held by a Tilton entity-Octaluna III.[84]Finally, as with Zohar II, the holder of Zohar III's preference shares is entitled to receive whatever cash (if any) Zohar III retains after all of its notes have been paid in full.[85] In this regard, Zohar III's waterfall is analogous to Zohar II's waterfall, except that distributions to Zohar III's preference shareholder are capped at $45 million (rather than $60 million).[86]

         3. The Zohar Indentures-"Collateralization" Provisions

         As indicated above, Zohar II and Zohar III (each an "Issuer") raised investment capital by issuing notes pursuant to their respective Indentures. The Indentures' Granting Clauses secure (or "collateralize") each Issuer's notes (and certain of its other obligations) by granting to the indenture trustee a lien on virtually all of that Issuer's property:

The Issuer hereby Grants to the Trustee, for the benefit and security of the Secured Parties [which includes the noteholders] a continuing security interest in, and lien on, all of its right, title and interest in, to and under, in each case, whether now owned or existing, or hereafter acquired or arising, all accounts, payment intangibles, general intangibles, letter-of-credit rights, chattel paper, electronic chattel paper, instruments, deposit accounts, investment property (each, as defined in the UCC), and any and all other property of any type or nature owned by it (other than Excluded Property) . . . . [87]

         The Indentures then define the "Collateral" for each Issuer's secured obligations in sweeping terms:

All Money, instruments, accounts, payment intangibles, general intangibles, letter-of-credit rights, chattel paper, electronic chattel paper, deposit accounts, investment property and other property and rights subject or intended to be subject to the lien of th[e] Indenture for the benefit of the Secured Parties as of any particular time pursuant to the Granting Clauses of th[e] Indenture.[88]

         Thus, the Collateral for each Zohar Fund's secured obligations consists of "any and all . . . property of any type or nature" in which that Zohar Fund has or acquires an ownership interest.

         The Indentures contemplate that the Zohar Funds may own "Collateral Debt Obligations"[89] and "Equity Securit[ies]."[90] An "Equity Security" (per the Zohar II Indenture) includes "(a) [a]ny Equity Kicker, (b) any Equity Workout Security . . . and (d) any other security that does not entitle the holder thereof to receive periodic payments of interest and one or more installments of principal . . . ."[91] The Zohar III Indenture defines an Equity Security similarly.[92] Although the Zohar III Indenture does not use the term Equity Workout Security as appears in the Zohar II Indenture, it incorporates the language defining that term within its definition of Equity Security.[93]

         Both Indentures address the circumstances under which the Zohar Funds may (and may not) purchase Equity Securities. In general, the Zohar Funds may not purchase an "Equity Security (except for an Equity Kicker) . . . other than in connection with a workout or restructuring of an Obligor [on a Collateral Debt Obligation], its Affiliates, or the lines of business of the Obligor, or its Affiliates."[94]An "Equity Kicker" is "[a]ny Equity Security or any other security that is not eligible for purchase by the [Zohar Fund] but is received with respect to a Collateral Debt Obligation or purchased as part of a 'unit' with a Collateral Debt Obligation."[95]An "Equity Workout Security" (per the Zohar II Indenture) is "[a]ny security received in exchange for or in connection with a Collateral Debt Obligation or Unrestricted Collateral Debt Obligation, which security does not entitle the holder thereof to receive periodic payments of interest and one or more installments of principal."[96]

         4. The Zohar Indentures-Negative Covenants

         The Zohar Indentures include a series of negative covenants that prohibit the Zohar Funds from taking certain actions. Relevant here, at Section 7.8(a)(i), both Indentures prohibit the Zohar Funds from "sell[ing], transfer[ing], exchang[ing] or otherwise dispos[ing] of, or pledg[ing], mortgag[ing], hypothecat[ing] or otherwise encumber[ing] (or permit[ting] such to occur or suffer[ing] such to exist), any part of the Collateral," except as expressly permitted by the Indentures.[97] Similarly, at Section 7.8(a)(iv)(y), both Indentures provide that the Zohar Funds shall not "permit any lien, charge, adverse claim, security interest, mortgage or other encumbrance (other than the lien of th[e] Indenture) to be created on or extend to or otherwise arise upon or burden the Collateral or any part thereof, any interest therein or the proceeds thereof (except as may be expressly permitted [t]hereby)."[98] Finally, at Section 7.12, both Indentures prohibit the Zohar Funds from engaging in "any business or activity" other than the following:

