The Delaware General Corporation Law

  • 1 Introduction to the DGCL

    Although every state has its own corporate law, we will focus on the Delaware General Corporation Law. We do this for one very important reason: the vast majority of public corporations and a significant number of private corporations are incorporated in Delaware. A study by by Robert Daines found that when private companies are incorporated that there are only two incorporation choices. First, they tend to incorporate in the state in which they are headquartered and in which they do their business.  Second, they incorporate in Delaware.

    You might well ask how is it possible that a corporation that is headquartered in Massachusetts and does business in Massachusetts should be governed by Delaware law? This seemingly odd result is a function of a variety of factors, including historical developments as well as our federal system.

    In the earliest days of our Republic, the power to incorporate corporations was reserved to the states. Prior to the adoption of general incorporation statutes, the incorporation of a corporation required state legislatures to adopt a law incorporating the entity. These incorporation statutes laid out the powers and responsibilities of the corporation, including the rights of corporate stockholdhers with respect to the entity formed by the state legislature. It was not uncommon at the time for the state grants of corporate charters to reserve some monopoly power within the state to the corporation - typically to facilitate the development of some critical infrastructure like a canal, roadway, or railroad. Over time, the process of incorporation was simplified as states adopted general incorporation statutes, which took legislatures out of the business of incorporating businesses. General incorporation statutes laid out default powers and responsibilties of the corporation as well as describing the default powers and rights of the corporation's stockholders vis a vis the corporation. 

    When one combines the power of states to incorporate busineses with constitutional prohibitions against states impeding interstate commerce and Article IV's full faith and credit clause (requiring each state to provide full faith and credit to public acts of every other state) with a state's power to incorporate corporation's then one makes it possible for a corporation to be incorporated in one state and then do business in another. 

    Of course, a corporation's outward acts - for example with respect to employment law or the environment - are subject to the jurisdiction of the law in which the acts occur. The internal affairs of the corporation (relations among the stockholders, and managers with the corporation itself) are the stuff of the law of the state of incorporation.  In a 1982 case, Edgar v Mite Corp. (457 US 624 (1982)) the US Supreme Court recognized the "internal affairs doctrine" as well settled law in the US: 

    The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands. See Restatement (Second) of Conflict of Laws § 302, Comment b, pp. 307-308 (1971). 

    But Edgar is not a unique application of the internal affairs doctrine by the US Supreme Court. In an earlier case, Cort v. Ash (422 US 66, 1975), the court described the doctrine and the primacy of state law in the following way:

    Corporations are creatures of state law, and investors commit their funds to corporate directors on the understanding that, except where federal law expressly requires certain responsibilities of directors with respect to stockholders, state law will govern the internal affairs of the corporation. If, for example, state law permits corporations to use corporate funds as contributions in state elections, see Miller, supra, at 763 n. 4, shareholders are on notice that their funds may be so used and have no recourse under any federal statute. 

    The ability of entrpreneurs to elect to incorporate in one of any number of states gave way to something of a competition among states in the early 20th century for the revenue associated with incorporation of businesses. In corporate governance circles, this competitive environment was criticized as a "race to the bottom" with states competing with each other to reduce management accountability to its lowest possible level in order to attract incorporations. While this race to the bottom logic is by now slightly overblown, at one point states aggressively competed for incorporations.  Although some states occassionally attempt to revive their incorporations business, the age of active competition for incorporations is long since over with Delaware decisively winning. As Daines noted, the incorporation decision these days is more likely to be binary - incorporate where you do business or in Delaware.

    Rather than see itself in competition against other jurisdictions, Delaware sees itself in tension with the SEC and federal regulators for dominance in corporate governance.  Delaware is protective of its position as a leader in the law of corporations. To the extent the SEC and federal regulators adopt rules that affect corporate governance, Delaware reacts.  Over the course of this semester we will see various examples of federal movement in the corporate governance area along with reactions by the state of Delaware as it reacts to protect its position. 

    For now, though, we will focus on the basics of the Delaware corporate law, starting with formation.

  • 2 Formation

    • 2.1 The beginnings of incorporation

      Prior to the late 19th century, few states had general enabling laws with respect incorporations.  Incorporation was not a right, but rather a privilege granted by state governments on individual groups of promoters.  At that time,  the incorporation of a business required a legislative act by the state in which the corporation was to do its business.  As a consequence, there were few corporations in the US.  When legislatures granted incorporations, the majority of incorporations were limited to enterprises intended to engage in infrastructure development.  The earliest corporations in the US were corporations formed to develop canals, turnpikes and bridges.  It was not uncommon for state legislatures to grant monopoly rights to develop certain critical infrastructure.  It was also not uncommon for states to invest in these enterprises by way of a contribution of land for the use of the infrastructure corporation.  

      By the early 20th century, general enabling laws, which granted everyone the right to incorporate, began to take hold in states across the country.  One of the motivations for the switch to general enabling laws was a backlash to the high degree of corruption in state legislatures.  Promoters seeking support for acts of incorporation often found that support the old-fashioned way - by means of a bribe.  By turning the power dynamic on its head and making the act of incorporation ministerial rather than discretionary, state legislatures were robbed of an important motivation for corruption. 

      In his dissent in a 1933 case, Ligget v Lee (288, US 517), Justice Brandeis discussed the development of general enabling laws and the related concepts of "charter mongering" (or, competition amongst the states for incorporations in the period following adoption of the general enabling laws):

      The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life and, hence, to be borne with resignation. Throughout the greater part of our history a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational and charitable purposes. It was denied because of fear. Fear of encroachment upon the liberties and opportunities of the individual. Fear of the subjection of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain. There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So, at first, the corporate privilege was granted sparingly; and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unattainable. The later enactment of general incorporation laws does not signify that the apprehension of corporate domination had been overcome. The desire for business expansion created an irresistible demand for more charters; and it was believed that under general laws embodying safeguards of universal application the scandals and favoritism incident to special incorporation could be avoided. The general laws, which long embodied severe restrictions upon size and upon the scope of corporate activity, were, in part, an expression of the desire for equality of opportunity.

      (a) Limitation upon the amount of the authorized capital of business corporations was long universal. The maximum limit frequently varied with the kinds of business to be carried on, being dependent apparently upon the supposed requirements of the efficient unit. Although the statutory limits were changed from time to time this principle of limitation was long retained. Thus in New York the limit was at first $100,000 for some businesses and as little as $50,000 for others. Until 1881 the maximum for business corporations in New York was $2,000,000; and until 1890, $5,000,000. In Massachusetts the limit was at first $200,000 for some businesses and as little as $5,000 for others. Until 1871 the maximum for mechanical and manufacturing corporations was $500,000; and until 1899, $1,000,000. The limit of $100,000 was retained for some businesses until 1903.

      In many other states, including the leading ones in some industries, the removal of the limitations upon size was more recent. Pennsylvania did not remove the limits until 1905. Its first general act not having contained a maximum limit that of $500,000 was soon imposed. Later, it was raised to $1,000,000; and, for iron and steel companies, to $5,000,000. Vermont limited the maximum to $1,000,000 until 1911 when no amount over $10,000,000 was authorized if, in the opinion of a judge of the supreme court, such a capitalization would tend "to create a monopoly or result in restraining competition in trade." Maryland limited until 1918 the capital of mining companies to $3,000,000; and prohibited them from holding more than 500 acres of land (except in Allegany County, where 1,000 acres was allowed). New Hampshire did not remove the maximum limit until 1919. It had been $1,000,000 until 1907, when it was increased to $5,000,000. Michigan did not remove the maximum limit until 1921. The maximum, at first $100,000, had been gradually increased until in 1903 it became $10,000,000 for some corporations and $25,000,000 for others; and in 1917 became $50,000,000. Indiana did not remove until 1921 the maximum limit of $2,000,000 for petroleum and natural gas corporations. Missouri did not remove its maximum limit until 1927. Texas still has such a limit for certain corporations.

      (b) Limitations upon the scope of a business corporation's powers and activity were also long universal. At first, corporations could be formed under the general laws only for a limited number of purposes — usually those which required a relatively large fixed capital, like transportation, banking, and insurance, and mechanical, mining, and manufacturing enterprises. Permission to incorporate for "any lawful purpose" was not common until 1875; and until that time the duration of corporate franchises was generally limited to a period of 20, 30, or 50 years. All, or a majority, of the incorporators or directors, or both, were required to be residents of the incorporating state. The powers which the corporation might exercise in carrying out its purposes were sparingly conferred and strictly construed. Severe limitations were imposed on the amount of indebtedness, bonded or otherwise. The power to hold stock in other corporations was not conferred or implied.The holding company was impossible.

      (c) The removal by the leading industrial States of the limitations upon the size and powers of business corporations appears to have been due, not to their conviction that maintenance of the restrictions was undesirable in itself, but to the conviction that it was futile to insist upon them; because local restriction would be circumvented by foreign incorporation. Indeed, local restriction seemed worse than futile. Lesser States, eager for the revenue derived from the traffic in charters, had removed safeguards from their own incorporation laws. Companies were early formed to provide charters for corporations in states where the cost was lowest and the laws least restrictive. The states joined in advertising their wares.The race was one not of diligence but of laxity. Incorporation under such laws was possible; and the great industrial States yielded in order not to lose wholly the prospect of the revenue and the control incident to domestic incorporation.

      The history of the changes made by New York is illustrative. The New York revision of 1890, which eliminated the maximum limitation on authorized capital, and permitted intercorporate stockholding in a limited class of cases, was passed after a migration of incorporation from New York, attracted by the more liberal incorporation laws of New Jersey. But the changes made by New York in 1890 were not sufficient to stem the tide. In 1892, the Governor of New York approved a special charter for the General Electric Company, modelled upon the New Jersey Act, on the ground that otherwise the enterprise would secure a New Jersey charter. Later in the same year the New York corporation law was again revised, allowing the holding of stock in other corporations. But the New Jersey law still continued to be more attractive to incorporators. By specifically providing that corporations might be formed in New Jersey to do all their business elsewhere, the state made its policy unmistakably clear. Of the seven largest trusts existing in 1904, with an aggregate capitalization of over two and a half billion dollars, all were organized under New Jersey law; and three of these were formed in 1899. During the first seven months of that year, 1336 corporations were organized under the laws of New Jersey, with an aggregate authorized capital of over two billion dollars. The Comptroller of New York, in his annual report for 1899, complained that "our tax list reflects little of the great wave of organization that has swept over the country during the past year and to which this state contributed more capital than any other state in the Union." "It is time," he declared, "that great corporations having their actual headquarters in this State and a nominal office elsewhere, doing nearly all of their business within our borders, should be brought within the jurisdiction of this State not only as to matters of taxation but in respect to other and equally important affairs." In 1901 the New York corporation law was again revised.

      The history in other states was similar. Thus, the Massachusetts revision of 1903 was precipitated by the fact that "the possibilities of incorporation in other states have become well known, and have been availed of to the detriment of this Commonwealth."

      … Able, discerning scholars have pictured for us the economic and social results of thus removing all limitations upon the size and activities of business corporations and of vesting in their managers vast powers once exercised by stockholders — results not designed by the States and long unsuspected. They show that size alone gives to giant corporations a social significance not attached ordinarily to smaller units of private enterprise. Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business, have become an institution — an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the State. The typical business corporation of the last century, owned by a small group of individuals, managed by their owners, and limited in size by their personal wealth, is being supplanted by huge concerns in which the lives of tens or hundreds of thousands of employees and the property of tens or hundreds of thousands of investors are subjected, through the corporate mechanism, to the control of a few men. Ownership has been separated from control; and this separation has removed many of the checks which formerly operated to curb the misuse of wealth and power. And as ownership of the shares is becoming continually more dispersed, the power which formerly accompanied ownership is becoming increasingly concentrated in the hands of a few. The changes thereby wrought in the lives of the workers, of the owners and of the general public, are so fundamental and far-reaching as to lead these scholars to compare the evolving "corporate system" with the feudal system; and to lead other men of insight and experience to assert that this "master institution of civilised life" is committing it to the rule of a plutocracy.

       

      Questions for discussion

       1. Justice Brandeis observed that recently some had come to believe that the "privilege of doing business in the corporate form were inherent in the citizen." Should the people have the "right to incorporate" or should incorporation remain a "privilege?"

      2. Why might a state engage in "charter mongering", otherwise known as the "race to the bottom?"

       

    • 2.2 DGCL Sec. 101 - Formation

      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. 

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      TITLE 8
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      Corporations
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      CHAPTER 1. GENERAL CORPORATION LAW
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      Subchapter I. Formation
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      (a) Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person's or entity's residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation which shall be executed, acknowledged and filed in accordance with § 103 of this title.

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      (b) A corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes, except as may otherwise be provided by the Constitution or other law of this State.

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      (c) Corporations for constructing, maintaining and operating public utilities, whether in or outside of this State, may be organized under this chapter, but corporations for constructing, maintaining and operating public utilities within this State shall be subject to, in addition to this chapter, the special provisions and requirements of Title 26 applicable to such corporations.

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      8 Del. C. 1953, § 101; 56 Del. Laws, c. 5070 Del. Laws, c. 186, § 170 Del. Laws, c. 587, § 171 Del. Laws, c. 339, § 1.;

    • 2.3 DGCL Sec. 102 - Contents of Certificate of Incorporation

      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
      TITLE 8
      2
      Corporations
      3

      CHAPTER 1. GENERAL CORPORATION LAW

      4

      Subchapter I. Formation

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      (a) The certificate of incorporation shall set forth:

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      (1) The name of the corporation, which (i) shall contain 1 of the words "association," "company," "corporation," "club," "foundation," "fund," "incorporated," "institute," "society," "union," "syndicate," or "limited," (or abbreviations thereof, with or without punctuation), or words (or abbreviations thereof, with or without punctuation) of like import of foreign countries or jurisdictions (provided they are written in roman characters or letters); provided, however, that the Division of Corporations in the Department of State may waive such requirement (unless it determines that such name is, or might otherwise appear to be, that of a natural person) if such corporation executes, acknowledges and files with the Secretary of State in accordance with § 103 of this title a certificate stating that its total assets, as defined in § 503(i) of this title, are not less than $10,000,000, or, in the sole discretion of the Division of Corporations in the Department of State, if the corporation is both a nonprofit nonstock corporation and an association of professionals, (ii) shall be such as to distinguish it upon the records in the office of the Division of Corporations in the Department of State from the names that are reserved on such records and from the names on such records of each other corporation, partnership, limited partnership, limited liability company or statutory trust organized or registered as a domestic or foreign corporation, partnership, limited partnership, limited liability company or statutory trust under the laws of this State, except with the written consent of the person who has reserved such name or such other foreign corporation or domestic or foreign partnership, limited partnership, limited liability company or statutory trust, executed, acknowledged and filed with the Secretary of State in accordance with § 103 of this title, (iii) except as permitted by § 395 of this title, shall not contain the word "trust," and (iv) shall not contain the word "bank," or any variation thereof, except for the name of a bank reporting to and under the supervision of the State Bank Commissioner of this State or a subsidiary of a bank or savings association (as those terms are defined in the Federal Deposit Insurance Act, as amended, at 12 U.S.C. § 1813), or a corporation regulated under the Bank Holding Company Act of 1956, as amended, 12 U.S.C. § 1841 et seq., or the Home Owners' Loan Act, as amended, 12 U.S.C. § 1461 et seq.; provided, however, that this section shall not be construed to prevent the use of the word "bank," or any variation thereof, in a context clearly not purporting to refer to a banking business or otherwise likely to mislead the public about the nature of the business of the corporation or to lead to a pattern and practice of abuse that might cause harm to the interests of the public or the State as determined by the Division of Corporations in the Department of State;

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      (2) The address (which shall be stated in accordance with § 131(c) of this title) of the corporation's registered office in this State, and the name of its registered agent at such address;

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      (3) The nature of the business or purposes to be conducted or promoted. It shall be sufficient to state, either alone or with other businesses or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any;

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      (4) If the corporation is to be authorized to issue only 1 class of stock, the total number of shares of stock which the corporation shall have authority to issue and the par value of each of such shares, or a statement that all such shares are to be without par value. If the corporation is to be authorized to issue more than 1 class of stock, the certificate of incorporation shall set forth the total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class the shares of which are to have par value and the par value of the shares of each such class. The certificate of incorporation shall also set forth a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, which are permitted by § 151 of this title in respect of any class or classes of stock or any series of any class of stock of the corporation and the fixing of which by the certificate of incorporation is desired, and an express grant of such authority as it may then be desired to grant to the board of directors to fix by resolution or resolutions any thereof that may be desired but which shall not be fixed by the certificate of incorporation. The foregoing provisions of this paragraph shall not apply to nonstock corporations. In the case of nonstock corporations, the fact that they are not authorized to issue capital stock shall be stated in the certificate of incorporation. The conditions of membership, or other criteria for identifying members, of nonstock corporations shall likewise be stated in the certificate of incorporation or the bylaws. Nonstock corporations shall have members, but failure to have members shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation. Nonstock corporations may provide for classes or groups of members having relative rights, powers and duties, and may make provision for the future creation of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of members. Except as otherwise provided in this chapter, nonstock corporations may also provide that any member or class or group of members shall have full, limited, or no voting rights or powers, including that any member or class or group of members shall have the right to vote on a specified transaction even if that member or class or group of members does not have the right to vote for the election of the members of the governing body of the corporation. Voting by members of a nonstock corporation may be on a per capita, number, financial interest, class, group, or any other basis set forth. The provisions referred to in the 3 preceding sentences may be set forth in the certificate of incorporation or the bylaws. If neither the certificate of incorporation nor the bylaws of a nonstock corporation state the conditions of membership, or other criteria for identifying members, the members of the corporation shall be deemed to be those entitled to vote for the election of the members of the governing body pursuant to the certificate of incorporation or bylaws of such corporation or otherwise until thereafter otherwise provided by the certificate of incorporation or the bylaws;

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      (5) The name and mailing address of the incorporator or incorporators;

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      (6) If the powers of the incorporator or incorporators are to terminate upon the filing of the certificate of incorporation, the names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualify.

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      (b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

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      (1) Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation;

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      (2) The following provisions, in haec verba, (i), for a corporation other than a nonstock corporation, viz:

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      "Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under § 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under § 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation"; or

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      (ii), for a nonstock corporation, viz:

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      "Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its members or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or member thereof or on the application of any receiver or receivers appointed for this corporation under § 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under § 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the members or class of members of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the members or class of members of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the members or class of members, of this corporation, as the case may be, and also on this corporation";

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      (3) Such provisions as may be desired granting to the holders of the stock of the corporation, or the holders of any class or series of a class thereof, the preemptive right to subscribe to any or all additional issues of stock of the corporation of any or all classes or series thereof, or to any securities of the corporation convertible into such stock. No stockholder shall have any preemptive right to subscribe to an additional issue of stock or to any security convertible into such stock unless, and except to the extent that, such right is expressly granted to such stockholder in the certificate of incorporation. All such rights in existence on July 3, 1967, shall remain in existence unaffected by this paragraph unless and until changed or terminated by appropriate action which expressly provides for the change or termination;

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      (4) Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power, or a larger number of the directors, than is required by this chapter;

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      (5) A provision limiting the duration of the corporation's existence to a specified date; otherwise, the corporation shall have perpetual existence;

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      (6) A provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts;

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      (7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

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      (c) It shall not be necessary to set forth in the certificate of incorporation any of the powers conferred on corporations by this chapter.

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      (d) Except for provisions included pursuant to paragraphs (a)(1), (a)(2), (a)(5), (a)(6), (b)(2), (b)(5), (b)(7) of this section, and provisions included pursuant to paragraph (a)(4) of this section specifying the classes, number of shares, and par value of shares a corporation other than a nonstock corporation is authorized to issue, any provision of the certificate of incorporation may be made dependent upon facts ascertainable outside such instrument, provided that the manner in which such facts shall operate upon the provision is clearly and explicitly set forth therein. The term "facts," as used in this subsection, includes, but is not limited to, the occurrence of any event, including a determination or action by any person or body, including the corporation.

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      (e) The exclusive right to the use of a name that is available for use by a domestic or foreign corporation may be reserved by or on behalf of:

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      (1) Any person intending to incorporate or organize a corporation with that name under this chapter or contemplating such incorporation or organization;

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      (2) Any domestic corporation or any foreign corporation qualified to do business in the State of Delaware, in either case, intending to change its name or contemplating such a change;

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      (3) Any foreign corporation intending to qualify to do business in the State of Delaware and adopt that name or contemplating such qualification and adoption; and

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      (4) Any person intending to organize a foreign corporation and have it qualify to do business in the State of Delaware and adopt that name or contemplating such organization, qualification and adoption.

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      The reservation of a specified name may be made by filing with the Secretary of State an application, executed by the applicant, certifying that the reservation is made by or on behalf of a domestic corporation, foreign corporation or other person described in paragraphs (e)(1)-(4) of this section above, and specifying the name to be reserved and the name and address of the applicant. If the Secretary of State finds that the name is available for use by a domestic or foreign corporation, the Secretary shall reserve the name for the use of the applicant for a period of 120 days. The same applicant may renew for successive 120-day periods a reservation of a specified name by filing with the Secretary of State, prior to the expiration of such reservation (or renewal thereof), an application for renewal of such reservation, executed by the applicant, certifying that the reservation is renewed by or on behalf of a domestic corporation, foreign corporation or other person described in paragraphs (e)(1)-(4) of this section above and specifying the name reservation to be renewed and the name and address of the applicant. The right to the exclusive use of a reserved name may be transferred to any other person by filing in the office of the Secretary of State a notice of the transfer, executed by the applicant for whom the name was reserved, specifying the name reservation to be transferred and the name and address of the transferee. The reservation of a specified name may be cancelled by filing with the Secretary of State a notice of cancellation, executed by the applicant or transferee, specifying the name reservation to be cancelled and the name and address of the applicant or transferee. Unless the Secretary of State finds that any application, application for renewal, notice of transfer, or notice of cancellation filed with the Secretary of State as required by this subsection does not conform to law, upon receipt of all filing fees required by law the Secretary of State shall prepare and return to the person who filed such instrument a copy of the filed instrument with a notation thereon of the action taken by the Secretary of State. A fee as set forth in § 391 of this title shall be paid at the time of the reservation of any name, at the time of the renewal of any such reservation and at the time of the filing of a notice of the transfer or cancellation of any such reservation.

      32

      8 Del. C. 1953, § 102; 56 Del. Laws, c. 5057 Del. Laws, c. 148, § 165 Del. Laws, c. 127, § 165 Del. Laws, c. 289, §§ 1, 266 Del. Laws, c. 136, § 166 Del. Laws, c. 352, § 167 Del. Laws, c. 376, § 169 Del. Laws, c. 61, § 170 Del. Laws, c. 79, §§ 1-371 Del. Laws, c. 120, § 171 Del. Laws, c. 339, § 272 Del. Laws, c. 123, § 172 Del. Laws, c. 343, § 173 Del. Laws, c. 82, § 173 Del. Laws, c. 329, § 4374 Del. Laws, c. 326, § 175 Del. Laws, c. 306, §§ 1, 277 Del. Laws, c. 253, §§ 1-778 Del. Laws, c. 96, §§ 1-3.;

    • 2.4 DGCL Sec. 103 - Filing requirements

      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.

      1

      TITLE 8

      2

      Corporations

      3

      CHAPTER 1. GENERAL CORPORATION LAW

      4

      Subchapter I. Formation

      5

       

      6 7

      (a) Whenever any instrument is to be filed with the Secretary of State or in accordance with this section or chapter, such instrument shall be executed as follows:

      8

      (1) The certificate of incorporation, and any other instrument to be filed before the election of the initial board of directors if the initial directors were not named in the certificate of incorporation, shall be signed by the incorporator or incorporators (or, in the case of any such other instrument, such incorporator's or incorporators' successors and assigns). If any incorporator is not available by reason of death, incapacity, unknown address, or refusal or neglect to act, then any such other instrument may be signed, with the same effect as if such incorporator had signed it, by any person for whom or on whose behalf such incorporator, in executing the certificate of incorporation, was acting directly or indirectly as employee or agent, provided that such other instrument shall state that such incorporator is not available and the reason therefor, that such incorporator in executing the certificate of incorporation was acting directly or indirectly as employee or agent for or on behalf of such person, and that such person's signature on such instrument is otherwise authorized and not wrongful.

      9

      (2) All other instruments shall be signed:

      10

      a. By any authorized officer of the corporation; or

      11

      b. If it shall appear from the instrument that there are no such officers, then by a majority of the directors or by such directors as may be designated by the board; or

      12

      c. If it shall appear from the instrument that there are no such officers or directors, then by the holders of record, or such of them as may be designated by the holders of record, of a majority of all outstanding shares of stock; or

      13

      d. By the holders of record of all outstanding shares of stock.

      14

      (b) Whenever this chapter requires any instrument to be acknowledged, such requirement is satisfied by either:

      15

      (1) The formal acknowledgment by the person or 1 of the persons signing the instrument that it is such person's act and deed or the act and deed of the corporation, and that the facts stated therein are true. Such acknowledgment shall be made before a person who is authorized by the law of the place of execution to take acknowledgments of deeds. If such person has a seal of office such person shall affix it to the instrument.

      16

      (2) The signature, without more, of the person or persons signing the instrument, in which case such signature or signatures shall constitute the affirmation or acknowledgment of the signatory, under penalties of perjury, that the instrument is such person's act and deed or the act and deed of the corporation, and that the facts stated therein are true.

      17

      (c) Whenever any instrument is to be filed with the Secretary of State or in accordance with this section or chapter, such requirement means that:

      18

      (1) The signed instrument shall be delivered to the office of the Secretary of State;

      19

      (2) All taxes and fees authorized by law to be collected by the Secretary of State in connection with the filing of the instrument shall be tendered to the Secretary of State; and

      20

      (3) Upon delivery of the instrument, the Secretary of State shall record the date and time of its delivery. Upon such delivery and tender of the required taxes and fees, the Secretary of State shall certify that the instrument has been filed in the Secretary of State's office by endorsing upon the signed instrument the word "Filed", and the date and time of its filing. This endorsement is the "filing date" of the instrument, and is conclusive of the date and time of its filing in the absence of actual fraud. The Secretary of State shall file and index the endorsed instrument. Except as provided in paragraph (c)(4) of this section and in subsection (i) of this section, such filing date of an instrument shall be the date and time of delivery of the instrument.

      21

      (4) Upon request made upon or prior to delivery, the Secretary of State may, to the extent deemed practicable, establish as the filing date of an instrument a date and time after its delivery. If the Secretary of State refuses to file any instrument due to an error, omission or other imperfection, the Secretary of State may hold such instrument in suspension, and in such event, upon delivery of a replacement instrument in proper form for filing and tender of the required taxes and fees within 5 business days after notice of such suspension is given to the filer, the Secretary of State shall establish as the filing date of such instrument the date and time that would have been the filing date of the rejected instrument had it been accepted for filing. The Secretary of State shall not issue a certificate of good standing with respect to any corporation with an instrument held in suspension pursuant to this subsection. The Secretary of State may establish as the filing date of an instrument the date and time at which information from such instrument is entered pursuant to paragraph (c)(8) of this section if such instrument is delivered on the same date and within 4 hours after such information is entered.

      22

      (5) The Secretary of State, acting as agent for the recorders of each of the counties, shall collect and deposit in a separate account established exclusively for that purpose a county assessment fee with respect to each filed instrument and shall thereafter weekly remit from such account to the recorder of each of the said counties the amount or amounts of such fees as provided for in paragraph (c)(6) of this section or as elsewhere provided by law. Said fees shall be for the purposes of defraying certain costs incurred by the counties in merging the information and images of such filed documents with the document information systems of each of the recorder's offices in the counties and in retrieving, maintaining and displaying such information and images in the offices of the recorders and at remote locations in each of such counties. In consideration for its acting as the agent for the recorders with respect to the collection and payment of the county assessment fees, the Secretary of State shall retain and pay over to the General Fund of the State an administrative charge of 1 percent of the total fees collected.

