The Delaware General Corporation Law | Brian JM Quinn | November 15, 2013


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The Delaware General Corporation Law

Original Creator: Brian JM Quinn Current Version: Brian JM Quinn Show/Hide
  1. 2 Show/Hide More Formation
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
    1. 2.2 Show/Hide More DGCL Sec. 101 - Formation
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      A certificate of incorporation is the functional equivalent of a corporation's constitution. The certificate goes by different names in different states. In other states it is known as the articles of incorporation or the corporate charter, or the articles of organization. All of these refer to the same document.

      As the corporation's constitution, the certificate may limit or define the power of the corporation and the corporation's board of directors. Drafter's of certificates have a great deal of flexibility when drafting these documents. Although most certificates are “plain vanilla” certificates that rely almost entirely on the state corporate law default rules for limiting the power of the corporation and its directors, such a minimal approach to drafting corporate documents is not required.

      For example, some corporations, like the Green Bay Packers professional football team, have highly tailored certificates of incorporation. The Green Bay Packers' certificate is available on the course website. Promoters of the Green Bay Packers corporation tailored the rights of shareholders so that no shareholder can expect to receive any portion of the profits of the Packers – those have to be donated to a charity – and that no shareholder can expect their shares of the Packers to have any resale value on a stock exchange – any attempt to transfer shares to someone other than a family member will result in the corporation redeeming the shares for pennies. 

      Section 101 makes it clear that the filing of  a certificate of incorproation is sufficient to form a corporation. This is the essence of an enabling statute. Rather than require the state to provide permission, enabling statutes like Delaware's General Corporation Law require only a ministerial filing in order to establish a corporation and permit the corporation's promoters a high degree of freedom in the design of their internal governance mechanisms. 

    2. 2.3 Show/Hide More DGCL Sec. 103 - Filing requirements
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Section 103 describes the requirements for filing, where to file, what to file, and who has to sign which documents. Although this section may seem boring, it's actually an important one for practicing attorneys. You should familiarize yourself with §103's requirements.
    3. 2.4 Show/Hide More DGCL Sec. 102 - Contents of Certificate of Incorporation
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      The certificate of incorporation is the corporation's basic governing document. It lays out the basic understanding about governance of the corporation and the corporation's powers. It also limits the power and discretion of the corporation's board of directors in the management of the corporation. To the extent they comply with the requirements of the corporation law, the promoters of a corporation have the flexibility to tailor the internal governance of the corporation as well as to limit the powers of the board of directors.

      Section 102 describes the contents of every corporation's certificate of incorporation.  Section 102 has two basic components. First, §102(a) lays out the required elements of every certificate of incorporation.  Many of the required elements relate to notice (e.g. how can the state contact responsible parties in the corporation). To the extent some of the required elements of §102 seem out of place (e.g. par value), remember they were first included in the code following the transition from discretionary charters to general enabling laws. Consequently, they may reflect a number of vestigal elements of the corporate law.

      Second, §102(b) lays out the optional elements of every certificate of incorporation. Many of the optional elements in a certificate relate to corporate governance rights of stockholders and/or the board of directors. Section 102 does not generally limit promoters' ability to tailor governance structures, but it does often provide promoters with menus of options that they can choose from as they draft certificates.

      1. 2.5.1 Show/Hide More DGCL Sec. 242 - Amendments to Certificate
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        Like a constitution, a corporation's certificate of incorporation may be amended at any point in the future; it is not a “forever” contract.  A board of directors or stockholders can amend a certificate of incorporation.  Section 242 outlines the procedures for amending a certificate.

        There are two features of the amendment process that are worth pointing out. First, any amendment to a corporation's certificate of incorporation must be initiated by the corporation's board of directors and requires the board's assent. A certificate may not be amended against the will of the board of directors. Second, any amendments recommended by the board of directors must be approved by a vote of a majority of the outstanding shares of the corporation. A certificate may not be amended against the will of the majority of the stockholders.

        These dual requirements make the process of amending a certificate of incorporation difficult.  Thus, the limitations placed on a board or a corporation's stockholders by the certificate of incorporation are effective constraints.

        Although any portion of the certificate may be amended, the most common amendment to certificates of incorporation involves increases to the number of authorized shares. 

      2. 2.5.2 Show/Hide More DGCL Sec. 245 - Restating the Certificate
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
        When certificates are amended, the amendments are simply “stapled” to the back of the orignial certificate. The result is often a document that is cumbersome to read. Rather than rely on a potentially confusing set of documents, a certificate may be restated in its entirety reading all the amendments into the certificate so that the document is easier to read and more understandable. Section 245 lays out the process by which a certificate may be restated. 
    4. 2.6 Show/Hide More DGCL Sec. 107 - Powers of Incorporators
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Corporations can not incorporate themselves. The parties who incorporate a business are known as “incorporators” or “promoters”. An incorporator need not be a person. An incorporator may also be another corporation.  

      Typically, the promoter names the initial board of directors of the corporation immediately as part of the incorporation process, but if not, the incorporator has plenary power to manage the corporation until such time as the initial board of directors is appointed. 

    5. 2.7 Show/Hide More DGCL Sec. 108 - Organization Meeting
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Once a corporation is incorporated, a formal organization meeting of the initial board of directors is required to adopt corporate bylaws, and ratify any actions taken by the incorporator. This organizational meeting may be in person, or as is often the case, undertaken by relying on written consent of the directors.
    6. 2.9 Show/Hide More Piercing the Corporate Veil
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Legal personality and limited liability are two critical features of the modern corporate structure. Although these two features are often described as different, they are in fact two sides of the same coin. The “coin” in this case is the principal of separateness. Legal personality means that the corporate entity stands on its own, independent of its stockholders, such that the debts and other liabilities of the stockholders of the corporation are not the debts or liabilities of the corporation.