• "acquiring, managing and disposing of, and investing in, Collateral Debt Obligations . . . Equity Securities and [other specified assets]";[99]
• entering into the agreements specified in their respective Indentures, and performing their obligations under those agreements;
• issuing and selling notes pursuant to their respective Indentures (and the note purchase and subscription agreements specified therein);
• issuing and selling preference shares pursuant to their respective charters and the subscription agreements specified in their Indentures;
• "owning equity interests of [certain special purpose affiliates]";[100]
• with regard to each Zohar Fund's obligations under its notes and Indenture (and certain other contracts to which it is party), pledging as security for those obligations virtually all property in which the obligor Fund has or acquires an ownership interest; and
• "such other activities [as] are necessary, suitable or convenient to accomplish the foregoing or [which] are incidental thereto or connected therewith."[101]

         5. The Collateral Management Agreements-Key Provisions

         As noted, the Zohar Fund's Collateral is managed by a collateral manager.[102]Section 2.2 of each CMA provides that the collateral manager will render specified services to the Zohar Funds "in accordance with the terms of the Indenture[s] and [the CMAs]."[103] Those services include the following:

• "Subject to any restrictions in the Indenture, . . . effectuat[ing] the acquisition, origination, restructuring, exchange or disposition of Collateral on behalf of the [Zohar Fund] . . .";[104]
• "Mak[ing] determinations with respect to the exercise or enforcement of any and all rights by the [Zohar Fund] including . . . voting rights and rights arising in connection with the bankruptcy or insolvency of [an obligor on a Collateral Debt Obligation] or . . . [the] restructuring of the debt or equity [of any such obligor] . . .";[105]and
• "[M]onitor[ing] the Collateral on an ongoing basis, [and] prepar[ing] and deliver[ing] information [and] reports [about the Collateral] . . . ."[106]

Section 2.6 of the CMAs prohibits the collateral manager from causing the Zohar Funds to violate the terms of the Indentures.[107] In addition, both CMAs contemplate that the collateral manager may be removed and replaced in certain circumstances (or otherwise may resign and be replaced).[108] Thus, under the Zohar II CMA, Zohar II's Controlling Party may remove and replace the collateral manager if "an Event of Default under the [Zohar II Indenture] has occurred and is continuing."[109] Similarly, under the Zohar III CMA, Zohar III's Controlling Class may remove and replace the collateral manager "upon the occurrence of any Event of Default under the [Zohar III Indenture] that consists of a default in the payment of principal of or interest on the Notes when due and payable . . . ."[110]

         C. The Zohar Funds Acquire Stock in the Portfolio Companies

         The Zohar Funds acquired debt and equity of the three Portfolio Companies at issue here in six separate transactions. I discuss each briefly below.

          1. Zohar II Acquires FSAR and Glenoit Debt and Equity from Ark I

         At its inception, Zohar II purchased from Ark I a portfolio of loan receivables and associated equity interests in certain loan obligors (including Glenoit and FSAR) (the "Zohar II-Ark I Transfer").[111] To effect this transfer, Zohar II and Ark I entered into an "Issuer Collateral Debt Obligations Transfer Agreement" dated January 14, 2005.[112] Under that Agreement, Ark I transferred to Zohar II "any and all of [Ark I's] right, title and interest in" the following:

• a portfolio of credit receivables (Collateral Debt Obligations), including a $5,878,066.95 Glenoit obligation and a $11,210,000.00 obligation of FSAR subsidiary Electro Source, LLC (PDP's predecessor);[113] and
• with respect to each Collateral Debt Obligation being transferred, "all interest in any . . . equity interest . . . in any borrower or obligor" on that Collateral Debt Obligation.[114]

         As a result of this transfer, Zohar II received from Ark I, inter alia, 74,033 Class A and 20,137 Class B shares of Glenoit common stock[115] and 590 shares of FSAR common stock.[116]

         2. Zohar II Acquires Additional FSAR Equity from OFSI Fund II

         On May 27, 2005, Zohar II acquired additional FSAR debt and equity from a third party, OFSI Fund II, LLC ("OFSI").[117] Specifically, Zohar II paid $12,723,830.75 cash and received from OFSI "all of [its] right, title, and interest in" the following:

• a revolving commitment to FSAR subsidiary Electro Source, LLC in the aggregate principal amount of $7,790,000.00, consisting of a revolving loan in the outstanding principal amount of $7,364,739.71 and an unfunded revolving commitment in the principal amount of $425,260.29;[118]
• an Electro Source term loan in the outstanding principal amount of $10,332,000.00;[119]
• an Electro Source term loan in the outstanding principal amount of $820,000;[120] and
• 410 shares of FSAR common stock.[121]

         This transaction (the "Zohar II-OFSI Transfer") is memorialized in a "LSTA Purchase and Sale Agreement for Distressed Trades."[122] The LSTA Agreement uses the term "Transferred Rights" to refer to the subject matter of the Zohar II-OFSI Transfer.[123] "Transferred Rights" includes "all of [OFSI's] right, title, and interest in" (1) the Electro Source revolving commitment and term loans, and (2) the 410 shares of FSAR common stock.[124]

         3. Zohar II Acquires Additional Glenoit Debt and Equity from BNP Paribas

         On January 18, 2006, Zohar II acquired additional Glenoit debt and equity from third party, BNP Paribas.[125] Specifically, Zohar II paid $4,009,735.00 cash and received from BNP Paribas "all of [BNP Paribas's] right, title, and interest in" the following:

• a $5,378,633.22 term loan commitment to Glenoit LLC (Glenoit's wholly-owned subsidiary);[126]
• 78,561 Class A (voting) shares of Glenoit common stock;[127] and
• 21,369 Class B (nonvoting) shares of Glenoit common stock.[128]

         This transaction (the "Zohar II-BNP Paribas Transfer") is memorialized in a "LSTA Purchase and Sale Agreement for Distressed Trades."[129] This LSTA Agreement again uses the term "Transferred Rights" to refer to the subject matter of the Transfer.[130] "Transferred Rights" includes "all of [BNP Paribas'] right, title, and interest in" (1) the Glenoit LLC term loan commitment; (2) the 78,561 Class A shares of Glenoit common stock; and (3) the 21,369 Class B shares of Glenoit common stock.[131]

          BNP Paribas also executed an "Assignment and Acceptance" in connection with the Zohar II-BNP Paribas Transfer.[132] In the Assignment and Acceptance, BNP Paribas represented and warranted that it was the "legal and beneficial owner of the interests being assigned" pursuant to that Transfer.[133]

         4. Zohar II Acquires Additional Glenoit Debt and Equity from Deutsche Bank

         On November 30, 2006, Zohar II acquired additional Glenoit debt and equity from a third party, Deutsche Bank AG Cayman Islands Branch ("Deutsche Bank").[134] Specifically, Zohar II paid $2,665,331.20 cash and received from Deutsche Bank "all of [Deutsche Bank's] right, title, and interest in" the following:

• a Glenoit LLC term loan commitment of $3,502,279.77;[135]
• 57,448 Class A shares of Glenoit common stock;[136] and
• 15,626 Class B shares of Glenoit common stock.[137]

          This transaction (the "Zohar II-Deutsche Bank Transfer") is memorialized in a "LSTA Purchase and Sale Agreement for Distressed Trades."[138] Again, the LSTA Agreement uses the term "Transferred Rights" to refer to the subject matter of the Transfer.[139] "Transferred Rights" includes "all of [Deutsche Bank's] right, title, and interest in" (1) the Glenoit LLC term loan commitment; (2) the 57,448 Class A shares of Glenoit common stock; and (3) the 15,626 Class B shares of Glenoit common stock.[140]

         5. Zohar II and Zohar III Acquire UI Equity

         Prior to 2008, the Zohar Funds had participated in a syndicated loan to UI.[141]That loan was restructured at the end of 2008 as follows:

• The Zohar Funds (and the other lenders) waived a covenant default, extended the loan's maturity by two years and extended another $10 million loan to UI.[142]
• In exchange, the Zohar Funds (and other lenders) received 100% of UI's stock, subject to a warrant of the existing owner of UI's equity (Francisco Partners) to acquire a 30% economic interest in UI.[143]

          This restructuring transaction (the "UI Restructuring") is memorialized in a "Sale, Settlement, and Release Agreement" dated December 31, 2008.[144] That agreement provides for the transfer of UI equity to the Zohar Funds:

• UI "hereby sells to the Agent (on behalf of the Lenders [including Zohar II and Zohar III]), free and clear of all liens and encumbrances, 100% of the outstanding equity interests in [UI]";[145]and
• "Upon Agent's request, [UI] will transfer the Shares directly to the Lenders in the amounts set forth on the signature pages . . . and shall deliver stock certificates representing the applicable Shares . . . to the applicable Lenders."[146]

         The signature pages to the Sale, Settlement, and Release Agreement indicate that Zohar II received 54.9604 Class A and 2.8663 Class B shares of UI, and that Zohar III received 30.3621 Class A and 1.5834 Class B shares of UI.[147]

         6. Zohar III Acquires Additional UI Debt and Equity from Platinum Grove

         On December 23, 2010, Zohar III acquired additional UI debt and equity from a third party, Platinum Grove.[148] Specifically, Zohar III paid $5,792,030.08 cash and acquired (1) a UI term loan in the outstanding principal amount of $6,435,588.98;[149] (2) 21.8674 Class A (voting) shares of UI;[150] and (3) 1.1404 Class B (non-voting) shares of UI.[151]

         This transaction (the "Zohar III-Platinum Grove Transfer") is memorialized in a "LSTA Purchase and Sale Agreement for Distressed Trades."[152] Per the LSTA Agreement, "[Zohar III's] obligations to pay the Purchase Price [to Platinum Grove and] to acquire the Transferred Rights . . . shall be subject to the additional condition that [Platinum Grove] has completed the transfer to [Zohar III] . . . for no additional consideration . . . of 21.8674 shares of [UI's] Class A Voting Common Stock and 1.1404 shares of [UI's] Class B Non-Voting Common Stock . . . ."[153]

         D. Tilton's Roles at the Portfolio Companies

         As with the Ark funds, the plan for the Zohar Funds was that Tilton (through the Patriarch Managers) would take on an "active role" in managing-and rehabilitating-the Funds' portfolio companies.[154] This plan is reflected, among other places, in the Zohar Funds' CMAs. Through the Patriarch Managers, Tilton was in a position to vote the stock of the Zohar Funds' portfolio companies and thereby control the composition of their directorship and management.[155] In turn, through the exercise of that control, Tilton came to "serve as the manager of the board of most of the portfolio companies" and, in some cases, as the companies' CEO.[156]

         Tilton has been actively involved in the management of FSAR, Glenoit and UI.[157] As of November 2016, Tilton had served as FSAR's sole director for fifteen years, as UI's sole director for eight years and as a Glenoit director for twelve years.[158] Tilton also served as "managing director" of FSAR's operating subsidiary, PDP (beginning in 2005) and as the "designated executive" of UI (beginning in 2009).[159]

         At trial, PDP's CEO, Christopher Richards, testified that Tilton was (and is) a very capable managing director. Richards explained, "[Tilton] has consistently pushed [PDP] to improve [its] growth, [its] sales, [its] profitability, and to look at all the deals that [PDP] work[s] on as inherently adding value and creating valuation for the company."[160] UI's CFO, Keith O'Leary, expressed similar sentiments in his trial testimony.[161]

         Tilton also provided a suite of fee-based consulting and agency services to the Zohar Funds' portfolio companies through (separate) entities she controlled: Patriarch Partners Management Group ("PPMG") and Patriarch Partners Agency Services ("PPAS").[162] Thus, through the Patriarch Managers, PPMG and PPAS, Tilton was "involved in every aspect of the rebuilding of the[] [Zohar Funds' portfolio] companies," including FSAR, Glenoit and UI.[163]

          E. The Irrevocable Proxies

         Leading up to the fall of 2015, Tilton sensed that Zohar I was destined for default.[164] She was prescient; Zohar I defaulted in November 2015.[165] Soon after, Zohar II's Controlling Party, MBIA, began to look carefully at its exposure with respect to Zohar II.[166] And rightfully so. Following Zohar I's default, MBIA was on the hook for approximately $150 million to Zohar I noteholders.[167]

         Tilton no doubt saw troubled waters ahead.[168] MBIA would soon be positioned to remove Patriarch Partners XIV as collateral manager for Zohar II.[169] Absent some other lever, the removal of the Patriarch Managers as collateral managers would jeopardize Tilton's control over the Zohar Funds and their portfolio companies and potentially threaten her interests as preference shareholder (through Octaluna II and Octaluna III).[170] By default, the removal would also jeopardize the substantial flow of fees Tilton received from the Zohar Funds (for the Patriarch Managers' collateral management services) and from the portfolio companies (for PPMG's consulting services and PPAS's agency services).[171] Her solution: construct the other lever-the Proxies.[172]