      23

      (6) The assessment fee to the counties shall be $24 for each 1-page instrument filed with the Secretary of State in accordance with this section and $9.00 for each additional page for instruments with more than 1 page. The recorder's office to receive the assessment fee shall be the recorder's office in the county in which the corporation's registered office in this State is, or is to be, located, except that an assessment fee shall not be charged for either a certificate of dissolution qualifying for treatment under § 391(a)(5)b. of this title or a document filed in accordance with subchapter XV of this chapter.

      24

      (7) The Secretary of State, acting as agent, shall collect and deposit in a separate account established exclusively for that purpose a courthouse municipality fee with respect to each filed instrument and shall thereafter monthly remit funds from such account to the treasuries of the municipalities designated in § 301 of Title 10. Said fees shall be for the purposes of defraying certain costs incurred by such municipalities in hosting the primary locations for the Delaware courts. The fee to such municipalities shall be $20 for each instrument filed with the Secretary of State in accordance with this section. The municipality to receive the fee shall be the municipality designated in § 301 of Title 10 in the county in which the corporation's registered office in this State is, or is to be, located, except that a fee shall not be charged for a certificate of dissolution qualifying for treatment under § 391(a)(5)b. of this title, a resignation of agent without appointment of a successor under § 136 of this title, or a document filed in accordance with subchapter XV of this chapter.

      25

      (8) The Secretary of State shall cause to be entered such information from each instrument as the Secretary of State deems appropriate into the Delaware Corporation Information System or any system which is a successor thereto in the office of the Secretary of State, and such information and a copy of each such instrument shall be permanently maintained as a public record on a suitable medium. The Secretary of State is authorized to grant direct access to such system to registered agents subject to the execution of an operating agreement between the Secretary of State and such registered agent. Any registered agent granted such access shall demonstrate the existence of policies to ensure that information entered into the system accurately reflects the content of instruments in the possession of the registered agent at the time of entry.

      26

      (d) Any instrument filed in accordance with subsection (c) of this section shall be effective upon its filing date. Any instrument may provide that it is not to become effective until a specified time subsequent to the time it is filed, but such time shall not be later than a time on the ninetieth day after the date of its filing. If any instrument filed in accordance with subsection (c) of this section provides for a future effective date or time and if the transaction is terminated or its terms are amended to change the future effective date or time prior to the future effective date or time, the instrument shall be terminated or amended by the filing, prior to the future effective date or time set forth in such instrument, of a certificate of termination or amendment of the original instrument, executed in accordance with subsection (a) of this section, which shall identify the instrument which has been terminated or amended and shall state that the instrument has been terminated or the manner in which it has been amended.

      27

      (e) If another section of this chapter specifically prescribes a manner of executing, acknowledging or filing a specified instrument or a time when such instrument shall become effective which differs from the corresponding provisions of this section, then such other section shall govern.

      28

      (f) Whenever any instrument authorized to be filed with the Secretary of State under any provision of this title, has been so filed and is an inaccurate record of the corporate action therein referred to, or was defectively or erroneously executed, sealed or acknowledged, the instrument may be corrected by filing with the Secretary of State a certificate of correction of the instrument which shall be executed, acknowledged and filed in accordance with this section. The certificate of correction shall specify the inaccuracy or defect to be corrected and shall set forth the portion of the instrument in corrected form. In lieu of filing a certificate of correction the instrument may be corrected by filing with the Secretary of State a corrected instrument which shall be executed, acknowledged and filed in accordance with this section. The corrected instrument shall be specifically designated as such in its heading, shall specify the inaccuracy or defect to be corrected, and shall set forth the entire instrument in corrected form. An instrument corrected in accordance with this section shall be effective as of the date the original instrument was filed, except as to those persons who are substantially and adversely affected by the correction and as to those persons the instrument as corrected shall be effective from the filing date.

      29

      (g) Notwithstanding that any instrument authorized to be filed with the Secretary of State under this title is when filed inaccurately, defectively or erroneously executed, sealed or acknowledged, or otherwise defective in any respect, the Secretary of State shall have no liability to any person for the preclearance for filing, the acceptance for filing or the filing and indexing of such instrument by the Secretary of State.

      30

      (h) Any signature on any instrument authorized to be filed with the Secretary of State under this title may be a facsimile, a conformed signature or an electronically transmitted signature.

      31

      (i)(1) If:

      32

      a. Together with the actual delivery of an instrument and tender of the required taxes and fees, there is delivered to the Secretary of State a separate affidavit (which in its heading shall be designated as an "affidavit of extraordinary condition") attesting, on the basis of personal knowledge of the affiant or a reliable source of knowledge identified in the affidavit, that an earlier effort to deliver such instrument and tender such taxes and fees was made in good faith, specifying the nature, date and time of such good faith effort and requesting that the Secretary of State establish such date and time as the filing date of such instrument; or

      33

      b. Upon the actual delivery of an instrument and tender of the required taxes and fees, the Secretary of State in the Secretary's discretion provides a written waiver of the requirement for such an affidavit stating that it appears to the Secretary of State that an earlier effort to deliver such instrument and tender such taxes and fees was made in good faith and specifying the date and time of such effort; and

      34

      c. The Secretary of State determines that an extraordinary condition existed at such date and time, that such earlier effort was unsuccessful as a result of the existence of such extraordinary condition, and that such actual delivery and tender were made within a reasonable period (not to exceed 2 business days) after the cessation of such extraordinary condition,

      35

      then the Secretary of State may establish such date and time as the filing date of such instrument. No fee shall be paid to the Secretary of State for receiving an affidavit of extraordinary condition.

      36

      (2) For purposes of this subsection, an "extraordinary condition" means: any emergency resulting from an attack on, invasion or occupation by foreign military forces of, or disaster, catastrophe, war or other armed conflict, revolution or insurrection, or rioting or civil commotion in, the United States or a locality in which the Secretary of State conducts its business or in which the good faith effort to deliver the instrument and tender the required taxes and fees is made, or the immediate threat of any of the foregoing; or any malfunction or outage of the electrical or telephone service to the Secretary of State's office, or weather or other condition in or about a locality in which the Secretary of State conducts its business, as a result of which the Secretary of State's office is not open for the purpose of the filing of instruments under this chapter or such filing cannot be effected without extraordinary effort. The Secretary of State may require such proof as it deems necessary to make the determination required under paragraph (i)(1)c. of this section, and any such determination shall be conclusive in the absence of actual fraud.

      37

      (3) If the Secretary of State establishes the filing date of an instrument pursuant to this subsection, the date and time of delivery of the affidavit of extraordinary condition or the date and time of the Secretary of State's written waiver of such affidavit shall be endorsed on such affidavit or waiver and such affidavit or waiver, so endorsed, shall be attached to the filed instrument to which it relates. Such filed instrument shall be effective as of the date and time established as the filing date by the Secretary of State pursuant to this subsection, except as to those persons who are substantially and adversely affected by such establishment and, as to those persons, the instrument shall be effective from the date and time endorsed on the affidavit of extraordinary condition or written waiver attached thereto.

      38

      (j) Notwithstanding any other provision of this chapter, it shall not be necessary for any corporation to amend its certificate of incorporation, or any other document, that has been filed prior to August 1, 2011, to comply with § 131(c) of this title, provided that any certificate or other document filed under this chapter on or after August 1, 2011, and changing the address of a registered office shall comply with § 131(c) of this title.

      39

      8 Del. C. 1953, § 103; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 157 Del. Laws, c. 148, § 258 Del. Laws, c. 235, § 164 Del. Laws, c. 112, § 266 Del. Laws, c. 352, §§ 1, 267 Del. Laws, c. 190, §§ 1-368 Del. Laws, c. 211, §§ 1-469 Del. Laws, c. 221, § 169 Del. Laws, c. 235, §§ 1-370 Del. Laws, c. 79, § 470 Del. Laws, c. 186, § 170 Del. Laws, c. 349, § 170 Del. Laws, c. 587, §§ 2-671 Del. Laws, c. 339, §§ 3-572 Del. Laws, c. 343, § 273 Del. Laws, c. 298, § 174 Del. Laws, c. 9, §§ 1-774 Del. Laws, c. 118, § 178 Del. Laws, c. 96, § 4.;

      40

       

    • 2.5 Amendment of Certificate of Incorporation

      • 2.5.1 DGCL Sec. 242 - Amendments to Certificate

        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. 

        1
        TITLE 8
        2
        Corporations
        3
        CHAPTER 1. GENERAL CORPORATION LAW
        4
        Subchapter VIII. Amendment of Certificate of Incorporation; Changes in Capital and Capital Stock
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        6 7

        (a) After a corporation has received payment for any of its capital stock, or after a nonstock corporation has members, it may amend its certificate of incorporation, from time to time, in any and as many respects as may be desired, so long as its certificate of incorporation as amended would contain only such provisions as it would be lawful and proper to insert in an original certificate of incorporation filed at the time of the filing of the amendment; and, if a change in stock or the rights of stockholders, or an exchange, reclassification, subdivision, combination or cancellation of stock or rights of stockholders is to be made, such provisions as may be necessary to effect such change, exchange, reclassification, subdivision, combination or cancellation. In particular, and without limitation upon such general power of amendment, a corporation may amend its certificate of incorporation, from time to time, so as:

        8

        (1) To change its corporate name; or

        9

        (2) To change, substitute, enlarge or diminish the nature of its business or its corporate powers and purposes; or

        10

        (3) To increase or decrease its authorized capital stock or to reclassify the same, by changing the number, par value, designations, preferences, or relative, participating, optional, or other special rights of the shares, or the qualifications, limitations or restrictions of such rights, or by changing shares with par value into shares without par value, or shares without par value into shares with par value either with or without increasing or decreasing the number of shares, or by subdividing or combining the outstanding shares of any class or series of a class of shares into a greater or lesser number of outstanding shares; or

        11

        (4) To cancel or otherwise affect the right of the holders of the shares of any class to receive dividends which have accrued but have not been declared; or

        12

        (5) To create new classes of stock having rights and preferences either prior and superior or subordinate and inferior to the stock of any class then authorized, whether issued or unissued; or

        13

        (6) To change the period of its duration.

        14

        Any or all such changes or alterations may be effected by 1 certificate of amendment.

        15

        (b) Every amendment authorized by subsection (a) of this section shall be made and effected in the following manner:

        16

        (1) If the corporation has capital stock, its board of directors shall adopt a resolution setting forth the amendment proposed, declaring its advisability, and either calling a special meeting of the stockholders entitled to vote in respect thereof for the consideration of such amendment or directing that the amendment proposed be considered at the next annual meeting of the stockholders. Such special or annual meeting shall be called and held upon notice in accordance with § 222 of this title. The notice shall set forth such amendment in full or a brief summary of the changes to be effected thereby. At the meeting a vote of the stockholders entitled to vote thereon shall be taken for and against the proposed amendment. If a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class has been voted in favor of the amendment, a certificate setting forth the amendment and certifying that such amendment has been duly adopted in accordance with this section shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title.

        17

        (2) The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. If any proposed amendment would alter or change the powers, preferences, or special rights of 1 or more series of any class so as to affect them adversely, but shall not so affect the entire class, then only the shares of the series so affected by the amendment shall be considered a separate class for the purposes of this paragraph. The number of authorized shares of any such class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote irrespective of this subsection, if so provided in the original certificate of incorporation, in any amendment thereto which created such class or classes of stock or which was adopted prior to the issuance of any shares of such class or classes of stock, or in any amendment thereto which was authorized by a resolution or resolutions adopted by the affirmative vote of the holders of a majority of such class or classes of stock.

        18

        (3) If the corporation is a nonstock corporation, then the governing body thereof shall adopt a resolution setting forth the amendment proposed and declaring its advisability. If a majority of all the members of the governing body shall vote in favor of such amendment, a certificate thereof shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title. The certificate of incorporation of any nonstock corporation may contain a provision requiring any amendment thereto to be approved by a specified number or percentage of the members or of any specified class of members of such corporation in which event such proposed amendment shall be submitted to the members or to any specified class of members of such corporation in the same manner, so far as applicable, as is provided in this section for an amendment to the certificate of incorporation of a stock corporation; and in the event of the adoption thereof by such members, a certificate evidencing such amendment shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title.

        19

        (4) Whenever the certificate of incorporation shall require for action by the board of directors of a corporation other than a nonstock corporation or by the governing body of a nonstock corporation, by the holders of any class or series of shares or by the members, or by the holders of any other securities having voting power the vote of a greater number or proportion than is required by any section of this title, the provision of the certificate of incorporation requiring such greater vote shall not be altered, amended or repealed except by such greater vote.

        20

        (c) The resolution authorizing a proposed amendment to the certificate of incorporation may provide that at any time prior to the effectiveness of the filing of the amendment with the Secretary of State, notwithstanding authorization of the proposed amendment by the stockholders of the corporation or by the members of a nonstock corporation, the board of directors or governing body may abandon such proposed amendment without further action by the stockholders or members.

        21

        8 Del. C. 1953, § 242; 56 Del. Laws, c. 5057 Del. Laws, c. 148, §§ 18-2159 Del. Laws, c. 106, § 763 Del. Laws, c. 25, § 1264 Del. Laws, c. 112, § 2467 Del. Laws, c. 376, § 1070 Del. Laws, c. 349, §§ 5-770 Del. Laws, c. 587, § 14, 1572 Del. Laws, c. 123, § 577 Del. Laws, c. 253, §§ 33-3577 Del. Laws, c. 290, § 7.;

      • 2.5.2 DGCL Sec. 245 - Restating the Certificate

        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. 

        1 2
        Corporations
        3
        CHAPTER 1. GENERAL CORPORATION LAW
        4
        Subchapter VIII. Amendment of Certificate of Incorporation; Changes in Capital and Capital Stock
        5

         

        6 7

        (a) A corporation may, whenever desired, integrate into a single instrument all of the provisions of its certificate of incorporation which are then in effect and operative as a result of there having theretofore been filed with the Secretary of State 1 or more certificates or other instruments pursuant to any of the sections referred to in § 104 of this title, and it may at the same time also further amend its certificate of incorporation by adopting a restated certificate of incorporation.

        8

        (b) If the restated certificate of incorporation merely restates and integrates but does not further amend the certificate of incorporation, as theretofore amended or supplemented by any instrument that was filed pursuant to any of the sections mentioned in § 104 of this title, it may be adopted by the board of directors without a vote of the stockholders, or it may be proposed by the directors and submitted by them to the stockholders for adoption, in which case the procedure and vote required, if any, by § 242 of this title for amendment of the certificate of incorporation shall be applicable. If the restated certificate of incorporation restates and integrates and also further amends in any respect the certificate of incorporation, as theretofore amended or supplemented, it shall be proposed by the directors and adopted by the stockholders in the manner and by the vote prescribed by § 242 of this title or, if the corporation has not received any payment for any of its stock, in the manner and by the vote prescribed by § 241 of this title.

        9

        (c) A restated certificate of incorporation shall be specifically designated as such in its heading. It shall state, either in its heading or in an introductory paragraph, the corporation's present name, and, if it has been changed, the name under which it was originally incorporated, and the date of filing of its original certificate of incorporation with the Secretary of State. A restated certificate shall also state that it was duly adopted in accordance with this section. If it was adopted by the board of directors without a vote of the stockholders (unless it was adopted pursuant to § 241 of this title or without a vote of members pursuant to § 242(b)(3) of this title), it shall state that it only restates and integrates and does not further amend the provisions of the corporation's certificate of incorporation as theretofore amended or supplemented, and that there is no discrepancy between those provisions and the provisions of the restated certificate. A restated certificate of incorporation may omit (a) such provisions of the original certificate of incorporation which named the incorporator or incorporators, the initial board of directors and the original subscribers for shares, and (b) such provisions contained in any amendment to the certificate of incorporation as were necessary to effect a change, exchange, reclassification, subdivision, combination or cancellation of stock, if such change, exchange, reclassification, subdivision, combination or cancellation has become effective. Any such omissions shall not be deemed a further amendment.

        10

        (d) A restated certificate of incorporation shall be executed, acknowledged and filed in accordance with § 103 of this title. Upon its filing with the Secretary of State, the original certificate of incorporation, as theretofore amended or supplemented, shall be superseded; thenceforth, the restated certificate of incorporation, including any further amendments or changes made thereby, shall be the certificate of incorporation of the corporation, but the original date of incorporation shall remain unchanged.

        11

        (e) Any amendment or change effected in connection with the restatement and integration of the certificate of incorporation shall be subject to any other provision of this chapter, not inconsistent with this section, which would apply if a separate certificate of amendment were filed to effect such amendment or change.

        12

        8 Del. C. 1953, § 245; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 1559 Del. Laws, c. 437, § 1164 Del. Laws, c. 112, §§ 27-2970 Del. Laws, c. 587, § 16;73 Del. Laws, c. 82, § 1377 Del. Laws, c. 253, §§ 36, 37.;

    • 2.6 DGCL Sec. 107 - Powers of Incorporators

      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. 

      1

      TITLE 8

      2

      Corporations

      3

      CHAPTER 1. GENERAL CORPORATION LAW

      4

      Subchapter I. Formation

      5 6

      If the persons who are to serve as directors until the first annual meeting of stockholders have not been named in the certificate of incorporation, the incorporator or incorporators, until the directors are elected, shall manage the affairs of the corporation and may do whatever is necessary and proper to perfect the organization of the corporation, including the adoption of the original bylaws of the corporation and the election of directors.

      7

      8 Del. C. 1953, § 107; 56 Del. Laws, c. 50.;

    • 2.7 DGCL Sec. 108 - Organization Meeting

      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.

      1

      TITLE 8

      2

      Corporations

      3

      CHAPTER 1. GENERAL CORPORATION LAW

      4

      Subchapter I. Formation

      5 6

      (a) After the filing of the certificate of incorporation an organization meeting of the incorporator or incorporators, or of the board of directors if the initial directors were named in the certificate of incorporation, shall be held, either within or without this State, at the call of a majority of the incorporators or directors, as the case may be, for the purposes of adopting bylaws, electing directors (if the meeting is of the incorporators) to serve or hold office until the first annual meeting of stockholders or until their successors are elected and qualify, electing officers if the meeting is of the directors, doing any other or further acts to perfect the organization of the corporation, and transacting such other business as may come before the meeting.

      7

      (b) The persons calling the meeting shall give to each other incorporator or director, as the case may be, at least 2 days' written notice thereof by any usual means of communication, which notice shall state the time, place and purposes of the meeting as fixed by the persons calling it. Notice of the meeting need not be given to anyone who attends the meeting or who signs a waiver of notice either before or after the meeting.

      8

      (c) Any action permitted to be taken at the organization meeting of the incorporators or directors, as the case may be, may be taken without a meeting if each incorporator or director, where there is more than 1, or the sole incorporator or director where there is only 1, signs an instrument which states the action so taken.

      9

      8 Del. C. 1953, § 108; 56 Del. Laws, c. 50.;

    • 2.8 Doctrine of Preincorporation Adoption

      The preincorporation environment is perhaps the most common situation in which the doctrine of adoption is applied. The doctrine of adoption as it is applied to preincorporation agreements is straightforward. According to a leading treatise:

      American courts generally hold that promoters' contracts made on the corporation's behalf may be adopted, accepted or ratified by the corporation when organized, and that the corporation is then liable, both at law and in equity, on the contract itself, and not merely for the benefits which it has received. Accordingly, if the corporation accepts the contract's benefits, the corporation will be required to perform its obligations.

      Under Delaware law, if the subsequently formed corporation expressly adopts the preincorporation agreement or implicitly adopts it by accepting its benefits with knowledge of its terms, the corporation is bound by it. 

      See:  Alf v Lorillard Tobacco Co., 831 A.2d 335, 350 (Del. Ch. Ct, 2003).

    • 2.9 Piercing the Corporate Veil

      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.

      • 2.9.1 Walkovszky v. Carlton

        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.

        1
        18 N.Y.2d 414 (1966)
        2
        John Walkovszky, Respondent,
        v.
        William Carlton, Appellant, et al., Defendants.
        3

        Court of Appeals of the State of New York.

        4
        Argued September 26, 1966.
        5
        Decided November 29, 1966.
        6

        Norbert Ruttenberg and Stephen A. Cohen for appellant.

        7

        Lawrence Lauer and John Winston for respondent.

        8

        Chief Judge DESMOND and Judges VAN VOORHIS, BURKE and SCILEPPI concur with Judge FULD; Judge KEATING dissents and votes to affirm in an opinion in which Judge BERGAN concurs.

        9
        [416] FULD, J.
        10

        This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi fleet in many corporations, each owning only one or two cabs.

        11

        The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Although seemingly independent of one another, these corporations are alleged to be "operated * * * as a single entity, unit and enterprise" with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants.[1] The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt "to defraud members of the general public" who might be injured by the cabs.

        12

        [417] The defendant Carlton has moved, pursuant to CPLR 3211(a)7, to dismiss the complaint on the ground that as to him it "fails to state a cause of action". The court at Special Term granted the motion but the Appellate Division, by a divided vote, reversed, holding that a valid cause of action was sufficiently stated. The defendant Carlton appeals to us, from the nonfinal order, by leave of the Appellate Division on a certified question.

        13

        The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability (see, e.g., Bartle v. Home Owners Co-op., 309 N.Y. 103, 106) but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, "pierce the corporate veil", whenever necessary "to prevent fraud or to achieve equity". (International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292.) In determining whether liability should be extended to reach assets beyond those belonging to the corporation, we are guided, as Judge CARDOZO noted, by "general rules of agency". (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95.) In other words, whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts "upon the principle of respondeat superior applicable even where the agent is a natural person". (Rapid Tr. Subway Constr. Co. v. City of New York, 259 N.Y. 472, 488.) Such liability, moreover, extends not only to the corporation's commercial dealings (see, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233; Quaid v. Ratkowsky, 224 N.Y. 624; Luckenbach S. S. Co. v. Grace & Co., 267 F. 676, 681, cert. den. 254 U. S. 644; Weisser v. Mursam Shoe Corp., 127 F.2d 344) but to its negligent acts as well. (See Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, supra; Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687; Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676.)

        14

        In the Mangan case (247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra), the plaintiff was injured as a result of the negligent operation of a cab owned and operated by one of four corporations affiliated with the defendant Terminal. Although the defendant was not a stockholder of any of the operating [418] companies, both the defendant and the operating companies were owned, for the most part, by the same parties. The defendant's name (Terminal) was conspicuously displayed on the sides of all of the taxis used in the enterprise and, in point of fact, the defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil of the operating company — the nominal owner of the cab which injured the plaintiff — and holding the defendant liable. The operating companies were simply instrumentalities for carrying on the business of the defendant without imposing upon it financial and other liabilities incident to the actual ownership and operation of the cabs. (See, also, Callas v. Independent Taxi Owners Assn., 66 F.2d 192 [D. C. Ct. App.], cert. den. 290 U. S. 669; Association of Independent Taxi Operators v. Kern, 178 Md. 252; P. & S. Taxi & Baggage Co. v. Cameron, 183 Okla. 226; cf. Black & White v. Love, 236 Ark. 529; Economy Cabs v. Kirkland, 127 Fla. 867, adhered to on rearg. 129 Fla. 309.)

        15

        In the case before us, the plaintiff has explicitly alleged that none of the corporations "had a separate existence of their own" and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343, 348-350.) It is quite another to claim that the corporation is a "dummy" for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, 85.) Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible (see, e.g., Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra; Luckenbach S. S. Co. v. Grace & Co., 267 F.2d 676, 881, cert. den. 254 U. S. 644, supra; cf. Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687, supra) while, in the other, the stockholder would be personally liable. (See, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233, supra; Quaid v. Ratkowsky, 224 N.Y. 624, supra; [419] Weisser v. Mursam Shoe Corp., 127 F.2d 344, supra.) Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter — insofar as his personal liability is concerned — that the enterprise is actually being carried on by a larger "enterprise entity". (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343.)

        16

        At this stage in the present litigation, we are concerned only with the pleadings and, since CPLR 3014 permits causes of action to be stated "alternatively or hypothetically", it is possible for the plaintiff to allege both theories as the basis for his demand for judgment. In ascertaining whether he has done so, we must consider the entire pleading, educing therefrom "`whatever can be implied from its statements by fair and reasonable intendment.'" (Condon v. Associated Hosp. Serv., 287 N.Y. 411, 414; see, also, Kober v. Kober, 16 N Y 2d 191, 193-194; Dulberg v. Mock, 1 N Y 2d 54, 56.) Reading the complaint in this case most favorably and liberally, we do not believe that there can be gathered from its averments the allegations required to spell out a valid cause of action against the defendant Carlton.

        17

        The individual defendant is charged with having "organized, managed, dominated and controlled" a fragmented corporate entity but there are no allegations that he was conducting business in his individual capacity. Had the taxicab fleet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation's stockholders. The fact that the fleet ownership has been deliberately split up among many corporations does not ease the plaintiff's burden in that respect. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insufficient to assure him the recovery sought. If Carlton were to be held individually liable on those facts alone, the decision would apply equally to the thousands of cabs which are owned by their individual drivers who conduct their businesses through corporations organized pursuant to section 401 of the Business Corporation Law and carry the minimum insurance required by subdivision 1 (par. [a]) of section 370 of the Vehicle and Traffic Law. These [420] taxi owner-operators are entitled to form such corporations (cf. Elenkrieg v. Siebrecht, 238 N.Y. 254), and we agree with the court at Special Term that, if the insurance coverage required by statute "is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature." It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, § 1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of taxi corporations that they carry automobile liability insurance over and above that mandated by the Vehicle and Traffic Law.[2]

        18

        This is not to say that it is impossible for the plaintiff to state a valid cause of action against the defendant Carlton. However, the simple fact is that the plaintiff has just not done so here. While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any "sufficiently particular[ized] statements" (CPLR 3013; see 3 Weinstein-Korn-Miller, N. Y. Civ. Prac., par. 3013.01 et seq., p. 30-142 et seq.) that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations "without regard to formality and to suit their immediate convenience." (Weisser v. Mursam Shoe Corp., 127 F.2d 344, 345, supra.) Such a "perversion of the privilege to do business in a corporate form" (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95, supra) would justify imposing personal liability on the individual stockholders. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, supra.) Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon [421] Cab Corporation may actually be carried on by a larger corporate entity composed of many corporations which, under general principles of agency, would be liable to each other's creditors in contract and in tort.[3]

        19

        In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff's injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a fleet with ownership fragmented among many corporations. Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents.

        20

        In sum, then, the complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity.

        21

        The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, the certified question answered in the negative and the order of the Supreme Court, Richmond County, reinstated, with leave to serve an amended complaint.

        22
        KEATING, J. (dissenting).
        23

        The defendant Carlton, the shareholder here sought to be held for the negligence of the driver of a taxicab, was a principal shareholder and organizer of the defendant corporation which owned the taxicab. The corporation was one of 10 organized by the defendant, each containing [422] two cabs and each cab having the "minimum liability" insurance coverage mandated by section 370 of the Vehicle and Traffic Law. The sole assets of these operating corporations are the vehicles themselves and they are apparently subject to mortgages.[4]

        24

        From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet having cars out on the street 24 hours a day and engaged in public transportation. And during the course of the corporations' existence all income was continually drained out of the corporations for the same purpose.

        25

        The issue presented by this action is whether the policy of this State, which affords those desiring to engage in a business enterprise the privilege of limited liability through the use of the corporate device, is so strong that it will permit that privilege to continue no matter how much it is abused, no matter how irresponsibly the corporation is operated, no matter what the cost to the public. I do not believe that it is.