      Equally important, limited liability (the default rule, provided under 102(b)(6)) means that the debts and other liabilities of the corporation are the debts and liabilities of the corporation and not the stockholders. The separate life of the corporation and the power of limited liability are extremely powerful policy choices that have implications for third parties as well as for corporate decision-makers.

      Businesses can and do fail. When they do, limited liability means that the costs of that failure will mostly be borne by third party creditors of the firm and not by the directors or the stockholders of the firm. This creates may create incentives for third parties to careful when dealing with corporations. But, it also creates incentives that improve the liquidity of capital markets and encourage corporate risk-taking.

      “Piercing the corporate veil” is an equitable doctrine that is the exception to the rule. In extreme cases, courts may look through the protective barrier of limited liability and assign the corporation's liabilities to the stockholders. The following cases raise of the issues common in veil piercing cases.

      Although the concept of corporate separateness is well understood at the state level, in recent years a series of First Amendment cases have provided the US Supreme Court the opportunity to give its own view on the traditional state law question of corporate separateness. Unlike state level courts, the US Supreme Court has taken a much more malleable view towards the doctrine of corporate separateness as that concept relates to the First Amendment.

      1. 2.9.1 Show/Hide More Walkovszky v. Carlton
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        The default rule for the corporation is that stockholders face limited liability for the debts of the corporation. The liability of stockholders is limited to the capital contributed they to the corporation. For instance, if a stockholder contributes $100 in equity capital to the corporation (assume this represents all the equity capital available to the corporation), and if the corporation has $150 in debts, the corporation may be required to pay all of its equity capital (i.e. $100) to settle the corporation's debts. In most circumstances, stockholders will not be liable for the balance of the corporation's debt of $50. The liability of stockholders is thus limited to only their capital contributions.

        Although limited liability as described above is the default rule, in extreme cases courts may look through the corporate form, or “pierce the corporate veil”, and assign liability for corporate debts to stockholders.

        The following case is paradigmatic. The owner of the corporation has obviously established the corporations in question to limit their exposure to debts of each of the corporations the owner controls. In deciding whether the stockholder should receive the benefit of corporate limited liability, the court lays out a test to determine whether it should look through the veil of limited liability protection and find the shareholders liable for the debts of the corporation.

        If the corporation is a mere “alter ego” of the stockholders (e.g. if the corporation is operated without formality and for mere convenience of its stockholders), it is more likely, though not certain, that a court will look through the corporate form and assign corporate liabilities to stockholders in order to prevent a fraud or inequitable result.

      2. 2.9.2 Show/Hide More Kinney Shoe Corp. v. Polan
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        Courts have long recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation.

        In the following case, a Federal court lays out its approach to the question of whether a court should depart from the limited liability norm and “pierce the corporate veil” thus making stockholders liable for the debts of the corporation. The approach taken by the Federal court here differs only slightly from the approach to piercing taken by various state courts, including Walkovszky.

        Central to a court's inquiry will be whether the stockholders treated the corporation as a separate entity with respect for the formalities due to a separate entity such that a court should also respect the corporation's limited liability. 

        Although the court in this case provides us with a convenient “test” it is worth remembering that piercing the corporate veil is an equitable remedy, therefore courts can – at times – appear to be inconsistent in their application of these tests. Success will usually require highly idiosyncratic facts and very sympathetic plaintiffs. In the most general terms, piercing the corporate veil is never going to be a court's first instinct. 

      3. 2.9.3 Show/Hide More Fletcher v. Atex Inc.
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        A subsidiary corporation is a corporation whose shares are owned entirely (or mostly) by another corporation. As between parent corporations and their subsidiaries, the default rule of limited liability still applies. A parent corporation will not normally be held liable for the debts of its subsidiary corporations.

        In Fletcher, tort victims are asking the court to pierce the corporate veil of one of its defunct subsidiaries in order to make Kodak liable for the subsidiaries debts that resulted from an alleged product defect that caused repetitive stress disorders in customers.  

        The Fletcher court uses two different theories to test whether it should pierce the corporate veil and make Kodak, the sole stockholder of Atex, liable for the damages caused by Atex. The first theory is the same two prong test applied in other piercing the corporate veil cases. The second theory relies on more straightforward concepts of agency law. These theories are not necessarily mutually exclusive.

  2. 3 Show/Hide More Corporate Powers
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    Prior to the passage of general enabling laws, the explication of corporate power through the corporate charter was extremely important. State legislatures could tailor corporate charters to provide corporations significant powers, including monopoly rights over markets or territories. Although states no longer grant corporations such unique powers, explication of corporate powers (e.g. right to own property, right sue and be sued, etc.) remains nevertheless important in establishing a corporation's legal personality.

    Sections 121 and 122 are authorizing provisions that grant corporate entities both explicit and implicit authority to act and conduct business.  While §122 provides explicit authority for certain activities of the corporation, §121 is a catch-all provision that provides implied authority to the corporation to undertake all other actions required to conduct business. Taken together, the corporation has a great deal of flexibility to act.

    1. 3.1 Show/Hide More DGCL Sec. 121 - General Powers
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Section 121 provides for the general powers of a corporation.  The corporation has implied authority to undertake all actions required in order to conduct its business as determined by the board of directors and as limited by the corporation's certificate of incorporation and the statute.
    2. 3.2 Show/Hide More DGCL Sec. 122 - Specific Powers
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      In addition to a corporation's general powers, the statute lays out a series of specific powers available to every corporation.  Many of these specific powers are critical to the life of a corporation. These specific powersunder §122 were once controversial, but by now are almost taken for granted.