         On September 21, 2015, while Tilton still maintained control over the Zohar Funds, she caused Zohar II to grant Patriarch Partners XIV (which she owns and controls)[173] three irrevocable proxies:

• an irrevocable proxy for 1,000 shares of FSAR common stock, which purports to assign to Patriarch Partners XIV all voting rights in the shares of FSAR stock issued in Zohar II's name;[174]
• an irrevocable proxy for 210,042 shares of Glenoit Class A Common Stock, which purports to assign to Patriarch Partners XIV all voting rights in the shares of Glenoit voting stock issued in Zohar II's name;[175] and
• an irrevocable proxy for 54.96 shares of UI Class A voting stock, which purports to assign to Patriarch Partners XIV all voting rights in the shares of UI voting stock issued in Zohar II's name.[176]

         That same day, Tilton caused Zohar III to grant Ark II (which Tilton owns and controls)[177] an irrevocable proxy for 52.23 shares of UI Class A voting stock, which purports to assign to Ark II all voting rights in the shares of UI voting stock issued in Zohar III's name.[178]

          Notably, all of the Proxies state that the Zohar Funds own the underlying shares.[179] Tilton signed the Proxies on behalf of both the grantors and grantees.[180]

         F. The Written Consents

         As observed in Zohar I, Tilton and her team appeared to cooperate with AMZM at the outset of the collateral manager transition process.[181] Unfortunately, that cooperation was short lived.[182] It appears that at least one cause of the breakdown in the transition process was Tilton's refusal to turn over "equity documents" relating to the Zohar funds' portfolio companies.[183] In April 2016, with AMZM officially at the helm of all three Zohar funds, the funds initiated the Zohar I litigation against their former collateral managers, Patriarch Partners VIII, Patriarch Partners XIV and Patriarch Partners XV, to enforce the funds' informational rights under the CMAs.[184] After trial, the Court entered judgment for the Zohar funds and ordered Tilton's entities to produce designated books and records to the funds and their new collateral manager, AMZM.[185]

         At this juncture, even though Tilton no longer controlled the Zohar Funds, she still retained control of their portfolio companies by virtue of her directorship and management positions at the companies. The Zohar Funds, now managed by AMZM, sought to remove Tilton from any decision-making role. On November 23, 2016, AMZM caused the Zohar Funds to deliver written consents to the three Portfolio Companies. The FSAR consent, executed by Zohar II, purports to remove Tilton as FSAR's sole director and replace her with non-parties Elizabeth LaPuma, Tom Jones and Daniel Avitabile.[186] The UI consent, executed by Zohar II and Zohar III, purports to remove Tilton as UI's sole director and replace her with LaPuma, Jones and Avitabile.[187] And the Glenoit consent, executed by Zohar II (along with several other Glenoit stockholders), purports to remove Tilton and non- party Michael Ricciarelli as directors of Glenoit and replace them with LaPuma and non-party Jonathan Sacks.[188]

         On December 15, 2016, Zohar II delivered two additional written consents: one to FSAR and one to UI.[189] The second FSAR consent, executed by Zohar II, purports to remove Avitabile as a director of FSAR and replace him with non-party Kenneth Epstein.[190] The second UI consent, executed by Zohar II and Zohar III, purports to effect the same change with respect to UI's board.[191]

         G. Procedural Posture

         On November 29, 2016, the Zohar Funds filed a complaint under Section 225 of the DGCL[192] seeking a declaration that (1) the Consents delivered to the Portfolio Companies are valid and effective; and (2) that the Proxies signed by Tilton on their behalf are illegal, void and of no force or effect. Essentially, the Zohar Funds seek a declaration that their designees are the Portfolio Companies' rightful directors.

          The Zohar Funds argue that they beneficially own the Portfolio Companies' equity, as evidenced by the Indentures and detailed transactional documents, and thus have the sole right to elect directors to the boards of those companies. They also contend that the Proxies are invalid and ineffective because (1) the Proxies do not comply with Section 212(e) of the DGCL;[193] and (2) the creation of the Proxies violated the Indentures. For all of these reasons, the Funds argue, the Court should give their Consents full force and effect.