        26

        Under the circumstances of this case the shareholders should all be held individually liable to this plaintiff for the injuries he suffered. (See Mull v. Colt Co., 31 F. R. D. 154, 156; Teller v. Clear Serv. Co., 9 Misc 2d 495.) At least, the matter should not be disposed of on the pleadings by a dismissal of the complaint. "If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks [423] of loss, this is a ground for denying the separate entity privilege." (Ballantine, Corporations [rev. ed., 1946], § 129, pp. 302-303.)

        27

        In Minton v. Cavaney (56 Cal. 2d 576) the Supreme Court of California had occasion to discuss this problem in a negligence case. The corporation of which the defendant was an organizer, director and officer operated a public swimming pool. One afternoon the plaintiffs' daughter drowned in the pool as a result of the alleged negligence of the corporation.

        28

        Justice ROGER TRAYNOR, speaking for the court, outlined the applicable law in this area. "The figurative terminology `alter ego' and `disregard of the corporate entity'", he wrote, "is generally used to refer to the various situations that are an abuse of the corporate privilege * * * The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will * * *; when they hold themselves out as being personally liable for the debts of the corporation * * *; or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs". (56 Cal. 2d, p. 579; italics supplied.)

        29

        Examining the facts of the case in light of the legal principles just enumerated, he found that "[it was] undisputed that there was no attempt to provide adequate capitalization. [The corporation] never had any substantial assets. It leased the pool that it operated, and the lease was forfeited for failure to pay the rent. Its capital was `trifling compared with the business to be done and the risks of loss'". (56 Cal. 2d, p. 580.)

        30

        It seems obvious that one of "the risks of loss" referred to was the possibility of drownings due to the negligence of the corporation. And the defendant's failure to provide such assets or any fund for recovery resulted in his being held personally liable.

        31

        In Anderson v. Abbott (321 U. S. 349) the defendant shareholders had organized a holding company and transferred to that company shares which they held in various national banks in return for shares in the holding company. The holding company did not have sufficient assets to meet the double liability requirements of the governing Federal statutes which provided that the owners of shares in national [424] banks were personally liable for corporate obligations "to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares" (U. S. Code, tit. 12, former § 63).

        32

        The court had found that these transfers were made in good faith, that other defendant shareholders who had purchased shares in the holding company had done so in good faith and that the organization of such a holding company was entirely legal. Despite this finding, the Supreme Court, speaking through Mr. Justice DOUGLAS, pierced the corporate veil of the holding company and held all the shareholders, even those who had no part in the organization of the corporation, individually responsible for the corporate obligations as mandated by the statute.

        33

        "Limited liability", he wrote, "is the rule, not the exception; and on that assumption large undertakings are rested, vast enterprises are launched, and huge sums of capital attracted. But there are occasions when the limited liability sought to be obtained through the corporation will be qualified or denied. Mr. Justice CARDOZO stated that a surrender of that principle of limited liability would be made `when the sacrifice is essential to the end that some accepted public policy may be defended or upheld.' * * * The cases of fraud make up part of that exception * * * But they do not exhaust it. An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability * * * That rule has been invoked even in absence of a legislative policy which undercapitalization would defeat. It becomes more important in a case such as the present one where the statutory policy of double liability will be defeated if impecunious bank-stock holding companies are allowed to be interposed as non-conductors of liability. It has often been held that the interposition of a corporation will not be allowed to defeat a legislative policy, whether that was the aim or only the result of the arrangement * * * `the courts will not permit themselves to be blinded or deceived by mere forms of law' but will deal `with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require.'" (321 U. S., pp. 362-363; emphasis added.)

        34

        [425] The policy of this State has always been to provide and facilitate recovery for those injured through the negligence of others. The automobile, by its very nature, is capable of causing severe and costly injuries when not operated in a proper manner. The great increase in the number of automobile accidents combined with the frequent financial irresponsibility of the individual driving the car led to the adoption of section 388 of the Vehicle and Traffic Law which had the effect of imposing upon the owner of the vehicle the responsibility for its negligent operation. It is upon this very statute that the cause of action against both the corporation and the individual defendant is predicated.

        35

        In addition the Legislature, still concerned with the financial irresponsibility of those who owned and operated motor vehicles, enacted a statute requiring minimum liability coverage for all owners of automobiles. The important public policy represented by both these statutes is outlined in section 310 of the Vehicle and Traffic Law. That section provides that: "The legislature is concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted. The legislature determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them."

        36

        The defendant Carlton claims that, because the minimum amount of insurance required by the statute was obtained, the corporate veil cannot and should not be pierced despite the fact that the assets of the corporation which owned the cab were "trifling compared with the business to be done and the risks of loss" which were certain to be encountered. I do not agree.

        37

        The Legislature in requiring minimum liability insurance of $10,000, no doubt, intended to provide at least some small fund for recovery against those individuals and corporations who just did not have and were not able to raise or accumulate assets sufficient to satisfy the claims of those who were injured as a result of their negligence. It certainly could not have intended to shield those individuals who organized corporations, with the specific intent of avoiding responsibility to the public, where the operation of the corporate enterprise yielded profits sufficient to purchase additional insurance. Moreover, it is reasonable [426] to assume that the Legislature believed that those individuals and corporations having substantial assets would take out insurance far in excess of the minimum in order to protect those assets from depletion. Given the costs of hospital care and treatment and the nature of injuries sustained in auto collisions, it would be unreasonable to assume that the Legislature believed that the minimum provided in the statute would in and of itself be sufficient to recompense "innocent victims of motor vehicle accidents * * * for the injury and financial loss inflicted upon them".

        38

        The defendant, however, argues that the failure of the Legislature to increase the minimum insurance requirements indicates legislative acquiescence in this scheme to avoid liability and responsibility to the public. In the absence of a clear legislative statement, approval of a scheme having such serious consequences is not to be so lightly inferred.

        39

        The defendant contends that the court will be encroaching upon the legislative domain by ignoring the corporate veil and holding the individual shareholder. This argument was answered by Mr. Justice DOUGLAS in Anderson v. Abbot (supra, pp. 366-367) where he wrote that: "In the field in which we are presently concerned, judicial power hardly oversteps the bounds when it refuses to lend its aid to a promotional project which would circumvent or undermine a legislative policy. To deny it that function would be to make it impotent in situations where historically it has made some of its most notable contributions. If the judicial power is helpless to protect a legislative program from schemes for easy avoidance, then indeed it has become a handy implement of high finance. Judicial interference to cripple or defeat a legislative policy is one thing; judicial interference with the plans of those whose corporate or other devices would circumvent that policy is quite another. Once the purpose or effect of the scheme is clear, once the legislative policy is plain, we would indeed forsake a great tradition to say we were helpless to fashion the instruments for appropriate relief." (Emphasis added.)

        40

        The defendant contends that a decision holding him personally liable would discourage people from engaging in corporate enterprise.

        41

        [427] What I would merely hold is that a participating shareholder of a corporation vested with a public interest, organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation's business, may be held personally responsible for such liabilities. Where corporate income is not sufficient to cover the cost of insurance premiums above the statutory minimum or where initially adequate finances dwindle under the pressure of competition, bad times or extraordinary and unexpected liability, obviously the shareholder will not be held liable (Henn, Corporations, p. 208, n. 7).

        42

        The only types of corporate enterprises that will be discouraged as a result of a decision allowing the individual shareholder to be sued will be those such as the one in question, designed solely to abuse the corporate privilege at the expense of the public interest.

        43

        For these reasons I would vote to affirm the order of the Appellate Division.

        44

        Order reversed, etc.

        45

        [1] The corporate owner of a garage is also included as a defendant.

        46

        [2] There is no merit to the contention that the ownership and operation of the taxi fleet "constituted a breach of hack owners regulations as promulgated by [the] Police Department of the City of New York". Those regulations are clearly applicable to individual owner-operators and fleet owners alike. They were not intended to prevent either incorporation of a single-vehicle taxi business or multiple incorporation of a taxi fleet.

        47

        [3] In his affidavit in opposition to the motion to dismiss, the plaintiff's counsel claimed that corporate assets had been "milked out" of, and "siphoned off" from the enterprise. Quite apart from the fact that these allegations are far too vague and conclusory, the charge is premature. If the plaintiff succeeds in his action and becomes a judgment creditor of the corporation, he may then sue and attempt to hold the individual defendants accountable for any dividends and property that were wrongfully distributed (Business Corporation Law, §§ 510, 719, 720).

        48

        [4] It appears that the medallions, which are of considerable value, are judgment proof. (Administrative Code of City of New York, § 436-2.0.)

      • 2.9.2 Kinney Shoe Corp. v. Polan

        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. 

        1
        939 F.2d 209 (1991)
        2
        KINNEY SHOE CORPORATION, a New York corporation, Plaintiff-Appellant,
        v.
        Lincoln M. POLAN, Defendant-Appellee.
        3
        No. 90-2466.
        4

        United States Court of Appeals, Fourth Circuit.

        5
        Argued March 6, 1991.
        6
        Decided July 17, 1991.
        7
        As Amended August 26, 1991.
        8

        [210] William David Levine, St. Clair and Levine, Huntington, West Virginia, for plaintiff-appellant.

        9

        D.C. Offutt, Jr., argued (John M. Poma, on brief), Jenkins, Fenstermaker, Krieger, Kayes & Farrell, Huntington, W.Va., for defendant-appellee.

        10

        Before HALL, Circuit Judge, CHAPMAN, Senior Circuit Judge, and WARD, Senior District Judge for the Middle District of North Carolina, sitting by designation.

        11
        OPINION
        12
        CHAPMAN, Senior Circuit Judge:
        13

        Plaintiff-appellant Kinney Shoe Corporation ("Kinney") brought this action in the United States District Court for the Southern District of West Virginia against Lincoln M. Polan ("Polan") seeking to recover money owed on a sublease between Kinney and Industrial Realty Company ("Industrial"). Polan is the sole shareholder of Industrial. The district court found that Polan was not personally liable on the lease between Kinney and Industrial. Kinney appeals asserting that the corporate veil should be pierced, and we agree.

        14
        I.
        15

        The district court based its order on facts which were stipulated by the parties. In 1984 Polan formed two corporations, Industrial and Polan Industries, Inc., for the purpose of re-establishing an industrial manufacturing business. The certificate of incorporation for Polan Industries, Inc. was issued by the West Virginia Secretary of State in November 1984. The following month the certificate of incorporation for Industrial was issued. Polan was the owner of both corporations. Although certificates of incorporation were issued, no organizational meetings were held, and no officers were elected.

        16

        In November 1984 Polan and Kinney began negotiating the sublease of a building in which Kinney held a leasehold interest. The building was owned by the Cabell County Commission and financed by industrial revenue bonds issued in 1968 to induce Kinney to locate a manufacturing plant in Huntington, West Virginia. Under the terms of the lease, Kinney was legally obligated to make payments on the bonds on a semi-annual basis through January 1, 1993, at which time it had the right to purchase the property. Kinney had ceased using the building as a manufacturing plant in June 1983.

        17

        The term of the sublease from Kinney to Industrial commenced in December 1984, even though the written lease was not signed by the parties until April 5, 1985. On April 15, 1985, Industrial subleased part of the building to Polan Industries for fifty percent of the rental amount due Kinney. Polan signed both subleases on behalf of the respective companies.

        18

        Other than the sublease with Kinney, Industrial had no assets, no income and no bank account. Industrial issued no stock certificates because nothing was ever paid in to this corporation. Industrial's only income was from its sublease to Polan Industries, Inc. The first rental payment to Kinney was made out of Polan's personal funds, and no further payments were made by Polan or by Polan Industries, Inc. to either Industrial or to Kinney.

        19

        Kinney filed suit against Industrial for unpaid rent and obtained a judgment in the amount of $166,400.00 on June 19, 1987. A writ of possession was issued, but because Polan Industries, Inc. had filed for bankruptcy, Kinney did not gain possession for six months. Kinney leased the building until it was sold on September 1, 1988. Kinney then filed this action against Polan individually to collect the amount owed by Industrial to Kinney. Since the amount to which Kinney is entitled is undisputed, the only issue is whether Kinney can pierce the [211] corporate veil and hold Polan personally liable.

        20

        The district court held that Kinney had assumed the risk of Industrial's undercapitalization and was not entitled to pierce the corporate veil. Kinney appeals, and we reverse.

        21
        II.
        22

        We 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. See, e.g., DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir.1976). This concept, however, is a fiction of the law "`and it is now well settled, as a general principle, that the fiction should be disregarded when it is urged with an intent not within its reason and purpose, and in such a way that its retention would produce injustices or inequitable consequences.'" Laya v. Erin Homes, Inc., 352 S.E.2d 93, 97-98 (W.Va.1986) (quoting Sanders v. Roselawn Memorial Gardens, Inc., 152 W.Va. 91, 159 S.E.2d 784, 786 (1968).

        23

        Piercing the corporate veil is an equitable remedy, and the burden rests with the party asserting such claim. DeWitt Truck Brokers, 540 F.2d at 683. A totality of the circumstances test is used in determining whether to pierce the corporate veil, and each case must be decided on its own facts. The district court's findings of facts may be overturned only if clearly erroneous. Id.

        24

        Kinney seeks to pierce the corporate veil of Industrial so as to hold Polan personally liable on the sublease debt. The Supreme Court of Appeals of West Virginia has set forth a two prong test to be used in determining whether to pierce a corporate veil in a breach of contract case. This test raises two issues: first, is the unity of interest and ownership such that the separate personalities of the corporation and the individual shareholder no longer exist; and second, would an equitable result occur if the acts are treated as those of the corporation alone. Laya, 352 S.E.2d at 99. Numerous factors have been identified as relevant in making this determination.[1]

        25

        [212] The district court found that the two prong test of Laya had been satisfied. The court concluded that Polan's failure to carry out the corporate formalities with respect to Industrial, coupled with Industrial's gross undercapitalization, resulted in damage to Kinney. We agree.

        26

        It is undisputed that Industrial was not adequately capitalized. Actually, it had no paid in capital. Polan had put nothing into this corporation, and it did not observe any corporate formalities. As the West Virginia court stated in Laya, "`[i]ndividuals who wish to enjoy limited personal liability for business activities under a corporate umbrella should be expected to adhere to the relatively simple formalities of creating and maintaining a corporate entity.'" Laya, 352 S.E.2d at 100 n. 6 (quoting Labadie Coal Co. v. Black, 672 F.2d 92, 96-97 (D.C.Cir.1982)). This, the court stated, is "`a relatively small price to pay for limited liability.'" Id. Another important factor is adequate capitalization. "[G]rossly inadequate capitalization combined with disregard of corporate formalities, causing basic unfairness, are sufficient to pierce the corporate veil in order to hold the shareholder(s) actively participating in the operation of the business personally liable for a breach of contract to the party who entered into the contract with the corporation." Laya, 352 S.E.2d at 101-02.

        27

        In this case, Polan bought no stock, made no capital contribution, kept no minutes, and elected no officers for Industrial. In addition, Polan attempted to protect his assets by placing them in Polan Industries, Inc. and interposing Industrial between Polan Industries, Inc. and Kinney so as to prevent Kinney from going against the corporation with assets. Polan gave no explanation or justification for the existence of Industrial as the intermediary between Polan Industries, Inc. and Kinney. Polan was obviously trying to limit his liability and the liability of Polan Industries, Inc. by setting up a paper curtain constructed of nothing more than Industrial's certificate of incorporation. These facts present the classic scenario for an action to pierce the corporate veil so as to reach the responsible party and produce an equitable result. Accordingly, we hold that the district court correctly found that the two prong test in Laya had been satisfied.

        28

        In Laya, the court also noted that when determining whether to pierce a corporate veil a third prong may apply in certain cases. The court stated:

        29
        When, under the circumstances, it would be reasonable for that particular type of a party [those contract creditors capable of protecting themselves] entering into a contract with the corporation, for example, a bank or other lending institution, to conduct an investigation of the credit of the corporation prior to entering into the contract, such party will be charged with the knowledge that a reasonable credit investigation would disclose. If such an investigation would disclose that the corporation is grossly undercapitalized, based upon the nature and the magnitude of the corporate undertaking, such party will be deemed to have assumed the risk of the gross undercapitalization and will not be permitted to pierce the corporate veil.
        30

        Laya, 352 S.E.2d at 100. The district court applied this third prong and concluded that Kinney "assumed the risk of Industrial's defaulting" and that "the application of the doctrine of `piercing the corporate veil' ought not and does not [apply]." While we agree that the two prong test of Laya was satisfied, we hold that the district court's conclusion that Kinney had assumed the risk is clearly erroneous.

        31

        Without deciding whether the third prong should be extended beyond the context of the financial institution lender mentioned [213] in Laya, we hold that, even if it applies to creditors such as Kinney, it does not prevent Kinney from piercing the corporate veil in this case. The third prong is permissive and not mandatory. This is not a factual situation that calls for the third prong, if we are to seek an equitable result. Polan set up Industrial to limit his liability and the liability of Polan Industries, Inc. in their dealings with Kinney. A stockholder's liability is limited to the amount he has invested in the corporation, but Polan invested nothing in Industrial. This corporation was no more than a shell — a transparent shell. When nothing is invested in the corporation, the corporation provides no protection to its owner; nothing in, nothing out, no protection. If Polan wishes the protection of a corporation to limit his liability, he must follow the simple formalities of maintaining the corporation. This he failed to do, and he may not relieve his circumstances by saying Kinney should have known better.

        32
        III.
        33

        For the foregoing reasons, we hold that Polan is personally liable for the debt of Industrial, and the decision of the district court is reversed and this case is remanded with instructions to enter judgment for the plaintiff.

        34

        REVERSED AND REMANDED WITH INSTRUCTIONS.

        35

        [1] The following factors were identified in Laya:

        36

        (1) commingling of funds and other assets of the corporation with those of the individual shareholders;

        (2) diversion of the corporation's funds or assets to noncorporate uses (to the personal uses of the corporation's shareholders);

        (3) failure to maintain the corporate formalities necessary for the issuance of or subscription to the corporation's stock, such as formal approval of the stock issue by the board of directors;

        (4) an individual shareholder representing to persons outside the corporation that he or she is personally liable for the debts or other obligations of the corporation;

        (5) failure to maintain corporate minutes or adequate corporate records;

        (6) identical equitable ownership in two entities;

        (7) identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties);

        (8) failure to adequately capitalize a corporation for the reasonable risks of the corporate undertaking;

        (9) absence of separately held corporate assets;

        (10) use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation;

        (11) sole ownership of all the stock by one individual or members of a single family;

        (12) use of the same office or business location by the corporation and its individual shareholder(s);

        (13) employment of the same employees or attorney by the corporation and its shareholder(s);

        (14) concealment or misrepresentation of the identity of the ownership, management or financial interests in the corporation, and concealment of personal business activities of the shareholders (sole shareholders do not reveal the association with a corporation, which makes loans to them without adequate security);

        (15) disregard of legal formalities and failure to maintain proper arm's length relationships among related entities;

        (16) use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity;

        (17) diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another;

        (18) contracting by the corporation with another person with the intent to avoid risk of nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge for illegal transactions;

        (19) the formation and use of the corporation to assume the existing liabilities of another person or entity.

        37

        Laya, 352 S.E.2d at 98-99 (footnote omitted).

      • 2.9.3 Fletcher v. Atex Inc.

        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.

        1
        68 F.3d 1451 (1995)
        2
        Marianne E. FLETCHER, Nancy L. Bartley, Raphael Paganelli, and Charlotte Evans, Plaintiffs-Appellants,
        v.
        ATEX, INC., Defendant,
        EASTMAN KODAK COMPANY, Defendant-Appellee.
        and
        Jenny L. HERMANSON and Christy Scattarella, Plaintiffs-Appellants,
        v.
        805 MIDDLESEX CORP., f/k/a Atex, Inc., and Apple Computers, Inc., Defendants,
        Eastman Kodak Company, Defendant-Appellee.
        3
        Nos. 1426, 1427, Dockets 94-9080, 94-9120.
        4

        United States Court of Appeals, Second Circuit.

        5
        Argued May 26, 1995.
        6
        Decided October 5, 1995.
        7

        [1452] [1453] [1454] Steven J. Phillips, Levy Phillips & Konigsberg, New York City (Alani Golanski, Levy Phillips & Konigsberg, New York City, on the brief), for Plaintiffs-Appellants.

        8

        Thomas E. Reidy, Nixon, Hargrave, Devans & Doyle, Rochester, New York (Henry J. DePippo, Flor M. Ferrer-Colón, Nixon, Hargrave, Devans & Doyle, Rochester, New York, on the brief), for Defendant-Appellee.

        9

        Before: KEARSE, CALABRESI, and CABRANES, Circuit Judges.

        10
        JOSÉ A. CABRANES, Circuit Judge:
        11

        This is a consolidated appeal from a final judgment of the United States District Court for the Southern District of New York (Morris E. Lasker, Judge), granting defendant-appellee Eastman Kodak Company's motion for summary judgment and dismissing all claims against it in two actions, Fletcher v. Atex, Inc., 92 Civ. 8758 and Hermanson v. 805 Middlesex Corp., Inc., 94 Civ. 1272. Fletcher v. Atex, Inc., 861 F.Supp. 242 (S.D.N.Y.1994). The plaintiffs-appellants filed suit against Atex, Inc. ("Atex") and its parent, Eastman Kodak Company ("Kodak"), to recover for repetitive stress injuries that they claim were caused by their use of computer keyboards manufactured by Atex.

        12

        [1455] Plaintiffs-appellants argue that the district court erred in granting summary judgment in favor of Kodak on the ground that Kodak could be held liable for the plaintiffs' alleged injuries. They contend that summary judgment was inappropriate because genuine issues of material fact existed regarding Kodak's liability as a defendant under each of the plaintiffs' four theories of liability, which we describe below.

        13
        I. BACKGROUND
        14

        The Fletcher and Hermanson plaintiffs filed their respective complaints on December 4, 1992, and February 25, 1994, seeking recovery from Atex and Kodak, among others, for repetitive stress injuries that they claim were caused by their use of Atex computer keyboards. From 1981 until December 1992, Atex was a wholly-owned subsidiary of Kodak. In 1987, Atex's name was changed to Electronic Pre-Press Systems, Inc., ("EPPS"), but its name was changed back to Atex in 1990. In December 1992, Atex sold substantially all of its assets to an independent third party and again changed its name to 805 Middlesex Corp., which holds the proceeds from the sale. Kodak continues to be the sole shareholder of 805 Middlesex Corp.

        15

        After extensive discovery, Kodak moved for summary judgment in Fletcher on April 21, 1994, and in Hermanson on April 28, 1994. The plaintiffs opposed Kodak's motion, arguing that genuine issues of material fact existed as to Kodak's liability under any number of theories, including (1) that Atex was merely Kodak's alter ego or instrumentality; (2) that Atex was Kodak's agent in the manufacture and marketing of the keyboards; (3) that Kodak was the "apparent manufacturer" of the Atex keyboards; and (4) that Kodak acted in tortious concert with Atex in manufacturing and marketing the allegedly defective keyboards.

        16

        In support of their first theory, the plaintiffs argued that Kodak "dominated and controlled" Atex by maintaining significant overlap between the boards of directors of the two companies, "siphoning" off funds from Atex through use of a cash management system, requiring Kodak's approval for major expenditures, stock sales, and real estate acquisitions, participating in negotiations involving the sale of Atex to a third party, and including references to Atex as a "division" of Kodak and to the "merger" between Atex and Kodak in Atex's promotional literature and Kodak's Annual Report. Second, the plaintiffs claimed that, at the very least, the references to Atex in the promotional literature raised a question of material fact regarding Kodak's intent to confer authority on Atex to act as its agent in the manufacturing and marketing of computer keyboards. In support of their third theory, the plaintiffs maintained that the use of Kodak's name in Atex's advertising, promotional, and packaging materials provided assurances to consumers that the Kodak name stood behind Atex's products, and Kodak could thus be held liable as the "apparent manufacturer" of the keyboards. Finally, they argued that the fact that Kodak was generally aware of the danger of repetitive stress injuries and the fact that Kodak had tested the ergonomics of three Atex keyboards in 1990 presented evidence of concerted tortious action between Atex and Kodak. The Fletcher and Hermanson actions were consolidated before the district court for the purposes of summary judgment proceedings.

        17

        On August 17, 1994, the district court rejected each of the plaintiffs' theories of Kodak's liability and granted Kodak's motion for summary judgment in both actions. In its opinion, the court referred to, but did not rely upon, an identical suit filed against Atex and Kodak in New York state court, King v. Eastman Kodak Co., No. 23439/92 (N.Y.Sup. Ct. June 9, 1994), in which Kodak's motion for summary judgment was granted on similar grounds. Fletcher, 861 F.Supp. at 243.

        18

        First, the district court found that Kodak and Atex observed all corporate formalities and maintained separate corporate existences. It held that Atex's participation in Kodak's cash management system and Kodak's control over Atex's major expenditures and asset sales were insufficient to raise an issue of material fact regarding Kodak's liability under an alter ego theory. Id. at 244-45. Second, it held that the representations in various advertisements, promotional literature, [1456] and annual reports were similarly insufficient as a matter of law to find Kodak liable under an agency theory. Id. at 247. Third, the court held that Kodak was entitled to summary judgment on the plaintiffs' apparent manufacturer theory because the company was not involved in the sale or distribution of the keyboards. Id. at 245-46. Finally, the court found that the plaintiffs' concerted action theory failed as a matter of law because they offered no evidence indicating that Kodak and Atex had agreed to commit a tortious act. Id. at 246. This appeal followed.

        19
        II. DISCUSSION
        20
        A. The Summary Judgment Standard
        21

        We review a district court's grant of summary judgment de novo to determine whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. Healy v. Rich Prods. Corp., 981 F.2d 68, 72 (2d Cir. 1992). Summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits ... show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c). "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986) (emphasis in original). While the court must view the inferences to be drawn from the facts in the light most favorable to the party opposing the motion, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986), a party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987). The non-moving party may defeat the summary judgment motion by producing sufficient specific facts to establish that there is a genuine issue of material fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Finally, "`mere conclusory allegations or denials'" in legal memoranda or oral argument are not evidence and cannot by themselves create a genuine issue of material fact where none would otherwise exist. Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir.1980) (quoting SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir.1978)).

        22
        B. Theories of Liability
        23

        Plaintiffs argue that the district court should have denied Kodak's motion for summary judgment on the ground that genuine issues of material fact existed regarding each of the plaintiffs' four theories of liability. We consider the plaintiffs' arguments on each of these theories in turn.

        24
        1. Alter Ego Liability
        25

        The plaintiffs claim that the district court erred in granting Kodak's motion for summary judgment on their alter ego theory of liability. The plaintiffs offer two arguments in this regard. First, they contend that the district court was estopped from granting Kodak's motion for summary judgment because the New York state court found in King v. Eastman that issues of material fact existed regarding Kodak's domination of Atex. Second, they argue that even if collateral estoppel does not apply in the instant case, genuine issues of material fact remain that preclude a grant of summary judgment in favor of Kodak.

        26

        The district court correctly noted that "[u]nder New York choice of law principles, `[t]he law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders.'" Fletcher, 861 F.Supp. at 244 (quoting Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir.1993)). Because Atex was a Delaware corporation, Delaware law determines whether the corporate veil can be pierced in this instance.