      For example, the corporate power to make charitable donations is one such specific corporate power that was once controversial. In the early years of the corporate form, donations to charitable causes were deemed to be ultra vires – or beyond the power of boards of directors. Through a series of changes – in the code and the common law – charitable contributions are now permissible. 

      Section 122 grants the corporation other specific powers, all of which are calculated to facilitating the ability of the corporation to act in its own behalf as a corporate person separate from its stockholders. 

    3. 3.3 Show/Hide More Theodora Holding Corporation v. Henderson
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Theodora deals with the issue of corporate charity.  Until the post-War period, there was some question whether a corporation had the power to make donations to charity. On the one hand, there were those who felt that a board's sole duty was to  maximize profits for stockholders and that absent express authority to make corporate charitable contributions in the corporation's certificate of incorporation, that a board does not have the authority to make such contributions. On the other hand, there were those who recognized corporations had – even back to the pre-enabling laws period – a broader social role beyond maximizing profit for stockholders in the short run.

      Eventually, states legislatures put this question to rest by amending their corporate statutes to recognize the power of boards to make charitable corporate gifts. A series of court cases, including Theodora, reinforced the importance of corporate charitable contributions and the role of corporate chartitable contributions in the corporate social compact.

      The power of a corporation to make charitable contributions is not unlimited, however. Theodora and AP Smith, cited in Theodora, hint at the limits to corporate largesse.

    4. 3.4 Show/Hide More DGCL Sec. 123 - Ownership of securities
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Prior to the adoption of general incorporation statutes, corporations were regularly prohibited from owning stock or securities of other corporations. By specifically permitting a corporation to own and vote the stock of another corporation, §123 makes possible the “holding company” structure.

      A holding company is a corporation that has no operations but holds assets in the form of stock of subsidiary operating corporations. This hierarchial business structure is now quite common in the US and has a number of obvious benefits. First and foremost, the holding company structure permits the parent corporation to hold risky assets at arm's length, utilizing the subsidiary's limited liability shield to prevent an adverse risk in one business unit from affecting the entire business operation. The holding company structure also makes it easier to buy and sell corporate assets. Rather than engage in an corporate level merger or sale, the board of directors of a holding company can buy or sell divisions by simply transfering the shares of the division to or from a buyer. For these reasons, and others, the holding company structure has become ubiquitous.

    5. 3.5 Show/Hide More Public Benefit Corporations
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      The development of corporate social responsibility and social entrepreneurship has given rise to demand for a different kind of corporate form, the “public benefit corporation”. The public benefit corporation is a for-profit corporation established with a specific public purpose. The certificate of incorporation of a public benefit corporation requires that incorporators specify some public benefit against which the pecuniary interests of the corporation's business must be balanced. 

      Although the form is relatively new, there is very little in the public benefit form that could not also be accomplished using a regular corporation. For many years, non-profit corporations were nothing more than corporations in which the certificate of incorporation prohibited the board from making a profit for stockholders. In fact, the Green Bay Packers' certificate of incorporation prohibits stockholders from ever receiving a dividend and requires the board of the Packers to donate any profits the team might have to a community foundation.

      Public benefit corporations as a specifc form are a relatively new addition to corporate laws of states in response to a growing desire by promoters to have a corporate form that outwardly signals a credible commitment by managers to a more publicly-minded business. 

      In recent years, there has been a proliferation of public benefit corporations. For example, Ello, a Delaware public benefit corporation (social networking site), specifies as its public benefit that it will not share the private information of its customers with third parties. Plum Organics, another Delaware public benefit corporation (a baby food manufacturer), specifies that its public benefit includes “the delivery of nourishing, organic food to the nation's little ones.” Certificates of incorporation for these and other public benefit corporations are available on the course website. 

      1. 3.5.1 Show/Hide More DGCL Sec. 361-368 - Public Benefit Corporations
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
        The following amendments to the Delaware corporation code became effective on August 1, 2013 and provide for the establishment of public benefit corporations under the Delaware General Corporation Law. Section 362 requires public benefit corporations to identify a public benefit in its certificate of incorporation.  Section 365 requires boards of directors to manage the business in a manner that balances profit with the best interests of those affected by the corporation's conduct as well as the specific public benefit identified in the certificate of incorporation.
    6. 3.6 Show/Hide More Formation Assignment
      Formation Assignment
  3. 4 Show/Hide More Bylaws
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    The corporate bylaws, in addition to the certificate of incorporation, make up the core of any corporation's governance documents. Whereas the subject matter of the certificate of incorporation deals with the basic relationships between stockholders and the corporation, the substance of corporate bylaws is typically limited to issue of governance process within the corporation. Bylaws typically do not contain substantive mandates, but direct how the corporation, the board, and its stockholders may take certain actions.

    The corporate bylaws are subordinate to the certificate of incorporation. To the extent bylaws and the certificate or the DGCL are in conflict, the certificate and/or the DGCL will take precedence over the bylaws. Because they are subordinate, corproate bylaws are also easier to amend. Typically, corporate bylaws may be amended by a corporation's board of directors or its stockholders.  When stockholders amend the bylaws, they need only achieve a majority of a quorom rather than the more exacting majority of the outstanding shares as is the case in an amendment to the corporation's certificate of incorporation.

    Whereas the certificate of incorporation must be filed with the state, a corporation is not required to file its bylaws with any state authority. 