         Defendants deny that the Zohar Funds are entitled to the relief sought, and have filed counterclaims seeking counter-declarations that the Consents are invalid and ineffective. They also originally sought a declaration that Tilton (not the Zohar Funds) is the beneficial owner of the equity in the Portfolio Companies. After litigation was well underway, however, Tilton brought a motion to sever the beneficial ownership issue on the ground that the issue was beyond the limited focus of this Section 225 proceeding. The Court denied that motion because beneficial ownership is inextricably intertwined with the other issues presented.[194]

          Before trial, Tilton filed a motion for leave to file a motion for summary judgment or stay. The Court denied her motion to stay this proceeding but granted her motion for leave to argue for summary judgment in her pre- and post-trial briefs.[195]

         In support of her motion for summary judgment, Tilton argues that the Court need look no further than the Proxies to resolve this dispute in her favor as a matter of law. According to Tilton, even if the Zohar Funds beneficially own the Portfolio Companies' equity (which she does not concede), the Proxies validly give her the exclusive right to elect the Portfolio Companies' directors. She also argues that the Court should refrain from reaching the beneficial ownership issue entirely because the Court does not have the authority to decide that issue under Section 225. Moreover, she contends that the Court would violate her due process rights by deciding that issue in this summary proceeding.

         In the alternative, Tilton argues, if the Court must reach the beneficial ownership issue, then the Court should determine that she (through the various entities she controls) is the beneficial owner of the Portfolio Companies' equity. She argues that the Zohar Funds' Indentures prohibit them from owning the equity at issue and that this prohibition was central to the structure of the deals. In support of her argument, Tilton relies on internal documents and testimony from others involved in setting up the Zohar Funds to demonstrate that it was understood by all that she would be the beneficial owner of any equity ostensibly acquired by the Zohar Funds.

         The Court held a six-day trial beginning on April 19, 2017, and thereafter heard post-trial argument on July 21, 2017. The parties submitted (unsolicited) additional arguments in September and October 2017. This is the Court's post-trial decision.

         II. ANALYSIS

         I first address Tilton's motion for summary judgment. As noted, Tilton argues that even if the Zohar Funds are the beneficial owners of the Portfolio Companies' equity, the Proxies are valid as a matter of law and, therefore, only she can vote the Portfolio Companies' shares. After considering Tilton's motion for summary judgment, I have concluded that the motion must be denied because (1) Tilton's interests (directly or indirectly) in the Portfolio Companies are not "coupled" with the Proxies; and (2) the Proxies are prohibited by the Zohar Funds' Indentures, and are thus invalid and ineffective.

          Having determined that the Proxies are invalid, the Court must address the parties' competing claims to beneficial ownership of the Portfolio Companies' stock, as that is the only basis on which the Court can determine who belongs on the boards of these companies. Before reaching the merits of the beneficial ownership issue, however, I must first address Tilton's contention that the Court lacks the authority to decide beneficial ownership in a Section 225 action, and her claim that the Court would violate her due process rights by deciding that issue. For reasons explained below, I have concluded that the Court has the authority to decide beneficial ownership in this Section 225 action, and that deciding the issue in this instance does not deny Tilton due process.

         Having determined that Tilton's threshold legal arguments lack merit, the Court thus reaches the merits of the beneficial ownership issue. After carefully considering the evidence and applying settled principles of contract construction, I conclude that the Zohar Funds are the beneficial owners of the disputed equity in the Portfolio Companies. This conclusion is dictated by the plain language of the relevant transactional documents. The sole remaining issue, then, is whether the Zohar Funds' Consents are valid and effective. They are. Accordingly, judgment will be entered in favor of the Zohar Funds.

          A. The Irrevocable Proxies are Invalid and Ineffective

         Tilton's motion for summary judgment presents two issues: (1) whether the Proxies are valid and effective; and, if so, (2) whether that determination renders the Zohar Funds' Consents invalid and ineffective. For reasons discussed below, the Court need not reach the second issue.