        27

        [1457] Delaware law permits a court to pierce the corporate veil of a company "where there is fraud or where [it] is in fact a mere instrumentality or alter ego of its owner." Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del.Ch.1992). Although the Delaware Supreme Court has never explicitly adopted an alter ego theory of parent liability for its subsidiaries, lower Delaware courts have applied the doctrine on several occasions, as has the United States District Court for the District of Delaware. See Geyer, 621 A.2d at 793; Mabon, Nugent & Co. v. Texas Am. Energy Corp., No. CIV.A. 8578, 1990 WL 44267, at *5, (Del.Ch. Apr. 12, 1990); Harper v. Delaware Valley Broadcasters, Inc., 743 F.Supp. 1076, 1085 (D.Del.1990), aff'd, 932 F.2d 959 (3d Cir.1991). Thus, under an alter ego theory, there is no requirement of a showing of fraud. Id. at 1085. To prevail on an alter ego claim under Delaware law, a plaintiff must show (1) that the parent and the subsidiary "operated as a single economic entity" and (2) that an "overall element of injustice or unfairness ... [is] present." Id. (internal quotation marks omitted); see also Mabon, 1990 WL 44267, at *5; Harco Nat'l Ins. Co. v. Green Farms, Inc., No. CIV.A. 1331, 1989 WL 110537, at *5, (Del Ch. Sept. 19, 1989).

        28

        In the New York state action of King v. Eastman, the court granted Kodak's motion for summary judgment, relying on an erroneous interpretation of Delaware's alter ego doctrine. The court noted that although the plaintiffs had raised "ample questions of fact regarding the first element of the piercing theory — domination," they made "no showing that Kodak used whatever dominance it had over Atex to perpetrate a fraud or other wrong that proximately cause[d] injury to them." This was an error; under Delaware law, the alter ego theory of liability does not require any showing of fraud.

        29
        a. Collateral Estoppel
        30

        Although the plaintiffs acknowledge that the New York state court erred in its interpretation of Delaware law, they argue that the court's treatment of the question of Kodak's domination over Atex should preclude all further litigation of that issue. We disagree and hold that the New York court's findings in King v. Eastman regarding Kodak's domination over Atex do not have collateral estoppel effect under New York law.

        31

        The doctrine of collateral estoppel "precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party ... whether or not the tribunals or causes of action are the same." Ryan v. New York Tel. Co., 62 N.Y.2d 494, 500, 478 N.Y.S.2d 823, 826, 467 N.E.2d 487, 490 (1984) (citing Ripley v. Storer, 309 N.Y. 506, 517, 132 N.E.2d 87 (1956)). Under New York law, two conditions must be met to preclude relitigation in the second action: (1) "the issue must have been material to the first action or proceeding and essential to the decision rendered therein" and (2) "the party against whom collateral estoppel is asserted [must have been] afforded a full and fair opportunity in the prior administrative proceeding to contest the decision now said to be controlling...." 62 N.Y.2d at 500-01, 478 N.Y.S.2d at 826, 467 N.E.2d at 490. Neither condition was met in this case.

        32

        First, the state court's finding of "ample questions of fact" regarding Kodak's domination of Atex was not essential to its judgment in King. The state court did not decide the summary judgment motion based on its finding of factual disputes between the parties. To the contrary, it granted summary judgment to Kodak on the plaintiffs' alter ego theory of liability based on its erroneous interpretation of Delaware law. Since the court's finding of domination was not essential to the judgment, its conclusions should not be accorded preclusive effect in the present action.

        33

        The plaintiffs counter that the state court's finding of a factual dispute on the issue of domination should be given preclusive effect, even though it was not essential to the judgment, because it was fully litigated by the parties and fully considered by the court. They rely on Malloy v. Trombley, 50 N.Y.2d 46, 427 N.Y.S.2d 969, 405 N.E.2d 213 (1980), which held that a court's alternative holding, while not essential to the judgment, could be given conclusive effect. However, the Malloy court carefully limited its holding: [1458] "[W]ithout intending to enunciate any broad rule, we hold in this instance that the rule of issue preclusion is applicable notwithstanding that in a precise sense the issue precluded was the subject of only an alternative determination by the trial court." 50 N.Y.2d at 52, 427 N.Y.S.2d at 973, 405 N.E.2d at 216. In Malloy, the trial court articulated a viable alternative ground to support its conclusion, a ground that the Court of Appeals noted had "validating authenticity" because it was likely expressed by the trial court to provide another basis for affirmance in case the other ground was rejected on appeal. 50 N.Y.2d at 52, 427 N.Y.S.2d at 972, 405 N.E.2d at 215. Here, the trial court's finding of a factual dispute on the issue of domination was not an alternative holding at all. It was at odds with the court's conclusion that summary judgment was appropriate and certainly did not provide "validating authenticity" for the court's holding.

        34

        Second, the court's finding of a factual dispute cannot have collateral estoppel effect because Kodak did not have a "full and fair opportunity" to litigate the question that the plaintiffs are asserting against it. Under New York law, a party has not had a full and fair opportunity to litigate an issue if it has had no opportunity to appeal the adverse finding. People v. Medina, 208 A.D.2d 771, 617 N.Y.S.2d 491, 493 (2d Dep't 1994); see also Pinkney v. Keane, 737 F.Supp. 187, 195 (E.D.N.Y.) ("Under New York law, a party who has obtained a final judgment in its favor is not normally precluded from relitigating a subsidiary issue that was decided against it."), aff'd, 920 F.2d 1090 (2d Cir. 1990), cert. denied, 501 U.S. 1217, 111 S.Ct. 2824, 115 L.Ed.2d 995 (1991). Kodak was in precisely this situation. It could not appeal the trial court's finding of a material factual dispute, because the final judgment — that is, the grant of summary judgment — was in Kodak's favor.

        35

        In sum, the collateral estoppel doctrine does not bar the relitigation of the question of Kodak's domination over its subsidiary, Atex, because the state court's finding was not essential to its judgment and because Kodak did not have a full and fair opportunity to litigate the issue.

        36
        b. Summary Judgment on the Alter Ego Theory
        37

        To prevail on an alter ego theory of liability, a plaintiff must show that the two corporations "`operated as a single economic entity such that it would be inequitable ... to uphold a legal distinction between them.'" Harper, 743 F.Supp. at 1085 (quoting Mabon, 1990 WL 44267, at *5). Among the factors to be considered in determining whether a subsidiary and parent operate as a "single economic entity" are:

        38
        "[W]hether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder."
        39

        Harco, 1989 WL 110537, at *4 (quoting United States v. Golden Acres, Inc., 702 F.Supp. 1097, 1104 (D.Del.1988)). As noted above, a showing of fraud or wrongdoing is not necessary under an alter ego theory, but the plaintiff must demonstrate an overall element of injustice or unfairness. Harco, 1989 WL 110537, at *5.

        40

        A plaintiff seeking to persuade a Delaware court to disregard the corporate structure faces "a difficult task." Harco, 1989 WL 110537, at *4. Courts have made it clear that "[t]he legal entity of a corporation will not be disturbed until sufficient reason appears." Id. Although the question of domination is generally one of fact, courts have granted motions to dismiss as well as motions for summary judgment in favor of defendant parent companies where there has been a lack of sufficient evidence to place the alter ego issue in dispute. See, e.g., Akzona, Inc. v. Du Pont, 607 F.Supp. 227, 237 (D.Del. 1984) (rejecting plaintiffs' alter ego theory of liability on a motion to dismiss); Nelson v. International Paint Co., 734 F.2d 1084, 1092 (5th Cir.1984) ("[I]n the lack of sufficient evidence to place the alter ego issue in dispute, a corporate defendant may be entitled [1459] to summary judgment."); see also Japan Petroleum Co. (Nigeria) v. Ashland Oil Inc., 456 F.Supp. 831, 838, 846 (D.Del.1978) (finding that subsidiary was not instrumentality of parent on a motion for summary judgment).

        41

        Kodak has shown that Atex followed corporate formalities, and the plaintiffs have offered no evidence to the contrary. Significantly, the plaintiffs have not challenged Kodak's assertions that Atex's board of directors held regular meetings, that minutes from those meetings were routinely prepared and maintained in corporate minute books, that appropriate financial records and other files were maintained by Atex, that Atex filed its own tax returns and paid its own taxes, and that Atex had its own employees and management executives who were responsible for the corporation's day-to-day business. The plaintiffs' primary arguments regarding domination concern (1) the defendant's use of a cash management system; (2) Kodak's exertion of control over Atex's major expenditures, stock sales, and the sale of Atex's assets to a third party; (3) Kodak's "dominating presence" on Atex's board of directors; (4) descriptions of the relationship between Atex and Kodak in the corporations' advertising, promotional literature, and annual reports; and (5) Atex's assignment of one of its former officer's mortgage to Kodak in order to close Atex's asset-purchase agreement with a third party. The plaintiffs argue that each of these raises a genuine issue of material fact about Kodak's domination of Atex, and that the district court therefore erred in granting summary judgment to Kodak on the plaintiffs' alter ego theory. We find that the district court correctly held that, in light of the undisputed factors of independence cited by Kodak, "the elements identified by the plaintiffs ... [were] insufficient as a matter of law to establish the degree of domination necessary to disregard Atex's corporate identity." Fletcher, 861 F.Supp. at 245.

        42

        First, the district court correctly held that "Atex's participation in Kodak's cash management system is consistent with sound business practice and does not show undue domination or control." Id. at 244. The parties do not dispute the mechanics of Kodak's cash management system. Essentially, all of Kodak's domestic subsidiaries participate in the system and maintain zero-balance bank accounts. All funds transferred from the subsidiary accounts are recorded as credits to the subsidiary, and when a subsidiary is in need of funds, a transfer is made. At all times, a strict accounting is kept of each subsidiary's funds.

        43

        Courts have generally declined to find alter ego liability based on a parent corporation's use of a cash management system. See, e.g., In re Acushnet River & New Bedford Harbor Proceedings, 675 F.Supp. 22, 34 (D.Mass.1987) (Without "considerably more," "a centralized cash management system ... where the accounting records always reflect the indebtedness of one entity to another, is not the equivalent of intermingling funds" and is insufficient to justify disregarding the corporate form.); United States v. Bliss, 108 F.R.D. 127, 132 (E.D.Mo.1985) (cash management system indicative of the "usual parent-subsidiary relationship"); Japan Petrol., 456 F.Supp. at 846 (finding segregation of subsidiary's accounts within parent's cash management system to be "a function of administrative convenience and economy, rather than a manifestation of control"). The plaintiffs offer no facts to support their speculation that Kodak's centralized cash management system was actually a "complete commingling" of funds or a means by which Kodak sought to "siphon[] all of Atex's revenues into its own account."

        44

        Second, the district court correctly concluded that it could find no domination based on the plaintiffs' evidence that Kodak's approval was required for Atex's real estate leases, major capital expenditures, negotiations for a sale of minority stock ownership to IBM, or the fact that Kodak played a significant role in the ultimate sale of Atex's assets to a third party. Again, the parties do not dispute that Kodak required Atex to seek its approval and/or participation for the above transactions. However, this evidence, viewed in the light most favorable to the plaintiffs, does not raise an issue of material fact about whether the two corporations constituted "a single economic entity." Indeed, [1460] this type of conduct is typical of a majority shareholder or parent corporation. See Phoenix Canada Oil Co. v. Texaco, 842 F.2d 1466, 1476 (3d Cir.1988) (declining to pierce the corporate veil where subsidiary required to secure approval from parent for "large investments and acquisitions or disposals of major assets"), cert. denied, 488 U.S. 908, 109 S.Ct. 259, 102 L.Ed.2d 247 (1988); Akzona, 607 F.Supp. at 237 (same, where parent approval required for expenditures exceeding $850,000); Japan Petrol., 456 F.Supp. at 843 (finding no parent liability where parent approval required for expenditures exceeding $250,000). In Akzona, the Delaware district court noted that a parent's "general executive responsibilities" for its subsidiary's operations included approval over major policy decisions and guaranteeing bank loans, and that that type of oversight was insufficient to demonstrate domination and control. Akzona, 607 F.Supp. at 238 (internal quotation marks omitted). Similarly, the district court in the instant case properly found that the presence of Kodak employees at periodic meetings with Atex's chief financial officer and comptroller to be "entirely appropriate." Fletcher, 861 F.Supp. at 245 (citing Akzona, 607 F.Supp. at 238); see Acushnet, 675 F.Supp. at 34 ("The quarterly and annual reports made [to the parent] do not represent an untoward intrusion by the owner into the corporate enterprise. The right of shareholders to remain informed is similarly recognized in many public and closely held corporations.").

        45

        The plaintiffs' third argument, that Kodak dominated the Atex board of directors, also fails. Although a number of Kodak employees have sat on the Atex board, it is undisputed that between 1981 and 1988, only one director of Atex was also a director of Kodak. Between 1989 and 1992, Atex and Kodak had no directors in common. Parents and subsidiaries frequently have overlapping boards of directors while maintaining separate business operations. In Japan Petroleum, the Delaware district court held that the fact that a parent and a subsidiary have common officers and directors does not necessarily demonstrate that the parent corporation dominates the activities of the subsidiary. 456 F.Supp. at 841; see Scott-Douglas Corp. v. Greyhound Corp., 304 A.2d 309, 314 (Del.Super.Ct.1973) (same). Since the overlap is negligible here, we find this evidence to be entirely insufficient to raise a question of fact on the issue of domination.

        46

        Fourth, the district court properly rejected the plaintiffs' argument that the descriptions of the relationship between Atex and Kodak and the presence of the Kodak logo in Atex's promotional literature justify piercing the corporate veil. Fletcher, 861 F.Supp. at 245. The plaintiffs point to several statements in both Kodak's and Atex's literature to evidence Kodak's domination of its subsidiary. For example, plaintiffs refer to (1) a promotional pamphlet produced by EPPS (a/k/a Atex) describing Atex as a business unit of EPPS and noting that EPPS was an "agent" of Kodak; (2) a document produced by Atex entitled "An Introduction to Atex Systems," which describes a "merger" between Kodak and Atex; (3) a statement in Kodak's 1985 and 1986 annual reports describing Atex as a "recent acquisition[]" and a "subsidiar[y] ... combined in a new division"; and (4) a statement in an Atex/EPPS document, "Setting Up TPE 6000 on the Sun 3 Workstation," describing Atex as "an unincorporated division of Electronic Pre-Press Systems, Inc., a Kodak company." They also refer generally to the fact that Atex's paperwork and packaging materials frequently displayed the Kodak logo.

        47

        It is clear from the record that Atex never merged with Kodak or operated as a Kodak division. The plaintiffs offer no evidence to the contrary, apart from these statements in Atex and Kodak documents that they claim are indicative of the true relationship between the two companies. Viewed in the light most favorable to the plaintiffs, these statements and the use of the Kodak logo are not evidence that the two companies operated as a "single economic entity." See Coleman v. Corning Glass Works, 619 F.Supp. 950, 956 (W.D.N.Y.1985) (upholding corporate form despite "loose language" in annual report about "merger" and parent's reference to subsidiary as a "division"), aff'd, 818 F.2d 874 (1987); Japan Petrol., 456 F.Supp. at 846 (noting that representations made by parent in its annual reports that subsidiary [1461] serves as an agent "may result from public relations motives or an attempt at simplification"); American Trading & Prod. Corp. v. Fischbach & Moore, Inc., 311 F.Supp. 412, 416 (N.D.Ill.1970) ("boastful" advertising and consideration of subsidiaries as "family" do not prove that corporate identities were ignored).

        48

        Fifth, the plaintiffs contend that Atex's assignment of its former CEO's mortgage to Kodak in order to close the sale of Atex's assets to a third party is evidence of Kodak's domination of Atex. We reject this argument as well. The evidence is undisputed that Kodak paid Atex the book value of the note and entered into a formal repayment agreement with the former CEO. Formal contracts were executed, and the two companies observed all corporate formalities.

        49

        Finally, even if the plaintiffs did raise a factual question about Kodak's domination of Atex, summary judgment would still be appropriate because the plaintiffs offer no evidence on the second prong of the alter ego analysis. The plaintiffs have failed to present evidence of an "overall element of injustice or unfairness" that would result from respecting the two companies' corporate separateness. See Harper, 743 F.Supp. at 1085 (holding that plaintiff cannot prevail on alter ego theory "because he has failed to allege any unfairness or injustice which would justify the court in disregarding the [companies'] separate legal existences"). In the instant case, the plaintiffs offer nothing more than the bare assertion that Kodak "exploited" Atex "to generate profits but not to safeguard safety." There is no indication that Kodak sought to defraud creditors and consumers or to siphon funds from its subsidiary. The plaintiffs' conclusory assertions, without more, are not evidence, see Quinn, 613 F.2d at 445, and are completely inadequate to support a finding that it would be unjust to respect Atex's corporate form.

        50

        For all of the foregoing reasons, the district court's order entering summary judgment on the plaintiffs' alter ego theory of liability is affirmed.

        51
        2. Agency Liability
        52

        The plaintiffs next contend that a genuine issue of fact was raised as to whether Kodak could be held liable on an agency theory — that is, whether Kodak, as principal, could be liable for the tortious acts of Atex, its agent. The plaintiffs rely on statements in Atex/ EPPS literature to support their theory: (1) the statement in the Atex document "Setting Up TPE 6000 on the Sun 3 Workstation" that "Atex is an unincorporated division of Electronic Pre-Press Systems, Inc., a Kodak company"; and (2) the statements in the EPPS promotional pamphlet that "EPPS serves as Kodak's primary agent to supply electronic pre-press products" and that "Atex is the largest of the EPPS business units." In granting Kodak's motion for summary judgment, the district court rejected the plaintiffs' agency theory of liability, finding that there was no evidence that Kodak authorized the statements. Fletcher, 861 F.Supp. at 247.

        53

        The plaintiffs contend that the fact that Kodak permitted the use of its logo on these documents raises a question of fact as to whether Kodak authorized or appeared to authorize the references to Atex/EPPS as its agent. First, the plaintiffs' argument fails under a theory of actual authority. The Restatement (Second) of Agency states: "Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal's manifestations of consent to him." RESTATEMENT (SECOND) OF AGENCY § 7 (1958). "Manifestation of consent" is "the expression of the will to another as distinguished from the undisclosed purpose or intention." Id. cmt. b; see also Greene v. Hellman, 51 N.Y.2d 197, 203-04, 433 N.Y.S.2d 75, 79, 412 N.E.2d 1301, 1305 (1980). A close reading of the record reveals no evidence that Kodak conferred actual authority upon Atex to act on its behalf. The plaintiffs have offered no evidence that either document was produced by Kodak; in fact, it appears that Atex and EPPS published and disseminated the documents at issue. The presence of a parent's logo on documents created and distributed by a subsidiary, standing alone, does not confer authority [1462] upon the subsidiary to act as an agent.

        54

        For similar reasons, plaintiffs' arguments fail under a theory of apparent authority. New York's Court of Appeals has made it clear that "apparent authority is dependent upon verbal or other acts by a principal which reasonably give an appearance of authority to conduct the transaction." Greene, 51 N.Y.2d at 204, 433 N.Y.S.2d at 80, 412 N.E.2d at 1306 (emphasis added) (citing RESTATEMENT (SECOND) OF AGENCY § 8 cmts. a, c). "Key to the creation of apparent authority," the court continued, "is that the third person, accepting the appearance of authority as true, has relied upon it." Id. The plaintiffs offer no evidence that Kodak authorized or gave the appearance of having authorized the statements in the Atex/EPPS documents. Atex's/EPPS's use of the Kodak logo is not a "verbal or other act[] by a principal," but rather, an act by the purported agent. Furthermore, the record contains no evidence that the plaintiffs relied on the documents at issue. If there were evidence that the plaintiffs relied on these documents and if there were evidence that Kodak uttered or authorized them, then there would be an issue of material fact as to the existence of apparent authority. However, there is neither. We affirm the district court's order granting summary judgment to the defendant on the plaintiffs' agency theory of liability.

        55
        3. Apparent Manufacturer
        56

        The plaintiffs' third theory of liability is that Kodak should be held liable as the "apparent manufacturer" of the Atex keyboards. RESTATEMENT (SECOND) OF TORTS § 400 (1965). The apparent manufacturer doctrine is set forth in the Restatement as follows: "One who puts out as his own product a chattel manufactured by another is subject to the same liability as though he were its manufacturer." Id. This theory of liability is well-established under New York law. See Commissioners of State Ins. Fund v. City Chem. Corp., 290 N.Y. 64, 69, 48 N.E.2d 262 (1943); Markel v. Spencer, 5 A.D.2d 400, 171 N.Y.S.2d 770, 780 (4th Dep't 1958), aff'd, 5 N.Y.2d 958, 184 N.Y.S.2d 835, 157 N.E.2d 713 (1959).

        57

        The district court held that Kodak could not be held liable under the apparent manufacturer doctrine because "[t]here is no indication in the Restatement [and in New York case law] that Section 400 was intended to apply to a party which is not a seller of chattel, or is [not] otherwise involved in the chain of distribution of a product." Fletcher, 861 F.Supp. at 245. In support of its holding, the district court cited the New York state court ruling in King v. Eastman, which held that Kodak was not liable under this section because, inter alia, it was not involved in the sale or distribution of the allegedly defective keyboards. Id. at 246. The King court relied on two federal court opinions, which similarly limited the application of § 400. See Torres v. Goodyear Tire and Rubber Co., 867 F.2d 1234, 1236 (9th Cir. 1989) (parent not liable under § 400 for subsidiary's product where it was not manufacturer or seller); Affiliated FM Ins. Co. v. Trane Co., 831 F.2d 153, 156 (7th Cir.1987) (parent not liable under § 400 in the absence of evidence that it was involved in manufacture, sale, or installation of product); see also Nelson, 734 F.2d at 1087-88 (section 400 does not apply to one who allows manufacturer to use its name but was not itself a manufacturer nor a distributor of the product).

        58

        Kodak argues that the district court's conclusion is supportable on three different theories. First, § 400 cannot apply because Kodak was neither the seller nor the distributor of the allegedly defective keyboards. Second, even if § 400 liability could reach a party who did not sell or distribute the products in question, it does not apply to Kodak in this instance because the Kodak logo was not affixed to the keyboards or their packages, only to promotional and advertising materials. Finally, even if § 400 can apply when a defendant's name appears only on promotional and packaging materials, the materials submitted here do not suggest that Kodak, rather than Atex, manufactured the keyboards. We agree.

        59

        First, New York courts have only applied the apparent manufacturer doctrine to sellers [1463] of a product or parties otherwise involved in the chain of distribution. The commentary to the Restatement states:

        60
        The words "one who puts out a chattel" include anyone who supplies it to others for their own use or for the use of third persons, either by sale or lease or by gift or loan.
        61

        RESTATEMENT (SECOND) OF TORTS § 400 cmt. a (emphasis added). Although no New York court, with the exception of the King court, has explicitly declined to apply § 400 where a parent arguably represents itself as the manufacturer of a product without participating in its sale or distribution, no New York court has ever extended liability under the doctrine to anyone other than sellers of products manufactured by third parties. See Willson v. Faxon, Williams & Faxon, 208 N.Y. 108, 113, 101 N.E. 799 (1913) (finding seller of laxatives could be held liable under apparent manufacturer doctrine where seller purchased tablets from manufacturer and affixed its own label to the product); State Ins. Fund, 290 N.Y. at 69, 48 N.E.2d 262 (finding chemical vendor could be held liable under earlier version of § 400 where vendor purchased chemicals from a distributor, removed distributor's label, and affixed its own); Markel, 171 N.Y.S.2d at 780 (finding defendant Ford Motor Company liable for malfunctioning brake pedal arm that it sold as a component part of a Ford automobile); Schwartz v. Macrose Lumber & Trim Co., 50 Misc.2d 547, 270 N.Y.S.2d 875, 889 (Sup.Ct. Queens County 1966) (finding vendor liable under apparent manufacturer doctrine for defective nail in box sold by vendor under vendor's name), rev'd on other grounds, 29 A.D.2d 781, 287 N.Y.S.2d 706 (2d Dep't 1968).

        62

        In support of their argument for § 400 liability, the plaintiffs draw our attention to several cases in other jurisdictions. All of these cases are distinguishable. Although they hold that participation in the chain of distribution is not essential to liability under the apparent manufacturer doctrine, each involved a licensing agreement in which the defendant allowed the use of its name in exchange for control over (or involvement in) the manufacture of the product. See Kasel v. Remington Arms Co., 24 Cal.App.3d 711, 718, 724, 101 Cal.Rptr. 314 (2d Dist.1972) (licensor who retains "right to inspect and control the quality" of product could be liable as an "integral component[] of the ... enterprise responsible for placing ... products on the market"); City of Hartford v. Assoc. Constr. Co., 34 Conn.Supp. 204, 384 A.2d 390, 393, 396 (1978) (licensor who "retained and exercised rights of control as to the quality and the methods and manner of application of the product" could be held liable under § 400); Connelly v. Uniroyal, Inc., 75 Ill.2d 393, 408, 411, 27 Ill.Dec. 343, 389 N.E.2d 155 (1979) (licensor who remained involved with "the goods and manufacturing operations" of product liable under § 400 as an "integral part of the marketing enterprise"), cert. denied, 444 U.S. 1060, 100 S.Ct. 992, 62 L.Ed.2d 738 (1980).

        63

        In the instant case, the plaintiffs have not produced any evidence that Kodak developed, designed, sold or distributed the allegedly defective keyboards. Contending otherwise, the plaintiffs point to the fact that Atex, in response to an interrogatory, listed Kodak among over thirty companies that were "involved in the design, manufacture, sale, marketing, leasing and/or installation of Atex keyboards." This interrogatory, however, was amended to delete Kodak from the list, and defendant's attorney submitted an affirmation attesting that the inclusion of Kodak was in error. Plaintiffs have submitted no other evidence of Kodak's actual participation in the manufacturing or distribution process; nor have they submitted any evidence of a licensing agreement between Kodak and Atex.

        64

        Second, even assuming that New York law permits a party that did not sell or distribute a product to be held liable under the apparent manufacturer doctrine, the plaintiffs offer no evidence that Kodak held itself out as the manufacturer of the Atex keyboard. See RESTATEMENT (SECOND) OF TORTS § 400. There is no question that the keyboards prominently display the name of Atex, the true manufacturer, and the plaintiffs do not dispute the defendant's assertion that the Kodak logo was not affixed to the Atex keyboards or their packages. Under these circumstances, it is difficult to understand how [1464] any defendant could be held liable on an apparent manufacturer theory. Indeed, the cases cited by the plaintiffs only extend § 400 liability to defendants who placed their names directly on the product or the product packaging at issue. See Willson, 208 N.Y. at 110, 113, 101 N.E. 799 (defendant could be held liable where vial containing tablets causing plaintiff's injuries labeled with defendant's name); State Ins. Fund, 290 N.Y. at 69, 48 N.E.2d 262 (defendant could be held liable where inscription on label of product bore defendant's name); Markel, 171 N.Y.S.2d at 780 (defendant liable for defective component part where vehicle marked with defendant's name); Schwartz, 270 N.Y.S.2d at 889 (defendant liable where plaintiff injured by nail packaged in box labeled with defendant's name); Forry v. Gulf Oil Corp., 428 Pa. 334, 344, 237 A.2d 593 (1968) (defendant could be held liable where tire embossed with its name); Carney v. Sears, Roebuck & Co., 309 F.2d 300, 304 (4th Cir.1962) (defendant could be held liable where its name appeared on defective product's label as well as in advertising).

        65

        Third, even if apparent manufacturer liability could extend to a defendant whose name appears only on promotional and advertising materials, rather than on the product itself, the materials offered by the plaintiffs do not suggest that Kodak manufactured the Atex keyboards. Many of the documents that the plaintiffs rely on make reference only to Atex computer software, such as the Atex "Color Imaging System" and the "PC Custom Display Software User Manual." Furthermore, Atex is repeatedly identified as the manufacturer of the Atex computer systems in all the documents identified by the plaintiffs. Under these circumstances, the plaintiffs' argument — that the presence of the Kodak logo on these documents is sufficient to raise an issue of material fact as to whether Kodak represented itself as the manufacturer of the keyboards — must fail.