    1. 4.1 Show/Hide More DGCL Sec. 109 - Bylaws
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      This provision authorizes the corporation to adopt bylaws governing the conduct of the affairs of the corporation. The provision provides that the power to adopt and amend bylaws lies with the stockholders. However, if a corporation provides for such in its certificate of incorporation – as most corporate certificates do – then the board of directors may also amend the bylaws. As you might guess, issues may arise when stockholders and directors adopt conflicting bylaws. 
    2. 4.2 Show/Hide More Boilermakers Local 154 Retirement Fund v. Chevron Corporation
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      In Boilermakers, the court answers the question whether directors can unilaterally adopt bylaws to restrict the rights of stockholders. The bylaw in question is an ‘exclusive forum provision' bylaw that purports to limit the rights of stockholders to bring certain kinds of litigation against the corporation and its board to courts in Delaware. Forum selection provisions are common in commercial contracts.

      In this case, the board – and not the stockholders – adopted an exclusive forum bylaw. This case raises important questions about the ability of directors to act unilaterally in the context of corporate bylaws as well as the nature of the “corporate contract” that stockholders enter into when they purchase shares of any corporation.

      This case also reviews the standards of review a court will apply to judicial challenges to bylaws as well as the typical subject matter appropriate for bylaws. 

    3. 4.3 Show/Hide More Proxy Access and Expense Bylaws
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Although corporate bylaws are typically limited to process, they can still be extremely powerful in determining the balance of internal corporate governance. For example, although stockholders are required to vote for the board of directors, unless stockholders have the ability to nominate candidates the director positions, the power to vote might appear somewhat meaningless. Consequently, the ability to nominate directors to the corporate ballot is an extremely important power.  Without access to the corporate-sponsered ballot, stockholders are often left only rubber stamping board decisions about who is able to run for a seat on the board of directors. 

      Of course stockholders are always free to run a “proxy contest” by sponsering their own proxy ballot, however the mechanics of such a contest are prohibitively expensive for all but the largest stockolders.   

      In response to efforts by the SEC to enforce a blanket rule opening up access to the corporate-sponsered proxy to all stockholders, Delaware adopted permissive rules that on the one hand make it possible for corporations to opt to adopt bylaws making access to the corporate proxy available to stockholders under certain conditions.

      Delaware also adopted rules that allow corporations to adopt bylaws to permit the reimbursement of election expenses for successful candidates. Reimbursement bylaws are intended to reduce the financial hurdles for independent board candidates to run against incumbent directors. 

      Both of these changes – proxy access and reimbursement bylaws - are indended to reduce the incentives against stockholders nominating and running their own candidates for seats on boards and thereby make boards more responsive to stockholder interests. 

      1. 4.3.1 Show/Hide More DGCL Sec. 112 - Proxy Access Bylaw
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
        Section 112 permits boards to adopt bylaws that give stockholders the right, under certain conditions, to nominate their own directors who will appear on the corporate sponsered proxy.
      2. 4.3.2 Show/Hide More DGCL Sec. 113 - Proxy Expense Bylaw
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
        Section 113 reduces the economic incentives against stockholders engaging in proxy contests by permitting expense reimbursement following proxy contest for successful candidates.
  4. 5 Show/Hide More Board of Directors
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    Stockholders – as we will see later – have a number of rights with respect to the corporation. However, one right that stockholders do not have is the right to directly manage the day-to-day operations of the business. The general corporation law, as well as the common law, vests exclusive responsibility for corporate management and decisionmaking not with the stockholders, but rather with the corporation's board of directors.  

    We might like to think that shareholders own and run the business, but they do not.  The authority to manage and oversee the operation of the business on a day to day basis is vested exclusively with the board.  To the extent stockholders have rights to oversee the operations of the business, those rights are attenuated. Perhaps the most important provision of the Delaware corporate law is §141.  Delaware is by no means unique; every state has its equivalent to §141.  Section 141 centralizes decisionmaking authority to the board.  

    The statutory authority granted to the board by §141 lies at the heart of the business judgment presumption, or the “business judgment rule.” The business judgment presumption is judicial presumption that exists as an acknowledgment of the statutory authority vested in boards, and not shareholders, to run the corporation. The effect of this judicial presumption is to cause courts to defer to decisions of the board in most matters when those decisions are challenged by stockholders. 

    This presumption is quite powerful and have effects beyond the courtroom. Because courts will generally abstain from intervening in disputes between stockholders and boards about most business decisions, boards will feel a great deal of latitude and independence in their decision making process. The insulation from stockholders afforded by this judicial presumption encourages boards to take business risk.    

    1. 5.1 Show/Hide More DGCL Sec. 223 - Director vacanies
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      When a director resigns from the board of directors, such resignations are not contemporaneous with a stockholder meeting. In the interim period before the stockholder meeting, boards have the power to appoint replacement directors.
    2. 5.2 Show/Hide More DGCL Sec. 141 - Board of Directors
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Section 141 deals with the power and the structure of the board of directors. Of all the provisions in the corporate law, §141(a) is perhaps the single most important.  Section 141(a) grants plenary power over the management of the corporation – not the stockholders – but to the board of directors. Among other things, §141(a) provides the statutory basis for the business judgment presumption.

      Sections 141(b) & (f) describe the requirements for the conduct of regular business at board meetings or actions by the board without a meeting. Under §141©, a board is authorized to delegate almost all of its authority to committees of directors. Section 141(d) permits the creation of staggered, or classified, board structures.

      Section 141(e) creates a safe harbor from liability for boards that reasonably rely on experts when making decisions. Section 141(h) provides boards the statutory authority to set their own compensation, while §141(k) describes the circumstances under which stockholders may dismiss a director.


    3. 5.4 Show/Hide More Shlensky v. Wrigley
      Original Creator: Brian JM Quinn

      In this iconic case, a stockholder challenges a decision of the board of directors of the Chicago Cubs not to install lights at the field and to only play games during daylight hours.  