         To briefly reset the stage, once it was clear that Tilton was going to be replaced as collateral manager of the Zohar Funds, she caused the Zohar Funds (through the Patriarch Managers) to grant irrevocable proxies for shares of the Portfolio Companies' stock to Patriarch Partners XIV and Ark II (both of which she controls).[196] The Proxies state that they are irrevocable[197] and describe the Zohar Funds as the "owner" of the underlying stock.[198] They also purport to vest the grantees with the "exclusive right to vote" the underlying stock and state, conversely, that the Zohar Funds "shall not have any such rights."[199]

         According to Tilton, the Proxies give her the exclusive right to vote the disputed shares because the Proxies were validly executed and are coupled with her interest as a director of the Portfolio Companies or preference shareholder of the Zohar Funds (or both), in compliance with Section 212(e)'s irrevocability requirements.[200] The Zohar Funds disagree on all fronts. They contend that the Proxies are invalid and ineffective because (1) they are not coupled with a sufficient interest and (2) Tilton violated the Indentures' negative covenants in creating them. Finally, the Zohar Funds argue that, as a matter of equity, the Court should strike down the Proxies as a remedy to correct Tilton's improper self-dealing, even if the Proxies are otherwise valid.

         Proxies are evidence of an agency relationship,[201] and the agent-proxy holder must "act[] in strict accord with those requirements of a fiduciary relationship which inhere in the conception of agency."[202] Given the fiduciary responsibilities created by a proxy, Section 212(e) of the DGCL provides that certain predicates must be in place before the proxy will be deemed irrevocable:

A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally.[203]

         The Proxies at issue here cannot be deemed irrevocable because they are not "coupled" with a sufficient interest of the Proxy holder as required by Section 212(e). Tilton argues that her indirect economic interests in the Portfolio Companies and her position as director of those Companies constitutes a valid interest "sufficient in law to support an irrevocable power." [204] After considering Chancellor Allen's decision in Haft v. Haft[205] and its progeny,[206] I agree with Tilton that these interests (taken together) might well be "sufficient" interests to support irrevocability under Section 212(e).[207] But the problem Tilton faces is that neither of the "interests" she has identified is "coupled" with the Proxies.[208] Patriarch Partners XIV and Ark II hold the Proxies, not Tilton personally and not either of the preference shareholders.

         According to the plain meaning of the word "couple" in Section 212(e), the "sufficient interest" and the proxy must be joined or bound together in the same person or entity. "'In the construction of a statute, this Court has established as its standard the search for legislative intent. Where the intent of the legislature is clearly reflected by unambiguous language in the statute, the language itself controls.'"[209]In the search for legislative intent, Delaware courts often turn to dictionaries to discern the ordinary meaning of statutory language.[210] Webster's Dictionary defines the verb "couple" as "to connect for consideration together; to join for combined effect; to fasten together; link."[211] This notion of "coupling" in the irrevocable proxy context as a "fastening together" requires that the "power and the interest be in the same person."[212] This required coupling did not occur here because the "sufficient" interest and the Proxies never came together in the same person or entity.

         Delaware courts respect the separate legal existence of corporate entities.[213]With this in mind, Tilton has not provided any basis in law that would allow the Court to ignore the separate legal entity status of Patriarch Partners XIV and Ark II (which do not possess the interests proferred by Tilton) in considering whether the Proxies are "coupled" with a "sufficient" interest for purposes of Section 212(e). Stated differently, the Proxies cannot be deemed irrevocable because the holders of the Proxies lack "an interest sufficient in law to support an irrevocable power."

         Chancellor Allen cautioned in Haft that "the exercise of voting control over corporations by persons whose interest in them is not chiefly or solely as a residual owner will create circumstances in which the corporation will be less than optimally efficient in the selection of risky investment projects."[214] That sage warning is particularly apt here, where the Proxy holders independently have no legally cognizable "interests" (either as director of the Portfolio Companies or preference shareholders of the Zohar Funds). The Court risks setting a dangerous precedent if it upholds an irrevocable proxy when one person holds the valid interest and a separate person or entity holds the proxy. It is tempting to elide the distinction between Tilton and the Proxy holders in this case because there is no doubt she controls them. But establishing a judicially created rule that allows the court to presuppose that a proxy holder has a sufficient interest simply because its controller has a sufficient interest would impermissibly modify the statute's plain and clear requirement that the "sufficient interest" and the proxy be "coupled."[215] It would also produce uncertainty and imprecise line drawing in future cases. I am satisfied that Section 212(e) requires that the same person or entity hold both the supporting interest and the proxy in order to satisfy the statute's "coupling" requirement.[216]

          Thus, the Proxies are revocable, if they are valid at all. The Zohar Funds are the principals in the agency relationships the Proxies purportedly created.[217] The Zohar Funds revoked the Proxies when they voted the Portfolio Companies' shares, as this was a clear manifestation inconsistent with the proxy grants, and the agents had notice of the revocation upon the Zohar Funds' delivering the Consents.[218]Revoked Proxies cannot undo otherwise valid Consents.