        66

        For these reasons, we affirm the district court's order granting summary judgment for the defendant-appellee on the plaintiffs' apparent manufacturer theory of liability.

        67
        4. Concerted Tortious Action
        68

        The plaintiffs' final theory of liability is that Kodak acted in tortious concert with Atex in designing and marketing the allegedly defective keyboards. The plaintiffs present alternative arguments for Kodak's liability under the so-called concerted action doctrine. First, they argue that "the evidence of Kodak's direct participation in the marketing of the defective keyboard equipment" raises an issue of material fact regarding Kodak's acting in concert with Atex. In the alternative, they argue that Kodak could be liable under a separate theory of concerted action under which liability may be premised upon "concerted action by substantial assistance."

        69

        Section 876 of the Restatement (Second) of Torts provides that:

        70
        For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he
        71
        (a) does a tortious act in concert with the other or pursuant to a common design with him, or
        72
        (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself....
        73

        It remains an open question under New York law whether concerted action liability can be premised on a showing of concerted action by "substantial assistance or encouragement." Although the New York Court of Appeals has referred to both the traditional "common design" approach as well as the "substantial assistance" theory of concerted action, see Bichler v. Eli Lilly & Co., 55 N.Y.2d 571, 580-81, 450 N.Y.S.2d 776, 780, 436 N.E.2d 182, 186 (1982), no cases have ever applied the "substantial assistance" approach. We find it unnecessary to decide this question of New York law at this time, because the plaintiffs' claim fails as a matter of law under either theory.

        74

        Under the first theory of concerted action, New York law "provides for joint and several liability on the part of all defendants having an understanding, express or tacit, to participate in a common plan or design to commit a tortious act." Rastelli v. Goodyear Tire & Rubber Co., 79 N.Y.2d 289, [1465] 295, 582 N.Y.S.2d 373, 375, 591 N.E.2d 222, 224 (1992) (internal quotation marks omitted). The Court of Appeals has held that "[i]t is essential that each defendant charged with acting in concert have acted tortiously and that one of the defendants committed an act in pursuance of the agreement which constitutes a tort." Id. The plaintiffs argue that various statements in the Atex/EPPS literature and the use of the Kodak logo on certain documents packaged with Atex products, as well as the fact that Atex's interrogatory answer initially listed Kodak among the companies "involved in the design, manufacture, sale, marketing, leasing and/or installation of Atex keyboards," demonstrate Kodak's "full collaboration" in the marketing of the keyboards. In addition, the plaintiffs present various reports and documents on ergonomics[1] and repetitive stress injuries that Kodak created for the use of its own employees as evidence that "Kodak was fully aware of both the hazards associated with keyboard use and the means of reducing or eliminating those hazards." Finally, they rely on the Kodak Design Resource Center's evaluation of the ergonomics of three Atex keyboards in 1990 as evidence that "Kodak was a full participant with Atex in the deliberations about whether to warn users of the Kodak/Atex equipment, exactly what such warnings should state, and what would be the risks of not issuing such warnings."

        75

        As the district court correctly held, "none of this tends to show that Kodak and Atex had `an understanding ... to participate in a common plan or design to commit a tortious act.'" Fletcher, 861 F.Supp. at 246 (alteration in original) (quoting Rastelli, 79 N.Y.2d at 295, 582 N.Y.S.2d at 375, 591 N.E.2d at 224). As noted above, the defendant's attorney submitted an affirmation attesting that the answer to the interrogatory was an error, and the plaintiffs have offered no additional evidence that Kodak actually participated in the design or manufacture of the Atex keyboards. The documents offered by the plaintiffs do not suggest any "agreement" between Kodak and Atex to act "jointly and tortiously." They merely refer to general statements about the "merger" between Atex and Kodak and the "marriage" between the two companies.

        76

        Furthermore, none of the evidence demonstrates that Kodak's actions were tortious. The fact that Kodak prepared guidelines for its employees to use in relation to their own computer workstations does not constitute tortious conduct with regard to the keyboards developed and sold by Atex. There is no allegation that Kodak's internal guidelines were ever used in conjunction with the design or manufacture of the Atex keyboards. Likewise, while it is undisputed that Atex retained Kodak's Design Resource Center to evaluate the ergonomics of various Atex keyboards in 1990, nothing contradicts the evidence in the record that this evaluation occurred only after all of the keyboards at issue had been designed, developed, and manufactured. Furthermore, the plaintiffs have offered no shred of evidence to support their speculation that "Kodak was a full participant with Atex in the deliberations about whether to warn users of the Kodak/Atex equipment." Nothing contradicts the defendant's evidence that Atex retained Kodak as an "independent organization" solely to conduct a single evaluation of three Atex keyboards. Finally, there is no allegation that Kodak's laboratory performed the tests on the Atex equipment negligently or provided Atex with false information about its evaluation of Atex's keyboards.

        77

        In their second argument, the plaintiffs contend that even if there was no agreement between the parties to act tortiously, Kodak may be liable under the concerted action theory by providing "substantial assistance or encouragement" to Atex in furtherance of its tortious conduct. A "substantial assistance" claim based on § 876 of the Restatement (Second) of Torts requires evidence that (1) the defendant knows that the other's conduct constitutes a breach of [1466] duty and (2) the defendant gives substantial assistance or encouragement to the other's conduct. RESTATEMENT (SECOND) OF TORTS § 876(b).

        78

        We find that, viewed in the light most favorable to the plaintiffs, Kodak's general awareness of the hazards of repetitive stress injuries and the Kodak laboratory's evaluation of the Atex keyboards in 1990 are insufficient to raise a question of material fact regarding Kodak's knowledge of or substantial assistance in Atex's allegedly tortious conduct. Kodak's knowledge about repetitive stress injuries generally cannot be construed as knowledge of the alleged defective design of the Atex keyboard or Atex's alleged failure to warn keyboard users of the hazards of repetitive stress injuries. Furthermore, the plaintiffs have offered no evidence to contradict the defendant's assertions that Kodak's one-time evaluation of the keyboards in 1990 occurred years after the keyboards in question were designed and distributed. Finally, the plaintiffs present no evidence to suggest that Kodak was involved — either before or after the 1990 evaluation—in the decision to include warnings about repetitive stress disorders or user guidelines with Atex keyboards. Thus, we find that summary judgment on this claim was also appropriate.

        79
        III. CONCLUSION
        80

        To summarize:

        81

        We affirm the district court's order granting summary judgment for the defendant on each of the plaintiffs' four theories of liability.

        82

        1. We agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' alter ego theory of liability. The collateral estoppel doctrine does not preclude relitigation of the question of Kodak's domination over Atex because the state court's finding of material facts in dispute was not essential to its judgment and because the defendant did not have a full and fair opportunity to litigate the issue. The elements identified by the plaintiffs were insufficient to raise a material issue of fact regarding domination, and further, the plaintiffs failed to offer evidence of injustice that would justify disregarding Atex's corporate form.

        83

        2. We affirm the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' agency theory of liability because the plaintiffs offered no evidence that Kodak authorized or appeared to authorize Atex to act on its behalf in the manufacturing and marketing of keyboards or that the plaintiffs relied on the documents in question.

        84

        3. We agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' apparent manufacturer theory of liability on the ground that, under New York law, a parent cannot be liable as an apparent manufacturer where it was not the seller or the distributor of the product.

        85

        4. Finally, we agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' concerted tortious action theory. We also affirm the court's finding that the plaintiffs offered no evidence that Kodak and Atex had an agreement to commit a tortious act. Finally, we find that there was no evidence to support the plaintiffs' theory that Kodak provided "substantial assistance or encouragement" to Atex in furtherance of its allegedly tortious conduct.

        86

        [1] "Ergonomics is the study of the design of requirements of work in relation to the physical and psychological capabilities and limitations of people.... The aim of the discipline is to prevent the development of occupational disorders and to reduce the potential for fatigue, error, or unsafe acts through the evaluation and design of facilities, environments, jobs, tasks, tools, equipment, processes, and training methods to match the capabilities of specific workers." See 57 Fed.Reg. 34192, 34199 app. A (Aug. 3, 1992) (OSHA advance notice of proposed rulemaking on ergonomics safety).

      • 2.9.4 First Amendment, the Corporation, and "Reverse Veil Piercing"

        In recent years, the US Supreme Court has pursued an aggressive expansion of First Amendment rights for corporations. Underlying all of the court's opinions in this area is the proposition that a corporation's rights under the First Amendment are derived from the rights of the corporation's stockholders and that there is no separation between stockholders and the corporation for purposes of the First Amendment and regulation of corporate speech. It is important to recognize that this view of the corporation - as one and the same with its stockholders - is at odds with state corporate law where the default is legal separation between the existence of the corporation and its stockholders. This default rule is also known as the "doctrine of corporate separateness."

        In arriving at its present view of the First Amendment rights for corporations, the Roberts Court has had to basically ignore this doctrine. If one were to arrive at where the Roberts Court presently is, and still comport with basic conceptions of the corporate law and the doctrine of corporate separateness, one would first have to develop a theory of "reverse veil piercing". In neither of the two landmark First Amendment cases in recent years in which the court has imputed the First Amendment rights of stockholders, managers and employees to the corporation has the court done so through a reverse veil piercing theory.  

        First Amendment and Corporation

        In Citizens United, the court protected speech rights of corporations by analogizing that corporations are nothing more than "associations of citizens." Let us leave to the side the court's assumption that corporations are assocations of "citizens", which clearly they are not. It is well established that corporations can hold stock in other corporations. There is also no statutory requirement that limits stock ownership to citizens versus say, non-resident aliens. Nevertheless, in Citizens United the court would not sanction government restrictions on corporate speech because "citizens" had decided associate themselves together in the corporate form. The court reasoned in the same way the government could not restrict speech of persons under the constitution that corporations had rights derivative of the citizen stockholders associated with the corporation.   

        In Hobby Lobby, the Roberts Court imputes the religious views of stockholders to the corporation. Much like in Citizens United, Justice Alito rationalizes extending constitutional rights to corporations because of the people associated with the corporation. Justice Alito is, however, more expansive in his derivation of corporate rights:

        A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.

        In the view of Justice Alito in Hobby Lobby, the motivation for extension of the First Amendment to the corporation is to protect the right of a various constituents of the incorporation, specifically including shareholders, officers, and employees of the corporation. Although the court in Hobby Lobby uses this rationale to impute the religious views of the shareholders of Hobby Lobby to the corporation itself, nowhere in the court's opinion does the court describe how it weighs the diverse religious views of the thousands of Hobby Lobby's employees.

        Citizens United and Hobby Lobby represent a distinct departure from earlier cases where the Supreme Court expressed a high degree of deference for the corporate form and the doctrine of corporate separateness.  Take, for example Domino's Pizza v. McDonald (546 US 470, 2006). In Domino's, John W. McDonald, the sole shareholder and employee of JWM, Inc., brought a civil rights claim against Domino's arguing that Domino's discriminated against JWM, Inc. (a Domino's vendor) because McDonald himself was African-American. In that case, the Supreme Court had no problem in seeing a clear difference between the sole shareholder and the corporation and dismissed McDonald's claim for lack of standing because McDonald had signed the contracts in question in his capacity as an officer of JWM, Inc. and not in his personal capacity.

        McDonald's complaint does identify a contractual relationship, the one between Domino's and JWM. But it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation's contracts. McDonald now makes light of the law of corporations and of agency—arguing, for instance, that because he "negotiated, signed, performed, and sought to enforce the contract," Domino's was wrong to "insist that [the contract] somehow was not his `own.'" Brief for Respondent 4. This novel approach to the law contradicts McDonald's own experience. Domino's filed a proof of claim against JWM during its corporate bankruptcy; it did not proceed against McDonald personally. The corporate form and the rules of agency protected his personal assets, even though he "negotiated, signed, performed, and sought to enforce" contracts for JWM. The corporate form and the rules of agency similarly deny him rights under those contracts.

        On the one hand, the court is happy to look through the corporate form in order to impute shareholders' religious views to the legal fiction we call the corporation. On the other hand, when stockholders seek to asserts civil rights claims on behalf of the corporation, the court refuses to impute the rights of the stockholders to corporation. If it seems hard to make sense of the Robert Court's approach to the corporate form that is because, frankly, it does not make much sense. 

        Reverse Veil Piercing Theory

        If one were to create a doctrinally sound path for a court to impute the contitutional rights of stockholders to the corporation, one would have to do much more work than the Roberts Court has done in preparing the way. One would have to "pierce the corporate veil" but in reverse.

        Remember, in the context of traditional veil piercing, courts will rely on a two prong test to overcome the partition between stockholders and the corporation. First, stockholders must have operated the corporation as an "alter ego." In practice, that means stockholders must have disregarded the simple corporate formalities required by the statute that give a separate life to the corporation: articles of incorporation, bylaws, meetings of a board of directors, etc.  Second, the court must determine that not piercing the corporate veil of limited liabilty would result in some inequity or injustice. 

        Any theory of looking through the corporate form and pierce the corporate veil in reverse, as the Supreme Court would have us do, must require a test that is an analogue of the traditional veil piercing test: a unity of interest between the corporation and the corporation and whether not permitting a reverse veil piercing would result in some injustice to the stockholders.  

        Where stockholders treat the corporation as no more than their alter ego (due to lack of formality, etc) and where the failure of the court to impute the constitutional rights of the stockholders to the corporation would result in some inequity or injustice, then a court would be right to impute the constitutional rights of the shareholder to the corporation. Of course, application of this reverse veil piercing standard to corporations would be a two-edge sword for the corporations that avail themselves of this. Corporations seeking to disregard the doctrine of corporate separateness for the purposes of imputing the constitutional rights of stockholders to the corporation would also give up, in effect, the benefits of limited liability.

         

         

        ***

         

        If the Supreme Court were to apply state-level veil piercing doctrines to the question of imputing a group of stockholders' religious views to the corporation, what might that “reverse veil piercing” doctrine look like?  In that case, what would have to be true before the court might impute the religious views of stockholders to the corporation?

  • 3 Corporate Powers

    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.

    • 3.1 DGCL Sec. 121 - General Powers

      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.

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4
      Subchapter II. Powers
      5

       

      6 7

      (a) In addition to the powers enumerated in § 122 of this title, every corporation, its officers, directors and stockholders shall possess and may exercise all the powers and privileges granted by this chapter or by any other law or by its certificate of incorporation, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business or purposes set forth in its certificate of incorporation.

      8

      (b) Every corporation shall be governed by the provisions and be subject to the restrictions and liabilities contained in this chapter.

      9

      8 Del. C. 1953, § 121; 56 Del. Laws, c. 50.;

    • 3.2 DGCL Sec. 122 - Specific Powers

      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. 

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4 5 6

      Every corporation created under this chapter shall have power to:

      7

      (1) Have perpetual succession by its corporate name, unless a limited period of duration is stated in its certificate of incorporation;

      8

      (2) Sue and be sued in all courts and participate, as a party or otherwise, in any judicial, administrative, arbitrative or other proceeding, in its corporate name;

      9

      (3) Have a corporate seal, which may be altered at pleasure, and use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced;

      10

      (4) Purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of its property and assets, or any interest therein, wherever situated;

      11

      (5) Appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation;

      12

      (6) Adopt, amend and repeal bylaws;

      13

      (7) Wind up and dissolve itself in the manner provided in this chapter;

      14

      (8) Conduct its business, carry on its operations and have offices and exercise its powers within or without this State;

      15

      (9) Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof;

      16

      (10) Be an incorporator, promoter or manager of other corporations of any type or kind;

      17

      (11) Participate with others in any corporation, partnership, limited partnership, joint venture or other association of any kind, or in any transaction, undertaking or arrangement which the participating corporation would have power to conduct by itself, whether or not such participation involves sharing or delegation of control with or to others;

      18

      (12) Transact any lawful business which the corporation's board of directors shall find to be in aid of governmental authority;

      19

      (13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income, and make contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of (a) a corporation all of the outstanding stock of which is owned, directly or indirectly, by the contracting corporation, or (b) a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, or (c) a corporation all of the outstanding stock of which is owned, directly or indirectly, by a corporation which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, which contracts of guaranty and suretyship shall be deemed to be necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation, and make other contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion or attainment of the business of the contracting corporation;

      20

      (14) Lend money for its corporate purposes, invest and reinvest its funds, and take, hold and deal with real and personal property as security for the payment of funds so loaned or invested;

      21

      (15) Pay pensions and establish and carry out pension, profit sharing, stock option, stock purchase, stock bonus, retirement, benefit, incentive and compensation plans, trusts and provisions for any or all of its directors, officers and employees, and for any or all of the directors, officers and employees of its subsidiaries;

      22

      (16) Provide insurance for its benefit on the life of any of its directors, officers or employees, or on the life of any stockholder for the purpose of acquiring at such stockholder's death shares of its stock owned by such stockholder.

      23

      (17) Renounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or 1 or more of its officers, directors or stockholders.

      24

      8 Del. C. 1953, § 122; 56 Del. Laws, c. 5057 Del. Laws, c. 148, § 364 Del. Laws, c. 112, § 365 Del. Laws, c. 127, § 271 Del. Laws, c. 339, § 772 Del. Laws, c. 343, § 3.;

    • 3.3 Theodora Holding Corporation v. Henderson

      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.

      1
      257 A.2d 398 (1969)
      2
      THEODORA HOLDING CORPORATION, Plaintiff,
      v.
      Girard B. HENDERSON, Bengt Ljunggren and Alexander Dawson, Inc., Defendants.
      3

      Court of Chancery of Delaware, New Castle.

      4
      September 18, 1969.
      5

      [399] Richard F. Corroon, of Potter, Anderson & Corroon, Wilmington, and Milton Kunen of Kaye, Scholer, Fierman, Hays & Handler, New York City, for plaintiff.

      6

      Robert H. Richards, Jr., of Richards, Layton & Finger, Wilmington, and John R. Hupper, of Cravath, Swaine & Moore, New York City, for defendant Girard B. Henderson.

      7

      W. Laird Stabler, Jr., Wilmington, for defendant Alexander Dawson, Inc.

      8
      MARVEL, Vice Chancellor:
      9

      Plaintiff, which was formed in May of 1967 by the defendant Girard B. Henderson's former wife, Theodora G. Henderson, is the holder of record of 11,000 of the 40,500 issued and outstanding shares of common stock of the defendant Alexander Dawson, Inc. It sues derivatively as well as on its own behalf for an accounting by the individual defendants for the losses allegedly sustained by the corporate defendant and the concomitant improper gains allegedly received by the individual defendants as a result of certain transactions of which plaintiff complains. However, the basic relief sought by plaintiff after trial is the appointment of a liquidating receiver for the corporate defendant, such application being based on the alleged wrongs suffered by the corporate defendant at the hands of the individual defendants, which wrongs, according to plaintiff, if permitted to continue, threaten the very existence of such corporation.

      10

      As of September 30, 1968, Theodora G. Henderson, in addition to her interest in [400] the plaintiff corporation, was the holder of the following shares of preferred stock of the corporate defendant, namely, 3,000 of first preferred, 12,000 of second preferred, and 22,000 of third preferred. She continues to receive dividends on such shares. Prior to plaintiff's formation in 1967 Mrs. Henderson had received dividends on both common and preferred shares of the corporate defendant until she transferred her 11,000 shares of the common stock of said company to plaintiff during the year 1967. Corporate dividends paid to Mrs. Henderson in recent years and now to plaintiff and Mrs. Henderson have increased substantially in recent years. As of December 3, 1968, dividends paid to plaintiff and Mrs. Henderson in that year totalled $385,240. In 1966, Mrs. Henderson had received dividends in the amount of $292,840, and in 1967, a year in which Alexander Dawson, Inc., made a controversial charitable contribution having a value of $528,000, the combined dividends of plaintiff and Mrs. Henderson totalled $286,240.

      11

      In January of 1955, the defendant Girard B. Henderson and his then wife, Theodora G. Henderson, had entered into a separation agreement looking towards a divorce, at which time Mrs. Henderson's dividends from the corporate defendant totalled approximately $50,000 per annum. Under the terms of such agreement Mrs. Henderson acknowledged that she had received from her then husband the shares of common stock of Alexander Dawson, Inc., here in issue as well as a number of shares of preferred stock of such corporation. Upon plaintiff's organization, it became the owner of Mrs. Henderson's 11,000 shares of common stock[1] on May 3, 1967. As of April 30, 1967, the shares of Alexander Dawson, Inc., to be turned over to the plaintiff corporation had a fair market value of $15,675,000 and an underlying net asset value of $28,996,000. Mrs. Henderson has since placed certain Dawson shares in trust for her own benefit and that of her two daughters and their issue.

      12

      The individual defendant Henderson by reason of the extent of his combined majority holdings of common and preferred stock of Alexander Dawson, Inc., each class of which has voting rights, exercises effective control over the affairs of such corporation, the net worth of the assets of which, at the time of the filing of this suit, was approximately $150,000,000.

      13

      It is claimed and the evidence supports such contention that on December 8, 1967, the defendant Girard B. Henderson, by virtue of his voting control over the affairs of Alexander Dawson, Inc., caused the board of directors of such corporation to be reduced in number from eight to three persons, namely himself, the defendant Bengt Ljunggren,[2] an employee of the corporate defendant, and Mr. Henderson's daughter, Theodora H. Ives. It is alleged that thereafter the defendant Girard B. Henderson (over the objection of the director, Mrs. Ives) caused the board and the majority of the voting stock of Alexander [401] Dawson, Inc., improperly to contribute stock held by it in the approximate value of $550,000 to the Alexander Dawson Foundation, a charitable trust, the affairs of which were then controlled and continue to be controlled by Mr. Henderson. Another claim asserted by plaintiff is to the effect that in November or December of 1967, the defendant Henderson wrongfully transferred assets of Alexander Dawson, Inc., consisting of some $14,000,000 in cash, to accounts in Switzerland, where a portion of said moneys was converted or sought to be converted into silver bullion and Swiss francs at a cost to the corporate defendant of more than $2,500,000. It is also claimed that on November 10, 1958, the defendant improperly caused the board of the corporate defendant to acquire rights to a membership on the New York Stock Exchange for said Henderson's personal use, and that said membership having been thereafter sold on January 22, 1968, at a net profit of $330,000, such profit was thereupon appropriated by Mr. Henderson. Plaintiff argues that the transaction complained of occurred in 1968 when the Stock Exchange seat, allegedly the property of the corporation, was sold and the profit pocketed by Mr. Henderson. However, as noted earlier, I am of the opinion that a decision as to the precise time at which this transaction occurred is not required because Mrs. Henderson's direct interest in the defendant corporation as well as her indirect interest therein through the plaintiff corporation constitute compliance with the requirements of 8 Del.C. § 327, and Rule 23.1. It is further claimed that in March 1968 the defendant Henderson caused some $1,400,000 of the corporate defendant's assets to be invested in an airplane servicing and mechanics training project known as Kensair Corporation and that said entire investment has been irretrievably lost. It is next alleged that in December, 1967, an additional sum of approximately $737,000.00 of corporate funds was lost by reason of Mr. Henderson's application of the corporate defendant's funds to a research project known as Credo, Inc. It is finally claimed that other sums in lesser amounts have been dissipated on other unprofitable projects; that Mr. Henderson has improperly paid to himself non-interest bearing corporate loans, and that on the basis of the many instances of gross mismanagement of Alexander Dawson, Inc. charged in the complaint that a liquidating receiver should be appointed. However, after trial, plaintiff now limits its application for relief to recovery of the profit gained by Mr. Henderson as a result of the sale of a New York Stock Exchange seat together with the commissions earned through the use of such seat, to an accounting for the alleged improper corporate gift of $528,000 to the Alexander Dawson Foundation in 1967, and finally to the appointment of a liquidating receiver on the ground of gross mismanagement and distortion of corporate purpose on the part of Mr. Henderson.

      14

      Alexander Dawson, Inc. has functioned as a personal holding company since 1935 when Mr. Henderson's mother exchanged a substantial number of shares held by her in a company which later became Avon Products, Inc., for all of the shares of her own company known as Alexander Dawson, Inc. Mr. Henderson and a brother later succeeded to their mother's interest in Alexander Dawson, Inc., the brother thereafter permitting his shares to be redeemed by the corporation. As noted earlier, Mr. Henderson, by reason of his combined holdings of common and preferred stock of the corporate defendant, is in clear control of the affairs of such corporation, which, for the most part, has been operated informally by Mr. Henderson with scant regard for the views of other board members. Some seventy-five percent of its assets consist of shares of Avon Products, Inc. stock, there having been some diversification, particularly in 1967, largely through the urging of officers of the United States Trust Company of New York who have served as advisors. Through exercise of such control, Mr. Henderson has, since 1957, [402] caused the corporate defendant to donate varying amounts to a charitable trust organized in that year by Mr. Henderson, namely the Alexander Dawson Foundation. In 1957, $10,610 was donated to such trust. From 1960 to 1966 (except for the year 1965) gifts were in the range of approximately $63,000 to $70,000 or higher in each year other than 1963 when $27,923 was donated. In 1966, however, a gift in the form of a large tract of land in Colorado, having a value of some $467,750, was made.[3] All of these gifts through 1966 were unanimously approved by all of the stockholders of Alexander Dawson, Inc., including Mrs. Theodora G. Henderson. The gift now under attack, namely one of the shares of stock of the corporate defendant having a value of some $528,000, was made to the Alexander Dawson Foundation in December of 1967. Such gift was first proposed by Mr. Henderson in April, 1967 before the board of the corporate defendant was reduced in number from eight to three. However, director reaction was thereafter confused, one of the directors, Mrs. Henderson's daughter, Theodora H. Ives, having expressed a desire that a corporate gift also be made to her own charitable corporation and that of her mother, Theodora G. Henderson. Accordingly, the matter was not pressed by Mr. Henderson until late December when the reduced board had taken over management of the corporate defendant. It is claimed and admitted that such gift had an effect on the equity and dividends of shareholders of the corporate defendant although the tax consequences of such gift clearly soften the apparent impact of such transaction. It is significant, however, as noted above, that the 1966 corporate gift, consisting of a ranch located in Colorado, had been approved by all of the directors and stockholders of the corporate defendant, and that the gift here under attack was apparently intended to be a step towards consummation of the purpose behind such grant of land, namely to provide a fund for the financing of a western camp for under privileged boys, particularly members of the George Junior Republic, a self-governing institution which has served the public interest for some seventy-five years at a school near Freeville, New York. Thus, in the summer of 1967, a small group of under privileged children had enjoyed the advantages of such camp in a test of the feasibility of such an institution. However, it is apparently Mr. Henderson's intention to continue and expand his interest in such camp where he maintains an underground home which he occupies at a $6,000 rental per annum, such house being occupied by him during some three months of the year. Plaintiff initially attacked such use. However, as in the case of charges made concerning the purchase of silver bullion and Swiss francs, as well as corporate investments in Credo, Inc., Kensair Corporation and other enterprises plaintiff seeks no accounting from the individual defendants concerning any of several specific transactions complained of other than those which charge Mr. Henderson with breaches of fiduciary duty in the purchase and sale of a seat on the New York Stock Exchange and the charitable gift of shares of stock of the corporate defendant having a value of $528,000 to the Alexander Dawson Foundation, although, to be sure, plaintiff asks that all actions undertaken by Mr. Henderson which demonstrate a course of irresponsible corporate conduct as well as misuse of corporate power and assets should be considered by the Court in reaching an ultimate decision on the question of whether or not a liquidating receiver for Alexander Dawson, Inc., should be appointed.