      For many years, the Chicago Cubs, a Delaware corporation, were controlled by Philip K. Wrigley – also known for his success as a chewing gum manufacturer. In many respects, Wrigley was an innovative businessman. During World War II he founded the All American Girls Baseball League to fill the void created when many professional baseball players went to war. The film, A League of Their Own, was a fictionalized account of the experiences of the AAGBL. In addition, Wrigley made a decision to increase the value of the Cubs brand by effectively giving away the rights to radio broadcasts of Cubs games. 

      In Shlensky v Wrigley, a stockholder sued the board of the Cubs, including Philip Wrigley, for the board's decision not to install lights and refusal to play night games at Wrigley Field.The stockholder alleged that the board's decision to only play day games at Wrigley caused the corporation to make less money than had the board installed lights and permitted the team to play night games.

      This case highlights a very typical board decision and a common tension between the managers of the corporation and its stockholders. In this case we also see the degree of deference that courts will pay to a board's business judgment when that decision is made in an informed manner at arm's length.

    4. 5.5 Show/Hide More Aronson v. Lewis
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      In Shlensky, the court described its policy of deferring to the decisions of the board of directors absent some evidence of fraud or wrongdoing. Aronson is the leading case for the restatement of the principle highlighted in Shlensky: the business judgment presumption, or the business judgment rule. This presumption, which is rooted in §141(a)'s allocation of exclusive management authority to the board of directors, requires that court leave board decisions undisturbed unless complaining stockholders present some evidence that the board made the challenged decisions in an uninformed manner, or in a manner not in good faith, or for reasons otherwise not in the best interests of the corporation (e.g. board self-dealing).

      Note that the pleading burden is on the complaining stockholders. In the absence of facts to undermine the business judgment presumption, courts will leave board decisions, even bad ones, in place. 

    5. 5.6 Show/Hide More Gagliardi v. TriFoods International Inc.
      Original Creator: Brian JM Quinn
      In this case, a stockholder brings suit to challenge a series of what turned out ultimately to be ill-advised board decisions. As in Shlensky, we see the degree of deference that courts will pay to a board's business judgment. The court in Gagliardi also offers up a rationale for why a high degree of deference for disinterested board decisions might generally be good policy.
    6. 5.7 Show/Hide More DGCL Sec. 145 - Indemnification of Directors and Other Agents
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      As we learned in the Agency Course, agents acting within the scope of their agency have a common law right of indemnification.  Section 145 authorizes the corporation to indemnify agents of the corporation (including directors, officers, and other agents) under certain conditions. 

      The statute envisions that directors seeking indemnification may well create conflicts as directors seek the approval of their fellow directors for indemnification. Consequently, the statute requires specific procedures prior to board approval of any such payments. These procedures attempt to mimic an arm's length approval of such payments by enlisting independent directors and/or unaffiliated stockholders. Note the analogue between an approval for purposes of §145 and agency law's approach to approving conflicted agent transactions.

  5. 6 Show/Hide More Stock and Dividends
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    The following provisions of the corporate law are enabling provisions related the corporation's stock. In general terms, a corporation may issue shares with a variety of rights and powers. Unless the certificate reserves to the board of directors the right designate stock rights, such rights must be stipulated in the corporation's certificate of incorporation.

    Where the certificate has reserved to the board the power to designate rights, when a board issues shares it may designate special rights, including voting power and dividend rights, for the stock it issues.  Boards have used this power to create high vote shares and other types of stock with preferences and rights. This power to tailor the rights of stock is central to the board's ability to adopt “poison pills”, also known as shareholder rights plans.

    A common right built in a share of stock is the “liquidation preference”. In firms funded by venture capital, venture capitalists will often demand that the shares they are issued come with liquidation preferences. A liquidation preference is a right that grants certain preferential payments to stockholder in the event the corporation undertakes any one of a series of different liquidation events (e.g. a merger, sale of the corporation, or a dissolution). Below is an example of a liquidation preference that might appear in a certificate of incorporation of venture backed start up firm:

    • Upon the occurence of a Liquidation, the holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $5 per share (as adjusted for any stock divdends, combinations or splits with respect to such shares) plus all declared or accumulated but unpaid dividends on such share for each share of Preferred Stock then held by them.

    This preference ensures that in the event of a liquidation event like a sale of the corporation, the venture investor receives $5 per share of the transaction consideration before any other stockholder is paid. Once the preference is paid, then stockholders share the balance of the transaction proceeds ratably.

    When a board issues shares, this chapter of the code also permits boards to restrict the ability of stockholders to buy and sell shares of the corporation – making such shares subject to redemption rights, rights of first offer, and also prohibiting in some circumstances interested stockholder transactions. 

    With respect to dividends, the provisions in this chapter makes it clear that decisions with respect to the declaration of dividends are ones that lie wholly within the discretion of the board of directors and are not the realm of stockholder action.

    1. 6.1 Show/Hide More DGCL Sec. 151- Classes and series of stock
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      A corporation may issue shares in more than one class, with each class having separate rights and powers.  In addition to the liquidation preference, discussed previously, a board can use §151 to issue shares with variable voting rights. For example, Facebook, Google, Twitter and other tech firms have used §151 to issue shares classes of stock to founders with 10 votes per share. Stock issued to the public have 1 vote per share, or in some cases, no votes at all. 

      Shares issued by the corporation, may also be subject to redemption should that right be stipulated in the certificate of incorporation or the certificate of designation. In a redemption, the board may at any time make a “call” on the stock and can redeem the stock for a price determined in the certificate. A redemption differs from a stock repurchase in the a number of ways. First, a stock repurchase involves a decision by the stockholder to sell their stock. Absent consent of the stockholder, no one can force a stockholder to sell into a stock repurchase. A redemption can lack a certain degree of voluntariness. Stockholders take the stock knowing that the board has the power to redeem stock against the will of stockholders. Second, the stock repurchase can be done at any price. Presumably, the board will want a sufficient number of stockholders to voluntarily tender their shares, consequently the repurchase is typically done a premium to the market price. In a redemption, the redemption price, or at least a formula to calculate the price is set in the certificate of incorporation.