         The Proxies are unenforceable for the additional reason that their creation caused a transfer of (and possibly encumbered) the voting rights attached to the Portfolio Companies' shares, in violation of Section 7.8(a)(i) of the Indentures.[219]Our Supreme Court held in Crown EMAK Partners, LLC v. Kurz that a party cannot exercise voting rights that it obtains from another in breach of contract.[220] That is precisely what has occurred here.

         Section 7.8(a)(i)'s language closely tracks the language of the contracts at issue in Crown EMAK,[221] except that the prohibition in Section 7.8(a)(i) is even broader. Under Section 7.8(a)(i), the Zohar Funds may not "sell, transfer, exchange or otherwise dispose of, or pledge, mortgage, hypothecate or otherwise encumber (or permit such to occur or suffer such to exist), any part of the Collateral, except as expressly permitted by th[e] Indenture[s]."[222] There can be no doubt that the Portfolio Companies' shares are "Collateral."[223] Because the shares are Collateral, and because voting rights are a "part of" those shares,[224] any transfer or encumbrance of those voting rights through the Proxies violated Section 7.8(a)(i) of the Indentures.

         The stated purpose of the Proxies was to transfer exclusive voting rights from the Zohar Funds to the Proxy holders.[225] Additionally, the Portfolio Companies' shares were "encumbered" in the sense that the Proxies are a "liability that is attached to property" which "may lessen [the property's] value."[226] There is little doubt that shares subject to an irrevocable proxy are not as valuable as shares free of such a proxy.[227] Nor can there be a doubt that an irrevocable proxy is a "liability" given the risk that the proxy holder may vote the shares differently than the stockholder-grantor desires. Since the Proxies "transferred" voting rights attendant to the underlying shares and "encumbered" those shares, the Proxies' creation constituted a clear violation of Section 7.8(a)(i) of the Indentures. Consequently, the Proxies are invalid and ineffective for this reason as well.

         Tilton's motion for summary judgment is denied. The Proxies do not bear on the rightful composition of the Portfolio Companies' management.[228]

         B. The Court May Decide the Beneficial Ownership Dispute

         Tilton has asked the Court to ignore the parties' competing beneficial ownership claims and resolve this dispute solely based on the Proxies and Consents.[229] Her two bases for this argument are that the Court lacks authority to adjudicate beneficial ownership in a Section 225 proceeding, and that the Court would violate her due process rights if it determined beneficial ownership in this summary proceeding. I disagree on both fronts.

         Because the Proxies are invalid and ineffective, only the beneficial owner's vote of the Portfolio Company's stock can been deemed valid and effective.[230] Both Tilton and the Zohar Funds maintain that they are the beneficial owners. Any judgment in this Section 225 action that does not resolve their dispute over beneficial ownership will be meaningless. Even if the Court somehow were to reach a point where it could address the validity of the Consents without deciding the ownership issue, the unsuccessful party would most certainly initiate yet another action to undo that determination by seeking a definitive declaration regarding equity ownership. That, in turn, would leave the question at the heart of this Section 225 proceeding- who are the proper directors of the Portfolio Companies-in a state of indefinite suspension until that later action is adjudicated. That runs contrary to the purpose of Section 225 and simply makes no sense.

         Before addressing the merits of the beneficial ownership dispute, I must first consider whether the Court lacks the authority to adjudicate beneficial ownership in a Section 225 proceeding (as Tilton argues). I need look no further than the statute and its legislative history to find the answer.[231] As discussed below, the rule that has developed over the history of Section 225 is that the court may address any issue that will aid in determining the "proper composition of the corporation's board or management team."[232]

         Section 225(a) has remained largely unchanged since the early 1900s.[233]Beginning in 1964, Professor Ernest Folk studied Sections 225 and 227 as part of the 1967 DGCL revisions,[234] and concluded that there was no need for any material changes.[235] The Delaware Corporation Law Study Committee agreed.[236] Professor Folk observed, consistent with precedent at that time, that the Court of Chancery has broad powers under Section 225.[237] Specific to the issue now before the Court, he wrote that "the court can go beyond a mere determination of voting rights and finally adjudicate the ...


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