      15

      Turning to the controversy over the defendant Henderson's purchase of a seat on the New York Stock Exchange in November, 1958, a transaction which involved use of $120,000 of the corporate defendant's [403] funds, it is clear, first of all, that the seat in question was purchased in Mr. Henderson's name and that while corporate funds were used for the purchase Mr. Henderson entered the sums used in his cheque book as loaned or advanced. Plaintiff claims, however, that the seat in question was in fact purchased on behalf of Alexander Dawson, Inc., that Mr. Henderson was a mere nominee for the corporation, and that purported November 10, 1958 corporate minutes to such effect signed by Mr. Turnbull (Mr. Henderson's attorney) as secretary of the meeting, reflect what actually was contemplated, although the directors purportedly present at such meeting did not sign an attached waiver of notice.[4] And while Mr. Henderson concedes that the original plan was to have the seat to be purchased held by him merely as nominee of the corporation, he testified that he had learned from his broker prior to his appearance before a subcommittee on admissions of the New York Stock Exchange on November 12, 1958, that the Board of Governors of the Exchange is not authorized to approve a corporation as an Exchange member unless, inter alia, the primary purpose of such corporation in becoming a member is the transaction of business as a broker or dealer in securities, Constitution and Rules, New York Stock Exchange, Article IX, § 1407. Accordingly, Mr. Henderson contends that he thereupon concluded that he must buy the seat with his own means and so testified before the sub-committee. However, he overlooks the fact that on November 7 when he drew a personal cheque to the order of the treasurer of the Exchange in the amount of $23,400 in part payment for the seat in question, he had simultaneously drawn a corporate cheque to his order in the amount of $25,000 contrary to the terms of 8 Del.C. § 143 which then forbade loans to corporate officers. On November 10, he borrowed $85,000 more from the corporate defendant, and passed on said money to the Stock Exchange, using his personal account and not that of the corporate defendant. Significantly, however, such Stock Exchange seat was carried on the balance sheets of Alexander Dawson, Inc. as an asset or the like and not as a loan receivable from as early as July 31, 1961 until Mr. Henderson had repaid the money he had borrowed from the corporate defendant for application to the controversial purchase.

      16

      I conclude that in a situation in which the defendant Henderson was faced with the dilemma of violating a basic rule[5] of the New York Stock Exchange or a section of the Delaware Corporation Law, he chose to violate the statute by using improperly borrowed corporate funds for his own ultimate benefit (though, to be sure, he did not remit brokerage commissions to the corporation until the so-called loan had been paid off), and the question as to whether or not the November 10, 1958 board meeting actually took place thus becomes insignificant.

      17

      In short, I am of the opinion that in a situation in which Mr. Henderson as president and the majority stockholder of the corporate defendant had a duty not to place his own interest above that of the corporation and to refrain from enriching himself through the use of allegedly borrowed corporate funds, such defendant is not entitled to the protection of the business judgment rule. Gottlieb v. McKee, 34 Del.Ch. 537, 107 A.2d 240. Compare Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A. [404] 2d 503. Accordingly, such defendant must account to the corporate defendant for any profits made by him in the sale of the Stock Exchange seat here in issue as well as for the receipt of any brokerage commissions not already remitted by him to the corporation.

      18

      The next matter to be considered is the propriety of the December 1967 gift made by Alexander Dawson, Inc. to the Alexander Dawson Foundation of shares of stock of the corporate defendant having a value in excess of $525,000, an amount within the limits of the provisions of the federal tax law having to do with deductible corporate gifts, Internal Revenue Code of 1954 §§ 170(b) (2), 545(b) (2).

      19

      Title 8 Del.C. § 122 provides as follows:

      20
      "Every corporation created under this chapter shall have power to —
      21
      * * * * * *
      22
      (9) Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof."
      23

      There is no doubt but that the Alexander Dawson Foundation is recognized as a legitimate charitable trust by the Department of Internal Revenue. It is also clear that it is authorized to operate exclusively in the fields of "* * * religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals * * *". Furthermore, contemporary courts recognize that unless corporations carry an increasing share of the burden of supporting charitable and educational causes that the business advantages now reposed in corporations by law may well prove to be unacceptable to the representatives of an aroused public. The recognized obligation of corporations towards philanthropic, educational and artistic causes is reflected in the statutory law of all of the states, other than the states of Arizona and Idaho.

      24

      In A. P. Smith Mfg. Co. v. Barlow, 13 N.J. 145, 98 A.2d 681, 39 A.L.R.2d 1179, appeal dismissed, 346 U.S. 861, 74 S.Ct. 107, 98 L.Ed. 373, a case in which the corporate donor had been organized long before the adoption of a statute authorizing corporate gifts to charitable or educational institutions, the Supreme Court of New Jersey upheld a gift of $1500 by the plaintiff corporation to Princeton University, being of the opinion that the trend towards the transfer of wealth from private industrial entrepreneurs to corporate institutions, the increase of taxes on individual income, coupled with steadily increasing philanthropic needs, necessitate corporate giving for educational needs even were there no statute permitting such gifts, and this was held to be the case apart from the question of the reserved power of the state to amend corporate charters. The court also noted that the gift tended to bolster the free enterprise system and the general social climate in which plaintiff was nurtured. And while the court pointed out that there was no showing that the gift in question was made indiscriminately or to a pet charity in furtherance of personal rather than corporate ends, the actual holding of the opinion appears to be that a corporate charitable or educational gift to be valid must merely be within reasonable limits both as to amount and purpose. Compare Union Pacific R. R. v. Trustees, Inc., 8 Utah 2d 101, 329 P.2d 398.

      25

      The New Jersey statute in force and effect at the time of the Smith case gift provided that directors might cause their corporation to contribute for charitable and educational purposes and the like "* * such reasonable sum or sums as they may determine * * *" provided, however, that such contributions might not be made in situations where the proposed donee owned more than 10% of the voting stock of the donor and provided further that such gifts be limited to 5% of capital and surplus unless "* * * authorized by the stockholders."

      26

      [405] Whether or not these statutory limitations on corporate giving were the source of the limiting language of the New Jersey Supreme Court is not clear, the point being that the Delaware statute contains no such limiting language and therefor must, in my opinion, be construed to authorize any reasonable corporate gift of a charitable or educational nature. Significantly, Alexander Dawson, Inc. was incorporated in Delaware in 1958 after 8 Del.C. § 122(9) was cast in its present form, therefor no constitutional problem arising out of the effect on a stockholder's property rights of the State's reserved power to amend corporate charters is presented.

      27

      I conclude that the test to be applied in passing on the validity of a gift such as the one here in issue is that of reasonableness, a test in which the provisions of the Internal Revenue Code pertaining to charitable gifts by corporations furnish a helpful guide. The gift here under attack was made from gross income and had a value as of the time of giving of $528,000 in a year in which Alexander Dawson, Inc.'s total income was $19,144,229.06, or well within the federal tax deduction limitation of 5% of such income. The contribution under attack can be said to have "cost" all of the stockholders of Alexander Dawson, Inc. including plaintiff, less than $80,000, or some fifteen cents per dollar of contribution, taking into consideration the federal tax provisions applicable to holding companies as well as the provisions for compulsory distribution of dividends received by such a corporation. In addition, the gift, by reducing Alexander Dawson, Inc.'s reserve for unrealized capital gains taxes by some $130,000, increased the balance sheet net worth of stockholders of the corporate defendant by such amount. It is accordingly obvious, in my opinion, that the relatively small loss of immediate income otherwise payable to plaintiff and the corporate defendant's other stockholders, had it not been for the gift in question, is far out-weighed by the overall benefits flowing from the placing of such gift in channels where it serves to benefit those in need of philanthropic or educational support, thus providing justification for large private holdings, thereby benefiting plaintiff in the long run. Finally, the fact that the interests of the Alexander Dawson Foundation appear to be increasingly directed towards the rehabilitation and education of deprived but deserving young people is peculiarly appropriate in an age when a large segment of youth is alienated even from parents who are not entirely satisfied with our present social and economic system.

      28

      Plaintiff seeking to draw an analogy between the bizarre situation found to exist in the case of Tansey v. Oil Producing Royalties, Inc., 36 Del.Ch. 472, 133 A.2d 141, decided in 1957, to the facts at bar, prays finally that a liquidating receiver be appointed for the corporate defendant. In the cited case it appeared that the basic purpose of the company for which a receiver was sought was to purchase and hold oil royalties. The evidence before the Court was to the effect that while the corporation was in fact the holder of some $20,000 of oil royalties, it had, with one minor exception, purchased no royalty interests since 1930. In addition, the chief executive officer and majority stockholder of the defendant corporation testified that he had no intention of continuing the business of the company. Such individual defendant having been found by the Chancellor to be advanced in years and with "strange" ideas, the Court concluded that such officer's high handed practice of using the corporation as a vehicle for loans without regard to the views of other corporate officers and directors actually threatened the rights of the corporation's preferred stockholders. Accordingly, a liquidating receiver was appointed. In the case at bar, on the other hand the value of the assets of the corporate defendant has steadily increased largely through appreciation in value of its stock in Avon Products, Inc. between the [406] time Mr. Henderson became president and chairman of the board of Alexander Dawson, Inc. in the mid 1940's and December 31, 1967. As of the earlier date such stock had a value of $1,900,000, while the corporation's financial statements as of the latter date list the value[6] of such stock based on market quotations to be $115,593,772.50. And while Mr. Henderson has accepted recommendations for some diversification of investment for the corporate defendant, particularly in 1967, it has been his confidence in Avon and its retention in the corporate defendant's portfolio which has led to the enormous growth in the value of Alexander Dawson, Inc.'s assets in the last twenty years. Compare Hall v. John S. Isaacs & Sons Farms, Inc., 39 Del. Ch. 244, 163 A.2d 288. As stated in Warshaw v. Calhoun (Del.Sup.Ct.), 221 A.2d 487:

      29
      "It is plain, we think, that for a court to order a dissolution or liquidation of a solvent corporation, the proponents must show a failure of corporate purpose, a fraudulent disregard of the minority's rights, or some other fact which indicates an imminent danger of great loss resulting from fraudulent or absolute mismanagement. Berwald v. Mission Development Co., 40 Del.Ch. 509, 185 A.2d 480, and Graham-Newman Corp. v. Franklin County Distilling Co., 26 Del. Ch. 233, 27 A.2d 142. As we pointed out in Hall v. John S. Isaacs & Sons Farms, Inc., 39 Del.Ch. 244, 163 A.2d 288, the remedy of a minority stockholder in a corporation who is dissatisfied with its management or method of operation is to withdraw from the corporate enterprise by the sale of his stock when the minority stockholder's complaint is not based on any illegality."
      30

      Finally, none of the separate transactions sought to be relied on by plaintiff to demonstrate gross mismanagement or a threat to the corporate defendant's existence as a viable business entity, considered separately or cumulatively, not only fail to demonstrate the type of corporate perversion or self-dealing which warrant interference by a court of equity but rather have been shown to be reasonable corporate acts within the business judgment rule. Plaintiff's application for the appointment of a liquidating receiver for Alexander Dawson, Inc. must be denied.

      31

      On notice, an order in conformity with the holdings of this opinion may be presented.

      32

      [1] Because it did not become a holder of Alexander Dawson, Inc., stock until May of 1967, the individual defendants contend that plaintiff cannot complain of corporate transactions which occurred prior to that date, Title 8 Del.C. § 327, and Rule 23.1, Del.C.Ann. This procedural rule, however, was designed to militate against the wrong of buying into a derivative law suit and should not be allowed to bar an action by a stockholder with a long standing equitable interest in a corporation, Rosenthal v. Burry Biscuit Co., 30 Del.Ch. 296, 60 A.2d 106, and Maclary v. Pleasant Hills, Inc., 35 Del. Ch. 39, 109 A.2d 830. Had the harsh rule of Myer v. Myer, 271 App.Div. 465, 66 N.Y.S.2d 83, been invoked, I would have entertained a motion for the joinder of Theodora G. Henderson as a party plaintiff in light of her continuing ownership of preferred stock of Alexander Dawson, Inc.

      33

      [2] Mr. Ljunggren, whose forte appears to be that of public relations, joined Alexander Dawson, Inc., in 1966 at a salary of $12,000 per annum. He has since been rewarded with substantial raises and bonuses which have more than doubled his starting salary.

      34

      [3] Mr. Henderson also made a personal donation of $122,602 to the Foundation in 1966.

      35

      [4] Mr. Henderson when asked whether or not such meeting was ever held, answered: "Not to the best of my knowledge sir." The other two directors allegedly present, namely Mrs. Theodora G. Henderson and Dariel A. Henderson, did not testify at trial or by deposition.

      36

      [5] Mr. Henderson did not demonstrate candor before the subcommittee in that he not only failed to disclose that he had purportedly borrowed $120,000 from the corporate defendant for the purchase in question but also neglected to report the terms of such loan. See Constitution and Rules, New York Stock Exchange, § 2301.30 et seq.

      37

      [6] The cost of said shares, presumably as of 1935, is given as $43,970.31.

    • 3.4 DGCL Sec. 123 - Ownership of securities

      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.

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4 5 6

      Any corporation organized under the laws of this State may guarantee, purchase, take, receive, subscribe for or otherwise acquire; own, hold, use or otherwise employ; sell, lease, exchange, transfer or otherwise dispose of; mortgage, lend, pledge or otherwise deal in and with, bonds and other obligations of, or shares or other securities or interests in, or issued by, any other domestic or foreign corporation, partnership, association or individual, or by any government or agency or instrumentality thereof. A corporation while owner of any such securities may exercise all the rights, powers and privileges of ownership, including the right to vote.

      7

      8 Del. C. 1953, § 123; 56 Del. Laws, c. 50.;

    • 3.5 Public Benefit Corporations

      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. 

      • 3.5.1 DGCL Sec. 361-368 - Public Benefit Corporations

        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.

        1

        BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE:

         

         

        2

        SUBCHAPTER XV

        3

        PUBLIC BENEFIT CORPORATIONS

        4

                        § 361.  Law applicable to public benefit corporations; how formed.

        5

        This subchapter applies to all public benefit corporations, as defined in § 362 of this title.  If a corporation elects to become a public benefit corporation under this subchapter in the manner prescribed in this subchapter, it shall be subject in all respects to the provisions of this chapter, except to the extent this subchapter imposes additional or different requirements, in which case such requirements shall apply.

        6

        § 362.  Public benefit corporation defined; contents of certificate of incorporation.

        7

        (a)           A public benefit corporation is a for-profit corporation organized under and subject to the requirements of this chapter that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.  To that end, a public benefit corporation shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.  In the certificate of incorporation, a public benefit corporation shall (i) identify within its statement of business or purpose pursuant to§ 102(a)(3) of this title one or more specific public benefits to be promoted by the corporation, and (ii) state within its heading that it is a public benefit corporation.

        8

        (b)           “Public benefit” means a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities  or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.  “Public benefit provisions” means the provisions of a certificate of incorporation contemplated by this subchapter.

        9

        (c)           The name of the public benefit corporation shall, without exception, contain the words “public benefit corporation”, or the abbreviation “P.B.C.”, or the designation “PBC”, which shall be deemed to satisfy the requirements of § 102(a)(l)(i) of this title.

        10

        § 363.  Certain amendments and mergers; votes required; appraisal rights.

        11

        (a)           Notwithstanding any other provisions of this chapter, a corporation that is not a public benefit corporation, may not, without the approval of ninety percent of the outstanding shares of each class of the stock of the corporation of which there are outstanding shares, whether voting or non-voting, (i) amend its certificate of incorporation to include a provision authorized by § 362(a)(i) of this title or (ii) merge or consolidate with or into another entity if, as a result of such merger or consolidation, the shares in such corporation would become, or be converted into or exchanged for the right to receive, shares or other equity interests in a domestic or foreign public benefit corporation or similar entity.  The restrictions of this § 363 shall not apply prior to the time that the corporation  has received payment for any of its capital stock, or in the case of a nonstock corporation, prior to the time that it has members.

        12

                        (b)           Any stockholder of a corporation that is not a public benefit corporation that holds shares of stock of such corporation immediately prior to the effective time of (1) an amendment to the corporation’s certificate of incorporation to include a provision authorized by § 362(a)(i) of this title, or (2) a merger or consolidation  that would result in the conversion of the corporation’s stock into or exchange of the corporation’s stock for the right to receive shares or other equity interests in a domestic or foreign public benefit corporation or similar entity, and has neither voted in favor of such amendment or such merger or consolidation nor consented thereto in writing pursuant to § 228 of this title, shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock.

        13

                        (c)           Notwithstanding any other provisions of this chapter, a corporation that is a public benefit corporation may not, without the approval of two-thirds of the outstanding shares of each class of the stock of the corporation of which there are outstanding shares, whether voting or non-voting, (i) amend its certificate of incorporation to delete or amend a provision authorized by § 362(a)(i) or § 366(c) of this title or (ii) merge or consolidate with or into another entity if, as a result of such merger or consolidation, the shares in such corporation would become, or be converted into or exchanged for the right to receive, shares or other equity interests in a domestic or foreign corporation that is not a public benefit corporation or similar entity and the certificate of incorporation (or similar  governing instrument) of which does not contain the identical provisions identifying the public benefit or public benefits pursuant to § 362(a) or imposing requirements pursuant to § 366(c) of this title.

        14

                        (d)           Notwithstanding the foregoing, a nonprofit nonstock corporation may not be a constituent corporation to any merger or consolidation governed by this section.

        15

                        § 364.  Stock certificates; notices regarding uncertificated stock.

        16

                        Any stock certificate issued by a public benefit corporation shall note conspicuously that the corporation is a public benefit corporation formed pursuant to this subchapter.  Any notice sent by a public benefit corporation pursuant to § 151(f) of this title shall state conspicuously that the corporation is a public benefit corporation formed pursuant to this subchapter.

        17

                        § 365.  Duties of directors.

        18

                        (a)           The board of directors shall manage or direct the business and affairs of the public benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.

        19

                        (b)           A director of a public benefit corporation shall not, by virtue of the public benefit provisions or § 362(a) of this title, have any duty to any person on account of any interest of such person in the public benefit or public benefits identified in the certificate of incorporation or on account of any interest materially affected by the corporation’s conduct and, with respect to a decision implicating the balance requirement in subsection (a) of this section, will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.

        20

                        (c)           The certificate of incorporation of a public benefit corporation may include a provision that any disinterested failure to satisfy this section shall not, for the purposes of § 102(b)(7) or § 145 of this title, constitute an act or omission not in good faith, or a breach of the duty of loyalty.

        21

                        § 366. Periodic statements and third party certification.

        22

                        (a)           A public benefit corporation shall include in every notice of a meeting of stockholders a statement to the effect that it is a public benefit corporation formed pursuant to this subchapter.

        23

                        (b)           A public benefit corporation shall no less than biennially provide its stockholders with a statement as to the corporation’s promotion of the public benefit or public benefits identified in the certificate of incorporation and of the best interests of those materially affected by the corporation’s conduct.  The statement shall include: (i) the objectives the board of directors has established to promote such public benefit or public benefits and interests; (ii) the standards the board of directors has adopted to measure the corporation’s progress in promoting such public benefit or public benefits and interests; (iii) objective factual information based on those standards regarding the corporation’s success in meeting the objectives for promoting such public benefit or public benefits and interests; and (iv) an assessment of the corporation’s success in meeting the objectives and promoting such public benefit or public benefits and interests.

        24

                        (c)           The certificate of incorporation or bylaws of a public benefit corporation may require that the corporation (i) provide the statement described in subsection (b) more frequently than biennially, (ii) make the statement described in subsection (b) available to the public, and/or (iii) use a third party standard in connection with and/or attain a periodic third party certification addressing the corporation’s promotion of the public benefit or public benefits identified in the certificate of incorporation and/or the best interests of those materially affected by the corporation’s conduct.

        25

                        § 367.  Derivative suits.

        26

                        Stockholders of a public benefit corporation owning individually or collectively, as of the date of instituting such derivative suit, at least two percent of the corporation’s outstanding shares or, in the case of a corporation with shares listed on a national securities exchange, the lesser of such percentage or shares of at least two million dollars in market value, may maintain a derivative lawsuit to enforce the requirements set forth in§ 365(a) of this title.

        27

                        § 368.  No effect on other corporations.

        28

                        This subchapter shall not affect a statute or rule of law that is applicable to a corporation that is not a public benefit corporation, except as provided in § 363 of this title.

    • 3.6 Formation Assignment

      Formation Assignment

      1. Draft an initial certificate of incorporation for a fictitious corporation. Your certificate must comply with all the relevant provisions of the Delaware code (including, but not necessarily limited to 101-103). You must make at least two 'customizations' to your initial certificate of incorporation. In addition, your corporation must have two classes of stock, each with different rights.
      2. Draft an initial certificate of incorporation for a fictitious public benefit corporation. Your certificate must comply with all the relevant provisions of the Delaware code (including, but not necessarily limited to 361-368). You must make at least two 'customizations' to your initial certificate of incorporation of your public benefit corporation. Your certificate for your public benefit corporation must specify a public benefit.
  • 4 Bylaws

    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. 

    • 4.1 DGCL Sec. 109 - Bylaws

      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. 

      1

      TITLE 8

      2

      Corporations

      3

      CHAPTER 1. GENERAL CORPORATION LAW

      4

      Subchapter I. Formation

      5 6

      (a) The original or other bylaws of a corporation may be adopted, amended or repealed by the incorporators, by the initial directors of a corporation other than a nonstock corporation or initial members of the governing body of a nonstock corporation if they were named in the certificate of incorporation, or, before a corporation other than a nonstock corporation has received any payment for any of its stock, by its board of directors. After a corporation other than a nonstock corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote. In the case of a nonstock corporation, the power to adopt, amend or repeal bylaws shall be in its members entitled to vote. Notwithstanding the foregoing, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its governing body. The fact that such power has been so conferred upon the directors or governing body, as the case may be, shall not divest the stockholders or members of the power, nor limit their power to adopt, amend or repeal bylaws.

      7

      (b) The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

      8

      8 Del. C. 1953, § 109; 56 Del. Laws, c. 5059 Del. Laws, c. 437, § 177 Del. Laws, c. 253, § 8.;

    • 4.2 Boilermakers Local 154 Retirement Fund v. Chevron Corporation

      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. 

      1
      BOILERMAKERS LOCAL 154 RETIREMENT FUND and KEY WEST POLICE & FIRE PENSION FUND, Plaintiffs,
      v.
      CHEVRON CORPORATION, SAMUEL H. ARMACOST, LINNET F. DEILY, ROBERT E. DENHAM, ROBERT J. EATON, CHUCK HAGEL, ENRIQUE HERNANDEZ, JR., FRANKLYN G. JENIFER, GEORGE L. KIRKLAND, SAM NUNN, DONALD B. RICE, KEVIN W. SHARER, CHARLES R. SHOEMATE, JOHN G. STUMPF, RONALD D. SUGAR, CARL WARE, and JOHN S. WATSON, Defendants.
      ICLUB INVESTMENT PARTNERSHIP, Plaintiff,
      v.
      FEDEX CORPORATION, JAMES L. BARKSDALE, JOHN A. EDWARDSON, J.R. HYDE, III, SHIRLEY A. JACKSON, STEVEN R. LORANGER, GARY W. LOVEMAN, SUSAN C. SCHWAB, FREDERICK W. SMITH, JOSHUA I. SMITH, DAVID P. STEINER, and PAUL S. WALSH, Defendants.
      2
      Civil Action Nos. 7220-CS, 7238-CS
      3

      Court of Chancery of Delaware.

      4
      Submitted: April 12, 2013.
      5
      Decided: June 25, 2013.
      6

      Michael Hanrahan, Esquire, Paul A. Fioravanti, Jr., Esquire, Tanya E. Pino, Esquire, Kevin H. Davenport, Esquire, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Marc A. Topaz, Esquire, Lee D. Rudy, Esquire, Eric L. Zagar, Esquire, Michael C. Wagner, Esquire, James H. Miller, Esquire, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Robert D. Klausner, Esquire, Stuart A. Kaufman, Esquire, KLAUSNER, KAUFMAN, JENSEN & LEVINSON, Plantation, Florida, Attorneys for Plaintiffs Boilermakers Local 154 Retirement Fund, Key West Police & Fire Pension Fund, and IClub Investment Partnership.

      7

      William B. Chandler III, Esquire, Tamika R. Montgomery, Esquire, Ryan A. McLeod, Esquire, Ian R. Liston, Esquire, WILSON SONSINI GOODRICH & ROSATI, P.C., Georgetown, Delaware; David J. Berger, Esquire, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for Defendants Chevron Corporation, Samuel H. Armacost, Linnet F. Deily, Robert E. Denham, Robert J. Eaton, Chuck Hagel, Enrique Hernandez, Jr., Franklyn G. Jenifer, George L. Kirkland, Sam Nunn, Donald B. Rice, Kevin W. Sharer, Charles B. Shoemate, John G. Stumpf, Ronald D. Sugar, Carl Ware, and John S. Watson.

      8

      A. Gilchrist Sparks, III, Esquire, Kenneth J. Nachbar, Esquire, Bradley D. Sorrels, Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Defendants FedEx Corporation, James L. Barksdale, John A. Edwardson, J.R. Hyde, III, Shirley A. Jackson, Steven R. Loranger, Gary W. Loveman, Susan C. Schwab, Frederick W. Smith, Joshua I. Smith, David P. Steiner, and Paul S. Walsh.

      9
      OPINION
      10
      STRINE, Chancellor.
      11
      I. Introduction
      12

      The board of Chevron, the oil and gas major, has adopted a bylaw providing that litigation relating to Chevron's internal affairs should be conducted in Delaware, the state where Chevron is incorporated and whose substantive law Chevron's stockholders know governs the corporation's internal affairs. The board of the logistics company FedEx, which is also incorporated in Delaware and whose internal affairs are also therefore governed by Delaware law, has adopted a similar bylaw providing that the forum for litigation related to FedEx's internal affairs should be the Delaware Court of Chancery. The boards of both companies have been empowered in their certificates of incorporation to adopt bylaws under 8 Del. C. § 109(a).[1]

      13

      The plaintiffs, stockholders in Chevron and FedEx, have sued the boards for adopting these "forum selection bylaws." The plaintiffs' complaints are nearly identical and were filed only a few days apart by clients of the same law firm. In Count I, the plaintiffs claim that the bylaws are statutorily invalid because they are beyond the board's authority under the Delaware General Corporation Law ("DGCL"). In Count IV, the plaintiffs allege that the bylaws are contractually invalid, and therefore cannot be enforced like other contractual forum selection clauses under the test adopted by the Supreme Court of the United States in The Bremen v. Zapata Offshore Co.,[2] because they were unilaterally adopted by the Chevron and FedEx boards using their power to make bylaws. The plaintiffs have attempted to prove their point by presenting to this court a number of hypothetical situations in which, they claim, the bylaws might operate inconsistently with law or unreasonably. The plaintiffs have also claimed that the boards of Chevron and FedEx breached their fiduciary duties in adopting the bylaws.

      14

      In this opinion, the court resolves the defendants' motion for judgment on the pleadings on the counts relating to the statutory and contractual validity of the bylaws. Because the two bylaws are similar, present common legal issues, and are the target of near-identical complaints, the court decided to address them together. This is efficient, and is also in the interests of the parties, because a decision on the legal validity of the bylaws under the DGCL will moot the plaintiffs' other challenges if the bylaws are found to be invalid. And, it also aids the administration of justice, because a foreign court that respects the internal affairs doctrine, as it must,[3] when faced with a motion to enforce the bylaws will consider, as a first order issue, whether the bylaws are valid under the "chartering jurisdiction's domestic law."[4] Furthermore, the plaintiffs' facial statutory invalidity claim and their related contention that, as a matter of law, the bylaws are not contractually enforceable, have cast a cloud over the defendants' bylaws and those of other corporations. A decision as to the basic legal questions presented by the plaintiffs' complaints will provide efficiency benefits to not only the defendants and their stockholders, but to other corporations and their investors.