    2. 6.2 Show/Hide More DGCL Sec. 157 - Rights and options
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      By now, stock options have become well known as a device for employee compensation in corporations.  A stock option provides the holder with the right to purchase a share of the corporation at a stated price.  When this “strike price” is below the price of the shares trading in the stock market, the options are considered “in the money” and the optionholder has an economic incentive to exercise the stock option. When the strike price is above the market price for the stock, the optionholder does not have an incentive to exercise the options.

      Because stock options increase in value with an increase in the stock price, options are thought to be reasonably efficient incentive mechanisms, delivering value to employees when the firm succeeds.   Because stock options issued to employees also vest over time, the existence of unvested options as part of an employee's compensation package creates a bonding mechanism between the corporation and the employee.

    3. 6.3 Show/Hide More DGCL Sec. 160 - Corporate ownership of its own stock
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Corporations, as entities separate from their stockholders, are empowered by the statute to hold and maintain all sorts of assets, including holding stock of other corporations (making the holding company possible). But can a corporation own its own stock? And, if it does, what are the implications? 

      The short answer is that a corporation can indeed buy and own its own stock. However, the implications of the corporation buying its own stock are significant. When a corporation buys or redeems its own stock that stock is deemed to be “treasury stock” and is no longer outstanding stock. Treasury stock may not be voted and does not count towards determining a quorum at stockholder meetings. 

      Any corporation stock held by wholly-owned subsidiary of the corporation is also deemed treasury stock. However, corporation stock held by the corporation in a fiduciary capacity (corporation stock held as part of an employee retirement plan managed by the corporation, for example), is not deemed to be treasury stock.

    4. 6.4 Show/Hide More DGCL Sec. 161 - Issuance of stock
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      The board of directors has the authority to issuance of new shares of the corporation. Provided the shares have been authorized in the certificate of incorporation, the board need not seek stockholder approval prior to issuing such shares.
    5. 6.5 Show/Hide More DGCL Sec. 170 - Dividends
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      When a corporation has profits, it may distribute those profits back to stockholders. These profit distributions back to stockholders are known as “dividends”. 

      The decision whether or not to issue dividends to stockholders lies wholly within the discretion of the board of directors. Unless the certificate of incorporation states otherwise, stockholders have no right to corporate dividends.

      Some old-line corporations, like G.E. are well-known for a long-standing board policy of making dividend payments to their stockholders. Other corporations, like start-up corporations or corporations in high-growth stages of development, have the exact opposite policy. Companies like Alphabet or Facebook have board policies against making dividend payments to stockholders, opting to reinvest all their profits into the company. 

    6. 6.6 Show/Hide More DGCL Sec. 202 - Restrictions on transfer of stock
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      When a board issues new shares, in addition assigning voting rights to the shares, the board may also, pursuant to §202, place reasonable restrictions on the ability of stockholders to transfer or sell such shares.  There are a variety of common restrictions placed on shares, particularly shares of private corporations. For example, a board might include a right of first refusal restriction on shares it issues to ensure that existing stockholders the opportunity to purchase any shares that a stockholder would like to sell. Another common restriction prevents accumulation of shares by any one stockholder. For example, the Green Bay Packers restrict any one shareholder from owning more than 5% of the outstanding shares of the corporation. The ability of boards to design restrictions on the transfer of stock is fairly broad. Of course, this power is not without limits. For example, restrictions against selling stock to based on racial or gender categories would run afoul of Federal law and thus not be enforceable.
    7. 6.7 Show/Hide More Henry v. Phixios Holdings
      Original Creator: Brian JM Quinn

       In Phixios, the court is asked to rule on the ability of a corporation to place restrictions on stock ownership. In the facts presented in Phixios, it is clear that a corporation has the right, pursuant to Section 202, to place restrictions on who and under what conditions certain people may own shares in the stock of the corporation. 

      The court's straightforward interpretation of Section 202 makes it clear that when a corporation purports to place restrictions on ownership or transfer of its stock that Section 202 requires actual knowledge by stockholders of such restrictions or at least disclosure of such restrictions on the face of the stock certificate.

    8. 6.8 Show/Hide More DGCL Sec. 203 - State anti-takeover legislation
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Section 203 is an example of state anti-takeover legislation. Section 203 is a flavor of the kinds of restrictions on stock transfer as we saw in §202. In §203 restrictions a board may prohibit a stockholder from purchasing additional shares in the corporation for a period of time once they have completed a transaction that gives them control of the corporation. These restrictions are intended to delay the ability of a hostile acquirer to quickly complete a hostile acquisition of the corporation unless the corporation's board consents. 
  6. 7 Show/Hide More Stockholder Meetings and Voting for Directors
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    Stockholders do not have a general right to manage the business and affairs of the corporation. Nor do they have a general right to vote on matters related to the operation of the corporation's business. The principle power of stockholders is the power to vote for directors and certain corporate transactions which for which there is a statutory stockholder vote required. Stockholders who disagree with the strategy or direction of the corporation have the right to vote in favor of a different board and thus through the corporate ballot box to affect a change in corporate direction. 

    It's no surprise then that the stockholder meeting and stockholder votes will be consequential for stockholders. The following provisions lay out the requirements for stockholder meetings as well as stockholder voting at these meetings.

    1. 7.1 Show/Hide More DGCL Sec. 211 - Stockholder meetings
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      The following provision lays out the requirements for a corporation to hold an annual meeting of the stockholders. The principle business of any corporation's annual meeting is the election of the directors. It is through the annual election of directors that stockholders have their biggest voice and influence in the running of the corporation's business and affairs. 


    2. 7.2 Show/Hide More DGCL. Sec. 228 - Action by written consent
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Stockholders may act by providing their written consent rather than at a meeting. Taking action by written consent rather than at a formal meeting may be preferrable in corporations, like start-up companies, where the number of stockholders is relatively small and easily identifiable.  Any action that can be taken at a meeting of the stockholders can also be accomplished by written consent of the majority of the outstanding shares.  

      This default right to act by written consent can be stripped from stockholders.  It is not uncommon for larger, publicly-traded corporations to include a prohibition against acting by written consent in the corporation's certificate of incorporation. By requiring stockholders to act only at a meeting – the time and place of which is controlled by the board of directors – managers of the corporation make it difficult for stockholder activists or for potential hostile acquirers of the corporation to organize stockholders against the incumbent board of directors and managers. 

    3. 7.3 Show/Hide More DGCL Sec. 212 - Stockholder voting rights
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      The default rule is that each share of stock gets one vote unless the certificate of incorporation provides otherwise. A stockholder may vote in person or may delegate authority to another person to vote as their proxy.  
    4. 7.5 Show/Hide More DGCL Sec. 213 - Record dates
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Prior to any stockholder meeting, the board must set a “record date” for determining who are the stockholders of the corporation who have the right to vote at the meeting. 

      Determining who is a stockholder for the purposes of notice and the right to vote at a meeting can be more complex than you might initially think. in a private corporation, like a start-up, determining who are the record stockholders entitled to notice and to vote at a meeting is, typically, a simple matter. Shares of a private corporation are not transferrable and are held by a relatively small number of easily identifiable persons. One need only refer to the corporation's stock ledger (usually an Excel spreadsheet) to determine who are the stockholders. 

      On the other hand, determining who is a stockholder in a modern publicly-traded corporation is an altogether different matter. In publicly-traded corporations, there are potentially millions of stockholders and the demographic of the stockholding base turns over regularly as traders in the market buy and sell shares of the corporation. Determining who is a stockholder for purposes of receiving notice of a meeting and then being entitled to vote at that meeting is difficult. For one thing, a stockholder who is given notice today may very well not be a stockholder of the corporation in 45 when the meeting is actually held.

      Later, when we discuss stockholder lists and §219, you will be introduced to the complexities of the system that has been gerry-rigged to try to deal with the question of record ownership in a fast paced trading environment. For now, though, note that §213 tries to deal with some obvious issues.

      By permitting a board to separate a stockholder's right to receive notice of a meeting and the identification of stockholders entitled to vote at a meeting. by delaying the identification of those stockholders entitlted to vote, the statute acknowledges the reality that in many corporations there will be significant turnover in the stockholding demographic between notice and the meeting. By identifying stockholders entitled to vote at a later point closer in time to the meeting, drafters of the statute hope the actual stockholding demographic more closely resembles those who have been identified as having the right to vote at a meeting. 

    5. 7.6 Show/Hide More DGCL Sec. 222 - Notice of meetings
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      A meeting may not be called unless all stockholders of record have received adequate notice under the provisions of the statute. Section 222 below outlines the notice requirements for stockholder meetings. 
    6. 7.7 Show/Hide More Who Gets to Vote - 219 and Lists of Record Shareholders
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      In advance of a meeting, stockholders have the right to seek a list of fellow stockholders of record for the purpose of communicating with them about the upcoming meeting. In the typical private corporation, identifying the stockholders of record is a relatively simple matter: every time the corporation issues a share, the corporate secretary records the name of the stockholder into the corporation's stock ledger. In order to determine the stockholders of record, one need only refer to the stock ledger.

      This exercise is more complex when one wishes to determine the stockholders of record of a corporation which has its stock trading on the public markets, liek the NASDAQ or the NYSE. In the Dell case that follows, Vice Chancellor Laster provides a review of the US system of recording beneficial and record stockholders for public corporations.

      1. 7.7.1 Show/Hide More DGCL Sec. 219 - Stockholder lists
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
        Access to stockholder lists
    7. 7.8 Show/Hide More DGCL Sec. 216 - Quorum and required votes
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      For any stockholder meeting to be a valid meeting, there must be sufficient representation of the corporation's underlying stockholder base. Quorum requirements exist to ensure that when a corporation's stockholders meet they are sufficiently representative such that their votes reflect the will of the stockholders as a whole.

      This §216 also sets out the default rules for voting for directors.

    8. 7.9 Show/Hide More DGCL Sec. 214 - Cumulative voting option for directors
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      Although plurality voting is the default rule for the election of directors under §216, a corporation may, in its certificate of incorporation, opt into a cumulative voting structure. The cumulative voting structure gives minority blockholders the power to elect representatives to the board in a manner that would be impossible under plurality voting. It does so by permitting stockholders to accumulate all their votes into a single (or multiple) block and then allocate that block of votes to a single candidate. 

      For example, if the election is for four directors and the stockholder has 500 shares, under the default plurality voting regime, the stockholder can vote a maximum of 500 shares for each one candidate. Under a cumulative voting regime, the stockholder has that number of votes equal to the number of shares owned by the stockholder multiplied by the number of available board seats in the election. In this case: 500 * 4 = 2,000 votes. The stockholder is then free to allocate those votes in any many she pleases, for example all 2,000 votes on candidate A, splitting her votes 1,000 each between candidate A and B while giving no votes to candidates C and D.