      15

      For these reasons, the court consolidated the Chevron and FedEx cases to address the purely facial legal challenges to the statutory and contractual validity of the bylaws raised by Counts I and IV of the plaintiffs' complaints. The defendants filed a motion for judgment on the pleadings, seeking a dismissal of Counts I and IV, and this is the motion before the court today.

      16

      After considering the parties' contending arguments on Count I of the complaints, the court finds that the bylaws are valid under our statutory law. 8 Del. C. § 109(b) provides that the bylaws of a corporation "may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." The forum selection bylaws, which govern disputes related to the "internal affairs" of the corporations, easily meet these requirements.[5] The bylaws regulate the forum in which stockholders may bring suit, either directly or on behalf of the corporation in a derivative suit, to obtain redress for breaches of fiduciary duty by the board of directors and officers. The bylaws also regulate the forum in which stockholders may bring claims arising under the DGCL or other internal affairs claims. In other words, the bylaws only regulate suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine. Thus, the bylaws, by establishing these procedural rules for the operation of the corporation, plainly relate to the "business of the corporation[s]," the "conduct of [their] affairs," and regulate the "rights or powers of [their] stockholders." Because Delaware law, like federal law, respects and enforces forum selection clauses, the forum selection bylaws are also not inconsistent with the law.[6] For these reasons, the forum selection bylaws are not facially invalid as a matter of statutory law.

      17

      As to Count IV of the complaints, the court finds that the bylaws are valid and enforceable contractual forum selection clauses. As our Supreme Court has made clear, the bylaws of a Delaware corporation constitute part of a binding broader contract among the directors, officers, and stockholders formed within the statutory framework of the DGCL.[7] This contract is, by design, flexible and subject to change in the manner that the DGCL spells out and that investors know about when they purchase stock in a Delaware corporation. The DGCL allows the corporation, through the certificate of incorporation, to grant the directors the power to adopt and amend the bylaws unilaterally.[8]

      18

      The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew (i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board's authority to adopt binding bylaws consistent with 8 Del. C. § 109. For that reason, our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader DGCL, form part of a flexible contract between corporations and stockholders, in the sense that the certificate of incorporation may authorize the board to amend the bylaws' terms and that stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.[9]

      19

      The plaintiffs' argument to the contrary—that stockholders' rights may not be regulated by board-adopted bylaws—misunderstands the relationship between the corporation and stockholders established by the DGCL, and attempts to revive the outdated "vested rights" doctrine. As cases like Kidsco Inc. v. Dinsmore show, that doctrine is inconsistent with the fundamental structure of Delaware's corporate law.[10] Thus, a forum selection clause adopted by a board with the authority to adopt bylaws is valid and enforceable under Delaware law to the same extent as other contractual forum selection clauses. Therefore, this court will enforce the forum selection bylaws in the same way it enforces any other forum selection clause, in accordance with the principles set down by the United States Supreme Court in Bremen[11] and adopted explicitly by our Supreme Court in Ingres Corp. v. CA, Inc.[12]

      20

      In an attempt to defeat the defendants' motion, the plaintiffs have conjured up an array of purely hypothetical situations in which they say that the bylaws of Chevron and FedEx might operate unreasonably. As the court explains, it would be imprudent and inappropriate to address these hypotheticals in the absence of a genuine controversy with concrete facts. Delaware courts "typically decline to decide issues that may not have to be decided or that create hypothetical harm."[13] Under the settled authority of cases such as Frantz Manufacturing Co. v. EAC Industries[14] and Stroud v. Grace,[15] there is a presumption that bylaws are valid. By challenging the facial statutory and contractual validity of the forum selection bylaws, the plaintiffs took on the stringent task of showing that the bylaws cannot operate validly in any conceivable circumstance.[16] The plaintiffs cannot evade this burden by conjuring up imagined future situations where the bylaws might operate unreasonably, especially when they acknowledge that in most internal affairs cases the bylaws will not operate in an unreasonable manner.[17]

      21

      Nor does the adherence to the accepted standard of review in addressing facial invalidity claims work any unfairness. Under Bremen and its progeny, like our Supreme Court's recent Carlyle decision,[18] as-applied challenges to the reasonableness of a forum selection clause should be made by a real plaintiff whose real case is affected by the operation of the forum selection clause. If a plaintiff faces a motion to dismiss because it filed outside the forum identified in the forum selection clause, the plaintiff can argue under Bremen that enforcing the clause in the circumstances of that case would be unreasonable. In addition, if a plaintiff-stockholder believes that a board is breaching its fiduciary duties by applying a forum selection clause to obtain dismissal of an actual case filed outside the forum designated by the bylaws, it may sue at that time. But the plaintiffs here, who have no separate claims pending that are affected by the bylaws, may not avoid their obligation to show that the bylaws are invalid in all circumstances by imagining circumstances in which the bylaws might not operate in a situationally reasonable manner. Such circumstantial challenges are required to be made based on real-world circumstances by real parties, and are not a proper basis for the survival of the plaintiffs' claims that the bylaws are facially invalid under the DGCL.

      22

      Therefore, the defendants' motion for judgment on the pleadings on Counts I and IV is granted.

      23
      II. Background And Procedural Posture
      24
      A. The Chevron And FedEx Forum Selection Bylaws
      25

      Critical to the resolution of this motion is an understanding of who has the power to adopt, amend, and repeal the bylaws, and what subjects the bylaws may address under the DGCL. 8 Del. C. § 109(a) identifies who has the power to adopt, amend, and repeal the bylaws:

      26
      [T]he power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote . . . . Notwithstanding the foregoing, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors . . . . The fact that such power has been so conferred upon the directors . . . shall not divest the stockholders . . . of the power, nor limit their power to adopt, amend or repeal bylaws.
      27
      8 Del. C. § 109(b) states the subject matter the bylaws may address:
      28
      The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.
      29

      Both Chevron's and FedEx's certificates of incorporation conferred on the boards the power to adopt bylaws under 8 Del. C. § 109(a). Thus, all investors who bought stock in the corporations whose forum selection bylaws are at stake knew that (i) the DGCL allows for bylaws to address the subjects identified in 8 Del. C. § 109(b), (ii) the DGCL permits the certificate of incorporation to contain a provision allowing directors to adopt bylaws unilaterally, and (iii) the certificates of incorporation of Chevron and FedEx contained a provision conferring this power on the boards.

      30

      Acting consistent with the power conferred to the board in Chevron's certificate of incorporation, the board amended the bylaws and adopted a forum selection bylaw. Generally speaking, a forum selection bylaw is a provision in a corporation's bylaws that designates a forum as the exclusive venue for certain stockholder suits against the corporation, either as an actual or nominal defendant, and its directors and employees. On September 29, 2010, the board of Chevron, a Delaware corporation headquartered in California, adopted a forum selection bylaw that provided:

      31
      Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this [bylaw].[19]
      32

      Several months later, on March 14, 2011, the board of FedEx, a Delaware corporation headquartered in Tennessee, adopted a forum selection bylaw identical to Chevron's.[20] Like Chevron, FedEx's board had been authorized by the certificate of incorporation to adopt bylaws without a stockholder vote, and the FedEx board adopted the bylaw unilaterally.

      33

      Chevron's board amended its bylaw on March 28, 2012 to provide that suits could be filed in any state or federal court in Delaware with jurisdiction over the subject matter and the parties. The amended bylaw also provides that the bylaw would not apply unless the court in Delaware had personal jurisdiction over all the parties that were "indispensable" to the action.[21] The amended bylaw, with the changes in italics, states:

      34
      Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court's having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this [bylaw].[22]
      35

      In their briefing, the boards of Chevron and FedEx state that the forum selection bylaws are intended to cover four types of suit, all relating to internal corporate governance:

      36
      Derivative suits. The issue of whether a derivative plaintiff is qualified to sue on behalf of the corporation and whether that derivative plaintiff has or is excused from making demand on the board is a matter of corporate governance, because it goes to the very nature of who may speak for the corporation.
      37
      Fiduciary duty suits. The law of fiduciary duties regulates the relationships between directors, officers, the corporation, and its stockholders.
      38
      D.G.C.L. suits. The Delaware General Corporation Law provides the underpinning framework for all Delaware corporations. That statute goes to the core of how such corporations are governed.
      39
      Internal affairs suits. As the U.S. Supreme Court has explained, "internal affairs," in the context of corporate law, are those "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders."[23]
      40

      That is, the description of the forum selection bylaws by the Chevron and FedEx boards is consistent with what the plain language of the bylaws suggests: that these bylaws are not intended to regulate what suits may be brought against the corporations, only where internal governance suits may be brought.[24]

      41
      B. The Defendant Boards Have Identified Multiforum Litigation Over Single Corporate Transactions Or Decisions As The Reason Why They Adopted The Bylaws
      42

      The Chevron and FedEx boards say that they have adopted forum selection bylaws in response to corporations being subject to litigation over a single transaction or a board decision in more than one forum simultaneously, so-called "multiforum litigation."[25] The defendants' opening brief argues that the boards adopted the forum selection bylaws to address what they perceive to be the inefficient costs of defending against the same claim in multiple courts at one time.[26] The brief describes how, for jurisdictional purposes, a corporation is a citizen both of the state where it is incorporated and of the state where it has its principal place of business.[27] Because a corporation need not be, and frequently is not, headquartered in the state where it is incorporated, a corporation may be subject to personal jurisdiction as a defendant in a suit involving corporate governance matters in two states.[28] Therefore, any act that the corporation or its directors undertake is potentially subject to litigation in at least two states.[29] Furthermore, both state and federal courts may have jurisdiction over the claims against the corporation. The result is that any act that the corporation or its directors undertake may be challenged in various forums within those states simultaneously.[30] The boards of Chevron and FedEx argue that multiforum litigation, when it is brought by dispersed stockholders in different forums, directly or derivatively, to challenge a single corporate action, imposes high costs on the corporations and hurts investors by causing needless costs that are ultimately born by stockholders, and that these costs are not justified by rational benefits for stockholders from multiforum filings.[31]

      43

      Thus, the boards of Chevron and FedEx claim to have tried to minimize or eliminate the risk of what they view as wasteful duplicative litigation by adopting the forum selection bylaws.[32] Chevron and FedEx are not the only boards to have recently unilaterally adopted these clauses: in the last three years, over 250 publicly traded corporations have adopted such provisions.[33]

      44

      As the court next explains, neither the wisdom of the Chevron and FedEx boards in adopting the forum selection bylaws to address the prevalence of multiforum litigation, or in proceeding by way of a bylaw, rather than proposing an amendment to the certificate of incorporation, are proper matters for this court to address. Those questions are not relevant on this motion.[34]

      45
      C. The Plaintiffs Challenge The Forum Selection Bylaws
      46

      Within the course of three weeks in February 2012, a dozen complaints were filed in this court against Delaware corporations, including Chevron and FedEx, whose boards had adopted forum selection bylaws without stockholder votes.[35] As a threshold issue, these complaints, which were all substantively identical and filed by clients of the same accomplished law firm, alleged that the boards of the defendant corporations had no authority to adopt the bylaws, and sought a declaration that the bylaws were invalid and a breach of fiduciary duty. The complaints also brought a salmagundi of other claims, alleging hypothetical ways in which the forum selection bylaws could potentially be enforced in an unreasonable and unfair manner, and accusing the directors of breaching their fiduciary duties by adopting them.

      47

      Ten of the twelve defendant corporations repealed their bylaws, and the complaints against them were dismissed. Chevron and FedEx did not repeal their bylaws and answered the plaintiffs' complaints. The defendants then asked the court to hear a consolidated action on the facial validity of the forum selection bylaws, not only because the plaintiffs' lawsuits were chilling the adoption of such bylaws under the DGCL, but, most importantly, because the "fundamental question[s]" of statutory validity and contractual enforceability were "ripe for adjudication now[.]"[36] The plaintiffs wrote in response that they objected to the defendants' "attempt to truncate discovery and abruptly seek an advisory opinion on the theoretical permissibility of the director-adopted exclusive forum bylaws."[37]

      48

      Shortly after the receipt of those letters, the court held an office conference on how the case should proceed. The defendant corporations argued that the statutory validity and contractual enforceability of their forum selection bylaws—as challenged by Counts I and IV—were important legal questions that could be addressed by dealing with these counts on motion practice now. The defendants believed that an adjudication of those purely legal issues would benefit the stockholders of Delaware corporations, because the statutory validity and contractual enforceability of the companies' bylaws in actual, real-world situations involving their effect on substantive internal affairs litigation had been clouded by the present case. On the other hand, the plaintiffs' other counts, which involve their fiduciary duty claims and arguments about the ways in which the forum selection clauses could be inequitably adopted or applied in particular situations, could be determined after the core questions of facial statutory validity and contractual enforceability had been resolved. The defendants pointed out that, if they lose, the legal issues are settled against them, and if the bylaws are invalid, then the plaintiffs' other as-applied claims are moot. But, if the bylaws are statutorily and contractually valid and enforceable as a facial matter, then there would be a more concrete legal context for consideration of whether the plaintiffs' fiduciary duty and as-applied claims are meritorious or even, on account of the purely hypothetical nature of the latter arguments, justiciable.

      49

      The plaintiffs resisted this approach, arguing that their facial challenges in Counts I and IV should not be resolved until discovery was completed on all their other claims. But, because Chevron and FedEx had made persuasive arguments that addressing the facial challenges to the bylaws would avoid unnecessary costs or delay, especially given the doubt the plaintiffs themselves created about a corporation's statutory power to adopt forum selection bylaws at all,[38] the court consolidated their cases to resolve those common and narrow questions of law: (i) whether the forum selection bylaws are facially invalid under the DGCL (Count I); and (ii) whether the board-adopted forum selection bylaws are facially invalid as a matter of contract law (Count IV). For those reasons, a scheduling order was entered that specifically contemplated motion practice on the statutory and contractual validity issues common to both cases in Counts I and IV.[39]

      50

      But the plaintiffs have taken the position that the court cannot consolidate the cases to address purely legal issues, because, as they say, it is improper for this court to make "a determination of the validity of the [b]ylaw[s] in the abstract."[40] The court's power to consolidate cases to address purely legal issues is codified in Delaware Court of Chancery Rule 42(a), which provides that:

      51
      When actions involving a common question of law or fact are pending before the Court, it may order a joint hearing or trial of any or all the matters in issue in the actions; it may order all the actions consolidated; and it may make such orders concerning proceedings therein as may tend to avoid unnecessary costs or delay.
      52

      Under that rule, the court may consolidate any cases involving a "common question of law" to decide "any or all the matters." And, here, the order to consolidate these actions to address the ripe legal issues—the facial statutory and contractual validity and enforceability of the forum selection bylaws adopted by Chevron's and FedEx's board of directors under the DGCL—rests on that clear authority.[41]

      53

      Even more surprising still was that the plaintiffs also argued in their brief that the pleadings had not been closed yet, and for that reason alone, the court must stay its hand, and not rule on the purely legal issues presented by their own Counts I and IV.[42] The basis for the plaintiffs' claim was that they had filed a supplemental pleading (which this court had authorized it to do) in response to Chevron's amended bylaw.[43]

      54

      But the schedule that the court entered on this consolidated action specifically contemplated that the court would address the counts contesting the facial statutory validity and contractual enforceability of the forum selection bylaws in a consolidated action, and as part and parcel of that decision, permitted the plaintiffs to file supplemental pleadings in the Chevron case that Chevron did not have to answer until this consolidated action was resolved, because the supplement would only raise certain additional counts not related to facial statutory or contractual invalidity.[44] That order was consistent with the court's finding that it would be efficient to resolve the legal questions first, given that it could moot other claims in both cases and even the new ones raised by the supplemental pleadings in the Chevron case. By order, a briefing schedule was put in place for the resolution of this motion, which addresses only Counts I and IV of the plaintiffs' complaints, for which the pleadings are closed.[45] These counts allege that the bylaws are statutorily invalid because they are beyond the board's authority under the DGCL, and that board-adopted forum selection bylaws are contractually invalid and therefore not enforceable.[46] The plaintiffs' claims that the boards breached their fiduciary duties in adopting the bylaws have been stayed.[47] The plaintiffs understood this, and their argument in their brief, that this motion addressing their counts relating to purely legal, facial challenges to the forum selection bylaws cannot be considered until their fact-intensive counts are addressed, contradicts the clear order of this court and has no support in the law. If this novel contention were adopted, plaintiffs could cast corporate action in doubt and impair the functioning of a corporation, while not allowing a corporation to clear up the doubt by means of traditional motion practice often used to resolve purely legal questions in a timely manner. Rather, the corporation would not be able to get a ruling on the purely legal challenge of facial validity until the court addressed all the more fact-laden counts in the complaint. Our law does not require that approach. Rather, "[f]acial challenges to the legality of provisions in corporate instruments are regularly resolved by this Court."[48]

      55
      III. The Standard Of Review
      56

      The standard of review on this motion is important in framing this consolidated motion. The two sides approach this issue differently. The plaintiffs, for their part, simply recite the basic procedural standard, by noting that this court may only grant judgment on the pleadings if there are no material facts in dispute, and one party is entitled to judgment as a matter of law.[49] Thus, the plaintiffs say, "[t]he Court can grant Defendants' [motion] only if unambiguous and unmistakably clear language of the Bylaws renders Defendants' constructions the only reasonable interpretation."[50] The plaintiffs then devote much of their complaints and briefing to arguing that the bylaws are ambiguous, because, they say, the forum selection bylaws could be applied in different ways in different factual situations.[51]

      57

      But, the plaintiffs ignore the nature of this motion, and the counts of their own complaints to which the defendants' motion is directed. This motion concerns Count I, in which the plaintiffs alleged that "the bylaw[s are] invalid because [they are] beyond the authority granted in 8 Del. C. § 109(b)," and Count IV, in which the plaintiffs claim that "the bylaw[s are] not [] valid and enforceable forum selection provision[s]."[52] Thus, this motion is only concerned with the facial statutory and contractual validity of the bylaws, and the motion is expressly not concerned with how the bylaws might be applied in any future, real-world situation. The plaintiffs' proposed standard, by contrast, is based on a case in which this court resolved an actual, live controversy over whether a bylaw could be applied to the real human events underlying that case.[53]

      58

      The defendants correctly point out this error in the plaintiffs' approach. As our Supreme Court held in the Frantz Manufacturing case, "[t]he bylaws of a corporation are presumed to be valid, and the courts will construe the bylaws in a manner consistent with the law rather than strike down the bylaws."[54] Thus, the plaintiffs' burden on this motion challenging the facial statutory and contractual validity of the bylaws is a difficult one: they must show that the bylaws cannot operate lawfully or equitably under any circumstances.[55] So, the plaintiffs must show that the bylaws do not address proper subject matters of bylaws as defined by the DGCL in 8 Del. C. § 109(b), and can never operate consistently with law.[56] The plaintiffs voluntarily assumed this burden by making a facial validity challenge,[57] and cannot satisfy it by pointing to some future hypothetical application of the bylaws that might be impermissible.[58]

      59

      The answer to the possibility that a statutorily and contractually valid bylaw may operate inequitably in a particular scenario is for the party facing a concrete situation to challenge the case-specific application of the bylaw, as in the landmark case of Schnell v. Chris-Craft Industries.[59] The settled approach of our law regarding bylaws is that courts should endeavor to enforce them to the extent that it is possible to do so without violating anyone's legal or equitable rights.[60] This is also consistent with the doctrine laid down by the U.S. Supreme Court decision in Bremen and its progeny, which requires courts to give as much effect as is possible to forum selection clauses and only deny enforcement of them to the limited extent necessary to avoid some fundamentally inequitable result or a result contrary to positive law.[61] Thus, a plaintiff can challenge the real-world enforcement of a forum selection bylaw. But that review happens when there is a genuine, extant controversy in which the forum selection bylaw is being applied. Under our Supreme Court's precedent in Stroud and Frantz, which this court must follow, the appropriate question now is simply whether the bylaws are valid under the DGCL, and whether they form facially valid contracts between the stockholders, the directors and officers, and the corporation.[62]

      60

      The court turns to these questions now.

      61
      IV. Legal Analysis
      62
      A. The Board-Adopted Forum Selection Bylaws Are Statutorily Valid
      63

      Given this procedural context, the court structures its analysis to mirror the two facial claims of invalidity as they have been presented in the complaints. First, the court looks at Count I's challenge that the "bylaw[s are] invalid because [they are] beyond the authority granted in 8 Del. C. § 109(b)."[63] As to that claim, the court must determine whether the adoption of the forum selection bylaws was beyond the board's authority in the sense that they do not address a proper subject matter under 8 Del. C. § 109(b), which provides that:

      64
      The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.
      65

      Thus, the court must decide if the bylaws are facially invalid under the DGCL because they do not relate to the business of the corporations, the conduct of their affairs, or the rights of the stockholders.

      66

      After first making that determination, the court then addresses Count IV's challenge that "the bylaw[s are] not a valid and enforceable forum selection provision."[64] That is, even if forum selection bylaws regulate proper subject matter under 8 Del. C. § 109(b), the plaintiffs allege that forum selection bylaws are contractually invalid because they have been unilaterally adopted by the board.[65]

      67
      1. The Forum Selection Bylaws Regulate A Proper Subject Matter Under 8 Del. C. § 109(b)
      68

      Having challenged whether the bylaws are authorized by 8 Del. C. § 109(b), the plaintiffs have to confront the broad subjects that § 109(b) permits bylaws to address. The DGCL provides that bylaws may address any subject, "not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees."[66] The most important consideration for a court in interpreting a statute is the words the General Assembly used in writing it.[67] As a matter of easy linguistics, the forum selection bylaws address the "rights" of the stockholders, because they regulate where stockholders can exercise their right to bring certain internal affairs claims against the corporation and its directors and officers.[68] They also plainly relate to the conduct of the corporation by channeling internal affairs cases into the courts of the state of incorporation, providing for the opportunity to have internal affairs cases resolved authoritatively by our Supreme Court if any party wishes to take an appeal.[69] That is, because the forum selection bylaws address internal affairs claims, the subject matter of the actions the bylaws govern relates quintessentially to "the corporation's business, the conduct of its affairs, and the rights of its stockholders [qua stockholders]."

      69

      Perhaps recognizing the weakness of any argument that the forum selection bylaws fall outside the plain language of 8 Del. C. § 109(b), the plaintiffs try to argue that judicial gloss put on the language of the statute renders the bylaws facially invalid.[70] The plaintiffs contend that the bylaws do not regulate permissible subject matters under 8 Del. C. § 109(b), because they attempt to regulate an "external" matter, as opposed to, an "internal" matter of corporate governance.[71] The plaintiffs attempt to support this argument with a claim that traditionally there have only been three appropriate subject matters of bylaws: stockholder meetings, the board of directors and its committees, and officerships.[72]

      70

      But even if one assumes that judicial statements could limit the plain statutory words in the way the plaintiffs claim (which is dubious), the judicial decisions do not aid the plaintiffs. The plaintiffs take a cramped view of the proper subject matter of bylaws.[73] The bylaws of Delaware corporations have a "procedural, process-oriented nature."[74] It is doubtless true that our courts have said that bylaws typically do not contain substantive mandates, but direct how the corporation, the board, and its stockholders may take certain actions.[75] 8 Del. C. § 109(b) has long been understood to allow the corporation to set "self-imposed rules and regulations [that are] deemed expedient for its convenient functioning."[76] The forum selection bylaws here fit this description. They are process-oriented, because they regulate where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain on behalf of herself or the corporation. The bylaws also clearly address cases of the kind that address "the business of the corporation, the conduct of its affairs, and . . . the rights or powers of its stockholders, directors, officers or employees," because they govern where internal affairs cases governed by state corporate law may be heard.[77] These are the kind of claims most central to the relationship between those who manage the corporation and the corporation's stockholders.

      71

      By contrast, the bylaws would be regulating external matters if the board adopted a bylaw that purported to bind a plaintiff, even a stockholder plaintiff, who sought to bring a tort claim against the company based on a personal injury she suffered that occurred on the company's premises or a contract claim based on a commercial contract with the corporation. The reason why those kinds of bylaws would be beyond the statutory language of 8 Del. C. §109(b) is obvious: the bylaws would not deal with the rights and powers of the plaintiff-stockholder as a stockholder.[78] As noted earlier, the defendants themselves read the forum selection bylaws in a natural way to cover only internal affairs claims brought by stockholders qua stockholders.

      72

      Nor is it novel for bylaws to regulate how stockholders may exercise their rights as stockholders. For example, an advance notice bylaw "requires stockholders wishing to make nominations or proposals at a corporation's annual meeting to give notice of their intention in advance of so doing."[79] Like such bylaws, which help organize what could otherwise be a chaotic stockholder meeting, the forum selection bylaws are designed to bring order to what the boards of Chevron and FedEx say they perceive to be a chaotic filing of duplicative and inefficient derivative and corporate suits against the directors and the corporations. The similar purpose of the advance notice bylaws and the forum selection bylaws reinforce that forum selection bylaws have a proper relationship to the business of the corporation and the conduct of its affairs under 8 Del. C. § 109(b).[80]

      73

      The plaintiffs' argument, then, reduces to the claim that the bylaws do not speak to a "traditional" subject matter, and should be ruled invalid for that reason alone. For starters, the factual premise of this argument is not convincing. The bylaws cannot fairly be argued to regulate a novel subject matter: the plaintiffs ignore that, in the analogous contexts of LLC agreements and stockholder agreements, the Supreme Court and this court have held that forum selection clauses are valid.[81] But in any case, the Supreme Court long ago rejected the position that board action should be invalidated or enjoined simply because it involves a novel use of statutory authority. In Moran v. Household International in 1985, the plaintiff argued that a corporation could not use its powers to issue rights to purchase shares of preferred stock in the form of a shareholder rights plan—a.k.a. poison pill—the sole purpose of which was to allow the board to defend against tender offers addressed solely to stockholders.[82] The Supreme Court rejected the appellants' argument that 8 Del. C. § 157 had never been used to authorize the issuance of rights for the purpose of defeating a hostile takeover.[83] Rather, echoing its recent iconic decision in Unocal, the court reiterated that "our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs. Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited."[84]

      74

      Just as the board of Household was permitted to adopt the pill to address a future tender offer that might threaten the corporation's best interests, so too do the boards of Chevron and FedEx have the statutory authority to adopt a bylaw to protect against what they claim is a threat to their corporations and stockholders, the potential for duplicative law suits in multiple jurisdictions over single events. As Moran makes clear, that a board's action might involve a new use of plain statutory authority does not make it invalid under our law, and the boards of Delaware corporations have the flexibility to respond to changing dynamics in ways that are authorized by our statutory law. Nor, in addressing this facial challenge, is it possible to conceive that choosing the most obviously reasonable forum—the state of incorporation, Delaware—so that internal affairs cases will be decided in the courts whose Supreme Court has the authoritative final say as to what the governing law means, somehow takes the forum selection bylaws outside of 8 Del C. § 109(b)'s broad authorizing language.[85]

      75

      Furthermore, the bylaws here are subject to the same, plus even more, controls on their misuse than the pill found valid in Moran. Like a board that has adopted a poison pill in case of some future threat and can redeem it when a tender offer poses no threat, the boards of the companies in this case have reserved the right in the bylaw itself—as is traditional for any party affected by a contractual forum provision—to waive the corporation's rights under the bylaw in a particular circumstance in order to meet their obligation to use their power only for proper corporate purposes.[86] And as with all exercises of fiduciary authority, the real-world application of a forum selection bylaw can be challenged as an inequitable breach of fiduciary duty.[87] But, as a distinguished scholar has noted, "[t]he presumption is not that the [bylaw] is invalid upon adoption because it might, under some undefined and hypothetical set of later-evolving circumstances, be improperly applied."[88]

      76

      And forum selection clauses have additional safeguards that poison pills do not have. For starters, unlike typical poison pills, board-adopted forum selection bylaws are subject, as will be discussed more later, to the most direct form of attack by stockholders who do not favor them: stockholders can simply repeal them by a majority vote.[89] In addition, because the corporation must raise the forum selection clause as a jurisdictional defense if it wishes to obtain dismissal of a case filed in a different forum outside of the state selected in the bylaws, the enforceability of the forum selection bylaws will be analyzed under the Bremen test in any case where an affected stockholder plaintiff resists compliance, as the court will explain in more depth later.[90] That is, the board must voluntarily submit the forum selection clause to the scrutiny of the courts if a plaintiff does not comply with it.