      Under §141(k), the director removal provision, a director may be removed under cumulative voting, however, remova of a director may be blocked by minority stockholders. Under §141(k), no director in a cumulative voting regime may be removed when the votes cast against removal would be sufficient to elect the director if voted cumulatively at an election where all memberships entitled to vote were voted.

    9. 7.10 Show/Hide More Shareholder Proposals
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

      At the annual stockholder meeting, directors ask stockholders to vote on certain matters, including the election of directors and other matters, like the ratification of the board's selection of a corporate auditor.  But, directors do not have exclusive control over the agenda at a stockholder meeting.  Stockholders also have the right to put proposals and questions before the meeting. Some matters that are proposed by stockholders, including amendments to bylaws are expressly permitted by the state corporate law. Others are governed by bylaws, for example stockholder nomination of candidates for the position of director.  

      Other proposals put forward by stockholders, however, are not expressly contemplated by the corporate law. For these stockholder proposals, the SEC has developed a series of rules to govern when a board is required to put a shareholder proposal on the corporate proxy statement, or to be more precise rules governing when a board is permitted to exclude a shareholder proposal from the corporation's proxy materials sent to stockholders.

      Although many shareholder proposals are focused on tradtional corporate governance issues, there is a long history of social activists using the shareholder proposal process to put important social issues on the agendas of corporate America. For example, during the 1970s and 1980s, the anti-Apartheid movement used the shareholder proposal process to raise awareness of the evils of Apartheid in South Africa.  

      1. 7.10.1 Show/Hide More 14a-8 - Shareholder Proposals
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        A “proxy statement” is a required disclosure document that publicly traded companies must send to all beneficial stockholders prior to any meeting of the stockholders. The proxy statement lays describes for beneficial stockholders the business of the upcoming meeting and include a voting proxy that a beneficial stockholder can return to the record holder. The most common business at a meeting is the annual election of directors. However, a board can bring any business or question to the stockholders for consideration and a vote.

        The contents of this document are laid out in a series of rules under the ‘34 Act. The rules governing how a stockholder can get access to a corporation's proxy statement for the purpose of presenting proposals to fellow shareholders for their consideration at annual shareholder meetings are presented below in a unique FAQ format. 

        The default rule is that any proposal put forward by an eligible stockholder in a timely manner must be included in the corporate proxy.  However, the board is not required to include all proposals in the proxy. There are a number of very important exceptions to the inclusion requirement, and they are laid out in the 14a-8 rules that follow.

      2. 7.10.2 Show/Hide More Lovenheim v. Iroquois Brands Ltd.
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        When a stockholder presents a proposal to a board of directors, the default rule is that such proposals shall be included in the proxy unless the board of the subject company has a legitimate reason to exclude the proposal.  

        In the case that follows, animal rights activists sought to include a proposal relating to the inhumane treatment of animals in the preparation of food products sold by the subjct company.  The board of subject company sought to exclude the proposal.  In seeking an no-action letter from the SEC, the board Iroquois argued that the stockholder's proposal lacked relevance and thus could properly be excluded.

        In this opinion, the court provides guidance on how the SEC will typically treat these kinds of social proposals.  

      3. 7.10.3 Show/Hide More CA INC. v. AFSCME Employees Pension Plan
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
        In the CA case, stockholders sought to include a shareholder question in the corporate proxy. CA's board took the position – by way of a letter from Delaware counsel – that the question was illegal under state law, so consequently the board should not be required to include the proposal. Plaintiff stockholders provided the SEC with their own legal opinion from Delaware counsel that the proposal was not illegal under the Delaware corporate statute. When presented with a question of conflicting interpretation of Delaware corporate law, the SEC can find itself asea. The Delaware Supreme Court permits, in these circumstances administrative units like the SEC to certify questions to the court. In the opinion that follows, the Delaware Supreme Court provides an answer to the SEC's certified question. The CA case is an example of the Delaware Supreme Court's regular interaction with the SEC.
      4. 7.10.4 Show/Hide More Bylaw Amendments and Shareholder Proposals
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        Stockholders have a statutory right to amend the bylaws. In public corporations, stockholders can put forward bylaw amendment proposals via the shareholder proposal process. A bylaw amendment included as a shareholder proposal in the company's proxy statement that receives sufficient votes in favor is binding on the corporation and becomes a valid bylaw of the corporation.

        Because a stockholder bylaw amendment that is binding on the corporation is permitted by law, one of the most common avenues for blocking shareholder proposals (that the proposal is contrary to the law) is usually not available for companies seeking to exclude such proposals.

        The court in CA opined that the bylaw amendment as offered was not permissible under Delaware law. However, the court offered up in dictum that if the stockholders did not like the result announced by the court that stockholders had the option of causing the corporation to amend its certificate of incorporation, or alternatively, working with the legislature to amend the DGCL to permit the proposed amendment.  In the wake of CA, the Delawarenlegislature amended the corporate statute to make bylaws such at the one proposed by shareholders in CA permissible under the Delaware law.

        1. Show/Hide More DGCL Sec. 113 - Expense reimbursement
          Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
          Expense Reimbursement following Proxy Contest
      5. 7.10.5 Show/Hide More Say on Pay Vote [Frank-Dodd, Sec 951]
        Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

        In the wake of the Financial Crisis of 2008, Congress adopted the Frank-Dodd bill.  Section 951 of Frank-Dodd requires regular votes by shareholders to approve executive compensation. 

        Note that the structure and effect of the vote are sensitive to the 14a-8 process and comport with what one might expect of other shareholder proposals. When approving the “say on pay” votes, Congress was sensitive to the traditional preeminance of the state corporate law.  Consequently, “say on pay” votes are precatory in nature. 


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May 31, 2016

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