      77

      Therefore, the court concludes that forum selection bylaws are statutorily valid under Delaware law, and Count I of the plaintiffs' complaints is dismissed. The court now considers whether a forum selection bylaw is contractually invalid when adopted by the board unilaterally.

      78
      2. The Board-Adopted Bylaws Are Not Contractually Invalid As Forum Selection Clauses Because They Were Adopted Unilaterally By The Board
      79

      Despite the contractual nature of the stockholders' relationship with the corporation under our law, the plaintiffs argue, in Count IV of their complaints, that the forum selection bylaws by their nature are different and cannot be adopted by the board unilaterally. The plaintiffs' argument is grounded in the contention that a board-adopted forum selection bylaw cannot be a contractual forum selection clause because the stockholders do not vote in advance of its adoption to approve it.[91] The plaintiffs acknowledge that contractual forum selection clauses are "prima facie valid" under The Bremen v. Zapata Off-Shore Co. and Ingres Corp. v. CA, Inc., and that they are presumptively enforceable.[92] But, the plaintiffs say, the forum selection bylaws are contractually invalid in this case, because they were adopted by a board, rather than by Chevron's and FedEx's dispersed stockholders. The plaintiffs argue that this method of adopting a forum selection clause is invalid as a matter of contract law, because it does not require the assent of the stockholders who will be affected by it. Thus, in the plaintiffs' view, there are two types of bylaws: (i) contractually binding bylaws that are adopted by stockholders; (ii) non-contractually binding bylaws that are adopted by boards using their statutory authority conferred by the certificate of incorporation.[93]

      80

      By this artificial bifurcation, the plaintiffs misapprehend fundamental principles of Delaware corporate law. Our corporate law has long rejected the so-called "vested rights" doctrine.[94] That vested rights view, which the plaintiffs have adopted as their own, "asserts that boards cannot modify bylaws in a manner that arguably diminishes or divests pre-existing shareholder rights absent stockholder consent."[95] As then-Vice Chancellor, now Justice, Jacobs explained in the Kidsco case, under Delaware law, where a corporation's articles or bylaws "put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment."[96]

      81

      In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders.[97] Stockholders are on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects.[98] Such a change by the board is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own.[99] In other words, the Chevron and FedEx stockholders have assented to a contractual framework established by the DGCL and the certificates of incorporation that explicitly recognizes that stockholders will be bound by bylaws adopted unilaterally by their boards.[100] Under that clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws.[101] The plaintiffs' argument that stockholders must approve a forum selection bylaw for it to be contractually binding is an interpretation that contradicts the plain terms of the contractual framework chosen by stockholders who buy stock in Chevron and FedEx. Therefore, when stockholders have authorized a board to unilaterally adopt bylaws, it follows that the bylaws are not contractually invalid simply because the board-adopted bylaw lacks the contemporaneous assent of the stockholders.[102] Accordingly, the conclusion reached by the United States District Court for the Northern District of California in Galaviz v. Berg, a case on which the plaintiffs rely heavily—that board-adopted bylaws are not like other contracts because they lack the stockholders' assent— rests on a failure to appreciate the contractual framework established by the DGCL for Delaware corporations and their stockholders.[103]

      82

      Even so, the statutory regime provides protections for the stockholders, through the indefeasible right of the stockholders to adopt and amend bylaws themselves. "[B]y its terms Section 109(a) vests in the shareholders a power to adopt, amend or repeal bylaws that is legally sacrosanct, i.e., the power cannot be non-consensually eliminated or limited by anyone other than the legislature itself."[104] Thus, even though a board may, as is the case here, be granted authority to adopt bylaws, stockholders can check that authority by repealing board-adopted bylaws. And, of course, because the DGCL gives stockholders an annual opportunity to elect directors,[105] stockholders have a potent tool to discipline boards who refuse to accede to a stockholder vote repealing a forum selection clause.[106] Thus, a corporation's bylaws are part of an inherently flexible contract between the stockholders and the corporation under which the stockholders have powerful rights they can use to protect themselves if they do not want board-adopted forum selection bylaws to be part of the contract between themselves and the corporation.

      83

      And, as noted, precisely because forum selection bylaws are part of a larger contract between the corporation and its stockholders,[107] and because bylaws are interpreted using contractual principles,[108] the bylaws will also be subject to scrutiny under the principles for evaluating contractual forum selection clauses established by the Supreme Court of the United States in The Bremen v. Zapata Off-Shore Co., and adopted by our Supreme Court.[109] In Bremen, the Court held that forum selection clauses are valid provided that they are "unaffected by fraud, undue influence, or overweening bargaining power," and that the provisions "should be enforced unless enforcement is shown by the resisting party to be `unreasonable.'"[110] In Ingres, our Supreme Court explicitly adopted this ruling, and held not only that forum selection clauses are presumptively enforceable, but also that such clauses are subject to as-applied review under Bremen in real-world situations to ensure that they are not used "unreasonabl[y] and unjust[ly]."[111] The forum selection bylaws will therefore be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable.[112]

      84

      In fact, U.S. Supreme Court precedent reinforces the conclusion that forum selection bylaws are, as a facial matter of law, contractually binding. In Carnival Cruise Line v. Shute, the respondent, a cruise ship passenger from Washington State, was injured during the ship's travel between Los Angeles and Mexico.[113] Mrs. Shute tried suing the company in Washington.[114] But the fine print on the ticket contained a forum selection clause designating the courts of Florida as an exclusive forum for disputes.[115] The Supreme Court held that the forum selection provision, although it was not subject to negotiation and was printed on the ticket she received after she purchased the passage, was reasonable, and thus enforceable.[116]

      85

      Unlike cruise ship passengers, who have no mechanism by which to change their tickets' terms and conditions, stockholders retain the right to modify the corporation's bylaws.[117] That plaintiffs did not vote on the bylaws at the time of their adoption is not relevant to the question of whether the bylaws are valid or contractually binding under Delaware law. Like any other bylaw, which may be unilaterally adopted by the board and subsequently modified by stockholders, these bylaws are enforced according to their terms. Thus, they will be enforced just like any other forum selection clause.[118]

      86

      In sum, stockholders contractually assent to be bound by bylaws that are valid under the DGCL—that is an essential part of the contract agreed to when an investor buys stock in a Delaware corporation. Where, as here, the certificate of incorporation has conferred on the board the power to adopt bylaws, and the board has adopted a bylaw consistent with 8 Del. C. § 109(b), the stockholders have assented to that new bylaw being contractually binding. Thus, Count IV of the complaints cannot survive and the bylaws are contractually valid as a facial matter.

      87
      B. The Plaintiffs' Parade Of Horribles Are Not Facial Challenges To The Bylaws And Do Not Make The Bylaws Inconsistent With Law
      88

      The plaintiffs try to show that the forum selection bylaws are inconsistent with law and thus facially invalid by expending much effort on conjuring up hypothetical as-applied challenges in which a literal application of the bylaws might be unreasonable. For reasons the court has explained, these hypotheticals are not appropriately posed. Rather, if a plaintiff believes that a forum selection clause cannot be equitably enforced in a particular situation, the plaintiff may sue in her preferred forum and respond to the defendant's motion to dismiss for improper venue by arguing that, under Bremen, the forum selection clause should not be respected because its application would be unreasonable.[119] The plaintiff may also argue that, under Schnell, the forum selection clause should not be enforced because the bylaw was being used for improper purposes inconsistent with the directors' fiduciary duties. The plaintiffs argue that following regular order in this manner puts a potential plaintiff in the predicament of potentially breaching the bylaws and suffering if the court upholds the forum selection clause and dismisses her case, rendering the plaintiff liable for damages. But that predicament is the same as is faced by any party that seeks to bring a case outside the forum designated in an applicable forum selection clause. And if a potential plaintiff does not have confidence in the strength of her argument under Bremen that the forum selection clause does not reasonably apply to the case she seeks to bring, she can always choose to file the case in the forum designated in the bylaws.

      89

      Review under Bremen and its progeny is genuine, not toothless.[120] Indeed, the Bremen doctrine exists precisely to ensure that facially valid forum selection clauses are not used in an unreasonable manner in particular circumstances.[121] Our Supreme Court and this court have in the past applied an analysis similar to Bremen to hold that forum selection clauses are situationally unenforceable. For example, in the TransAmerican Natural Gas case, Justice Berger, then-Vice Chancellor, declined to issue an injunction to enforce a forum selection clause designating this court as the exclusive forum for a contract dispute, because this court did not, as a matter of positive Delaware law, have subject matter jurisdiction over the controversy.[122] The Supreme Court affirmed, holding that the litigation could proceed in the forum that the plaintiff in the non-Delaware action had chosen, which was a court of general jurisdiction.[123]

      90

      But, the plaintiffs seek to undermine Bremen by using a facial challenge as a way to get this court to address conjured-up scenarios. Under our law, our courts do not render advisory opinions about hypothetical situations that may not occur.[124] Rather, as in other contexts, the time for a plaintiff to make an as-applied challenge to the forum selection clauses is when the plaintiff wishes to, and does, file a lawsuit outside the chosen forum. At that time, a court will have a concrete factual situation against which to apply the Bremen test, or analyze, à la Schnell,[125] whether the directors' use of the bylaws is a breach of fiduciary duty.

      91

      The absence of any principled basis to complete the law school hypotheticals posed by the plaintiffs is also made clear by the reality that the plaintiffs concede, as they must, that in the main, the forum selection bylaws will work without any problem.[126] As noted earlier, in their opening brief, the defendants outlined the types of claims that the forum selection bylaws cover.[127] Consistent with the plain language of the bylaws and the plaintiffs' own description of the covered claims in their complaints,[128] the defendants' brief makes clear that the forum selection bylaws are addressed solely to internal affairs claims governed by state corporate law. In other words, the forum selection bylaws only regulate where a certain set of claims, relating to the internal affairs of the corporation and governed by the law of the state of incorporation, may be brought, not what claims.[129]

      92

      In other words, the plaintiffs cannot even reasonably contend that the bylaws are intended to do more than address where claims clearly involving the internal affairs of the corporation and thus governed by the law of the state of incorporation must be brought. And the plaintiffs fail to make any reasoned argument that the forum selection bylaws cannot operate sensibly as to the bulk of typical internal affairs cases, where the traditional defendants are the directors and top officers of the corporations, subject to jurisdiction under 10 Del. C. § 3114.[130]

      93

      Perhaps recognizing this weakness in their position, the plaintiffs conjure up situations where there might be a stray defendant or two who is not subject to personal jurisdiction in the state of incorporation, but may be susceptible to service elsewhere.[131] In that situation, they say, the bylaws might not operate reasonably. But, of course, the plaintiffs ignore the reality that the bylaws might operate reasonably even then. For example, there may be no forum anywhere in which all possible defendants would be subject to personal jurisdiction. Nor is it apparent that it would be unreasonable to require a plaintiff to bring an internal affairs claim in the courts of the state of incorporation against the numerous corporate defendants who will be indisputably subject to the state's personal jurisdiction, simply because a few other defendants have to be sued elsewhere. And in the case of the most common type of litigation where filing of internal affairs claims in corporate litigation occurs—those involving challenges to proposed mergers—the plaintiffs ignore the multiple tools that exist to allow the courts of the state of incorporation to hold parties accountable to stockholders claiming that their rights were violated. This includes the broad reach of 10 Del. C. § 3114, which now covers not only all directors, but, as mentioned, also key officers,[132] and other jurisdictional doctrines that usually make it possible for a plaintiff to hale all the key defendants before this state's courts.[133] Not only that, the plaintiffs ignore that corporations such as Chevron and FedEx that have adopted forum selection bylaws will have an incentive to encourage officers, employees and affiliates not covered by § 3114 to consent to jurisdiction in the forum identified by the bylaws, and can accomplish that easily by conditioning the provision of advancement and indemnification on assent to jurisdiction in Delaware over the types of claims covered by the bylaws, or by including consent-to-jurisdiction provisions in employment agreements.

      94

      Similarly, the plaintiffs' attempts to show that there might be situations when the forum selection bylaws would not operate reasonably because they could somehow preclude a plaintiff from bringing a claim that must be brought exclusively in a federal court also is inappropriate and unconvincing as a way to show that the forum selection bylaws are facially invalid. For one thing, these arguments do not even pertain to the Chevron bylaw, which was amended to allow a filing in the federal courts of the state of incorporation. For another thing, it bears repeating that in the main, and as the plaintiffs themselves concede,[134] the kind of cases in which claims covered by the forum selection clause predominate are already overwhelmingly likely to be resolved by a state, not federal, court. And as with the issue of personal jurisdiction, the plaintiffs ignore a number of factors that suggest that their hypothetical concern that the forum selection clause will operate unreasonably is overstated. For example, it is common for derivative actions to be filed in state court on behalf of corporations coincident to the filing of federal securities claims exclusively within the jurisdiction of the federal courts.[135] And with good reason. The corporation is usually a defendant in the federal action. Any stockholder seeking to bring a derivative suit on behalf of the corporation has to act in the best interest of the corporation and cannot therefore sue it for damages simultaneously.[136] In these situations, the derivative suits typically seek recompense from the directors on behalf of the corporation for any harm the corporation may suffer if it has to pay damages or incur other loss because the directors caused the corporation to breach the securities laws.[137] It is not at all evident that in these situations, the application of the bylaws would operate unreasonably. Indeed, the strength of Bremen and situational fiduciary duty review is that any such argument is presented in an actual case with concrete facts.

      95

      On their face, neither of the forum selection bylaws purports in any way to foreclose a plaintiff from exercising any statutory right of action created by the federal government. Rather, the forum selection bylaws plainly focus on claims governed by the internal affairs doctrine and thus the law of the state of incorporation. In the event that a plaintiff seeking to bring a claim within the exclusive jurisdiction of the federal courts is met with a motion to dismiss because of the forum selection clause, the plaintiff will have the most hospitable forum possible to address the motion by pressing an argument that the bylaw cannot operate to foreclose her suit—a federal court. For example, if a claim under SEC Rule 14a-9 was brought against FedEx and its board of directors in federal court and the defendants moved to dismiss because of the forum selection clause, they would have trouble for two reasons.[138] First, a claim by a stockholder under federal law for falsely soliciting proxies does not fit within any category of claim enumerated in FedEx's forum selection bylaw. Thus, FedEx's bylaw is consistent with what has been written about similar forum selection clauses addressing internal affairs cases: "[Forum selection] provisions do not purport to regulate a stockholder's ability to bring a securities fraud claim or any other claim that is not an intra-corporate matter."[139] Second, the plaintiff could argue that if the board took the position that the bylaw waived the stockholder's rights under the Securities Exchange Act, such a waiver would be inconsistent with the antiwaiver provisions of that Act, codified at 15 U.S.C. § 78cc.[140] But, the court declines to wade deeper into imagined situations involving multiple "ifs" because rulings on these situationally specific kind of issues should occur if and when the need for rulings is actually necessary.[141]

      96

      As a distinguished scholar has pointed out, there likely are pragmatic solutions to the imagined scenarios that the plaintiffs cite, which would both respect the forum selection bylaws' requirement that state law internal affairs claims be adjudicated in the courts of the state of incorporation, while preserving any substantive claims that must be brought in federal court.[142] But, for present purposes, the key is that forum selection bylaws, like other forum selection clauses, are not facially invalid because they might operate in a problematic way in some future situation. The situational review Bremen requires, and the analogous protections of fiduciary duty review under cases like Schnell, exist to deal with real-world concerns when they arise in real-world and extant disputes, rather than hypothetical and imagined future ones.

      97

      The wisdom of declining to opine on hypothetical situations that might or might not come to pass is evident. The waiver provision in the bylaws also counsels against the need to do that, as by that tool, the board, as the statutory instrumentality charged with advancing the corporation's best interests, is empowered to permit a plaintiff with a claim within the exclusive jurisdiction of a federal court, but which arguably falls within the reach of the bylaw's language, to proceed. And, the prospective plaintiff may also ask the board to waive the bylaw in a particular circumstance, and if the prospective plaintiff believes that the board's refusal to waive amounts to a breach of fiduciary duty, the plaintiff may sue for an injunction seeking the board to be required to waive the bylaw's application. But, under Delaware law, the presumption is not that the Chevron and FedEx directors will not use their waiver authority in good faith and for the best interests of the corporations and their stockholders; it is that they will.[143] In view of that reality, and the fact that Chevron's and FedEx's stated reasons for the bylaws have nothing to do with foreclosing anyone from exercising any substantive federal rights, but only with channeling internal affairs cases governed by state law to the state of incorporation's courts, there is no basis on a facial challenge to assume that the bylaws can never operate reasonably.[144]

      98

      But the main point remains the mundane but important one. As with other forum selection clauses, Bremen provides protection in the event that a plaintiff believes that the clause is operating in a situationally unreasonable or unlawful manner.[145] And as with the case of bylaws generally, the board's use of its powers under the bylaw is subject to challenge as inconsistent with its fiduciary duties in the event of an actual dispute.[146]

      99
      V. Conclusion
      100

      For these reasons, the court finds that the challenged bylaws are statutorily valid under 8 Del. C. § 109(b), and are contractually valid and enforceable as forum selection clauses. Judgment is entered for the defendants dismissing Counts I and IV of the plaintiffs' complaints against Chevron and FedEx, with prejudice. IT IS SO ORDERED.

      101

      [1] 8 Del. C. § 109(a) ("[A]ny corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors . . . .").

      102

      [2] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972).

      103

      [3] See CTS Corp. v. Dynamics Corp., 481 U.S. 69, 90 (1987) ("[A] corporation—except in the rarest situations—is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation."); Edgar v. MITE Corp., 457 U.S. 624, 645 (1982) ("The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands." (citation omitted)); see also Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 92 (1991) (holding that in a derivative suit "the scope of the demand requirement embodies the incorporating State's allocation of governing powers within the corporation"); Burks v. Lasker, 441 U.S. 471, 478 (1979) ("[T]he first place one must look to determine the powers of corporate directors is in the relevant State's corporation law." (citations omitted)).

      104

      [4] Joseph A. Grundfest & Kristen A. Savelle, The Brouhaha over Intra-Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis, 68 Bus. Law. 325, 330 (2013) [hereinafter Grundfest & Savelle, Forum Selection Provisions].

      105

      [5] See Edgar, 457 U.S. at 645; VantagePoint Venture P'rs 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005).

      106

      [6] See 8 Del. C. § 109(b) ("The bylaws may contain any provision, not inconsistent with law. . . ."); Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010) (holding that forum selection clauses are presumptively valid and enforceable under Delaware law).

      107

      [7] For two cases making this clear, eighty years apart, see Airgas, Inc. v. Air Products & Chemicals, Inc., 8 A.3d 1182, 1188 (Del. 2010), and Lawson v. Household Finance Corp., 152 A. 723, 726 (Del. 1930).

      108

      [8] 8 Del. C. § 109(a).

      109

      [9] See, e.g., Centaur P'rs, IV v. Nat'l Intergp., Inc., 582 A.2d 923, 928 (Del. 1990).

      110

      [10] 674 A.2d 483 (Del. Ch. 1995).

      111

      [11] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972).

      112

      [12] 8 A.3d 1143 (Del. 2010).

      113

      [13] 3 Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Officers 3498 (6th ed. 2009) (discussing suits over bylaws).

      114

      [14] 501 A.2d 401, 407 (Del. 1985).

      115

      [15] 606 A.2d 75, 96 (Del. 1992) (citing STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1137 n.2 (Del. 1991); Ala. By-Prods. Corp. v. Neal, 588 A.2d 255, 258 n.1 (Del. 1991)).

      116

      [16] E.g., Frantz, 501 A.2d at 407.

      117

      [17] Tr. of Oral Arg. 64:13-65:6.

      118

      [18] Nat'l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., ___ A.3d ___, 2013 WL 2325602 (Del. May 29, 2013).

      119

      [19] Chevron Compl. ¶ 21.

      120

      [20] FedEx Compl. ¶ 20.

      121

      [21] Pls.' Revised Supplement to Compl. ¶¶ 1-2 [hereinafter "Chevron Supp."] (quoting Chevron Corp., Current Report (Form 8-K) (Mar. 28, 2012)).

      122

      [22] Id.

      123

      [23] Defs.' Opening Br. 30-31 (quoting Edgar v. MITE Corp., 457 U.S. 624, 645 (1982)) (other citations omitted).

      124

      [24] See also Grundfest & Savelle, Forum Selection Provisions, at 370-73.

      125

      [25] Defs.' Opening Br. at 6-9.

      126

      [26] Id. at 9-22.

      127

      [27] Id.; see also 28 U.S.C. § 1332(c)(1) (defining corporate citizenship for the purposes of federal diversity jurisdiction).

      128

      [28] Defs.' Opening Br. 6-9.

      129

      [29] Id.

      130

      [30] Id.

      131

      [31] Id. at 9-22 (citing Frederick H. Alexander & Daniel D. Matthews, The Multi-Jurisdictional Stockholder Litigation Problem and the Forum Selection Solution, 26 Corporate Counsel Weekly 19 (May 11, 2011)); Grundfest & Savelle, Forum Selection Provisions; Edward B. Micheletti & Jenness E. Parker, Multi-Jurisdictional Litigation: Who Caused This Problem, and Can It Be Fixed?, 37 Del. J. Corp. L. 1 (2012); Mark Lebovitch et al., Chaos: A Proposal To Improve Organization and Coordination in Multi-Jurisdictional Merger-Related Litigation (Dec. 1, 2011), http://www.blbglaw.com/misc_files/MakingOrderoutofChaos).

      132

      [32] Defs.' Opening Br. 9 ("The detriments of multi-jurisdictional duplicative litigation are significant.").

      133

      [33] Id. at 21 (citing Grundfest & Savelle, Forum Selection Provisions, at 326).

      134

      [34] Cf. CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 240 (Del. 2008) ("[W]e express no view on whether the [b]ylaw as currently drafted, would create a better governance scheme from a policy standpoint.").

      135

      [35] Boilermakers Local 154 Ret. Fund v. Priceline.com, Inc., C.A. No. 7216-CS (Del. Ch. Feb. 6, 2012); Boilermakers Local 154 Ret. Fund v. Danaher Corp., C.A. No. 7218-CS (Del. Ch. Feb. 6, 2012); Boilermakers Local 154 Ret. Fund v. CurtissWright Corp., C.A. No. 7219-CS (Del. Ch. Feb. 6, 2012); Boilermakers Local 154 Ret. Fund v. Chevron Corp., C.A. No. 7220-CS (Del. Ch. Feb. 6, 2012); Sutton v. AutoNation, Inc., C.A. No. 7221-CS (Del. Ch. Feb. 6, 2012); Singh v. Navistar Int'l Corp., C.A. No. 7222-CS (Del. Ch. Feb. 6, 2012); Stead v. Franklin Res., Inc., C.A. No. 7223-CS (Del. Ch. Feb. 7, 2012); City of Sunrise Gen. Emps.' Pension Plan v. Super. Energy Servs., Inc., C.A. No. 7224-CS (Del. Ch. Feb. 7, 2012); Laborers' Local No. 1174 Pension Fund v. SPX Corp., C.A. No. 7225-CS (Del. Ch. Feb. 7, 2012); IClub Inv. P'ship v. FedEx Corp., C.A. No. 7238-CS (Del. Ch. Feb. 13, 2012); Neighbors v. Air Prods. & Chems., Inc., C.A. No. 7240-CS (Del. Ch. Feb. 13, 2012); Schellman v. Jack in the Box, Inc.,C.A. No. 7274-CS (Del. Ch. Feb. 23, 2012).

      136

      A separate derivative complaint against the board of directors of Chevron, relating to the board's enactment of the forum selection bylaw, was filed in the United States District Court for the Northern District of California on March 30, 2012. That action was stayed in favor of this Delaware litigation. Bushansky v. Armacost, 2012 WL 3276937 (N.D. Cal. Aug. 9, 2012).

      137

      [36] Letter to the Ct. from Counsel for Defs. (Oct. 9, 2012).

      138

      [37] Letter to the Ct. from Counsel for Pls. (Oct. 11, 2012).

      139

      [38] Compare Galaviz v. Berg, 763 F. Supp. 2d 1170, 1174-75 (N.D. Cal. 2011) (ruling that a board-adopted forum selection clause was unenforceable), with In re Revlon, Inc. S'holders Litig., 990 A.2d 940, 960 & n.8 (Del. Ch. 2010) (suggesting that corporations could adopt "charter provisions selecting an exclusive forum for intra-entity disputes," but properly noting that "[t]he issues implicated by an exclusive forum selection provision must await resolution in an appropriate case").

      140

      [39] See Order Regarding Limited Coordination & Scheduling (Nov. 19, 2012).

      141

      [40] Pls.' Br. in Opp'n 30 (citation omitted).

      142

      [41] The plaintiffs have also ignored the appropriate procedural mechanism, Court of Chancery Rule 59(f), to reargue the court's October ruling in which it consolidated the cases to address the facial validity claims. Having failed to avail themselves of the appropriate procedural mechanism, the plaintiffs have waived this procedural argument. See McDaniel v. DaimlerChrysler Corp., 860 A.2d 321, 323 (Del. 2004). For that reason alone, the plaintiffs' argument that the court cannot address the consolidated legal issues must fail.

      143

      [42] Pls.' Br. in Opp'n 29-30.

      144

      [43] See Order Regarding Limited Coordination & Scheduling (Nov. 19, 2012) ("Plaintiffs shall file their revised Supplement to the Complaint . . . . The Chevron Defendants will agree that the Revised Supplement shall become part of the Complaint[.]").

      145

      [44] Id. (providing a schedule for a motion for judgment on the pleadings and permitting the plaintiffs to file supplemental pleadings); see also Tr. of Office Conf. (Oct. 31, 2012) (granting the defendants' request to consolidate the cases to address the facial validity of the forum selection bylaws before proceeding with the other claims).

      146

      [45] Order Regarding Limited Coordination & Scheduling (Nov. 19, 2012).

      147

      [46] Chevron Compl. ¶¶ 48-56, FedEx Compl. ¶¶ 49-57 (Count I); Chevron Compl. ¶¶ 73-81, FedEx Compl. ¶¶ 72-80 (Count IV).

      148

      [47] See Tr. of Office Conf. 24-26, 44-45 (Oct. 31, 2012).

      149

      [48] Lions Gate Entm't Corp. v. Image Entm't Inc., 2006 WL 1668051, at *6-7 (Del. Ch. June 5, 2006).

      150

      [49] Pls.' Br. in Opp'n 29.

      151

      [50] Id. (citing JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 338 (Del. Ch. 2008); United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007)).

      152

      [51] E.g., Pls.' Br. in Opp'n 5-24, 32-36; Chevron Compl. ¶¶ 59-67, FedEx Compl. ¶¶ 58-66 (Count II) (the bylaws conflict with Delaware statutes); Chevron Compl. ¶¶ 68-72, FedEx Compl. ¶¶ 67-71 (Count III) (the bylaws improperly grant jurisdiction over all stockholders); Chevron Compl. ¶¶ 82-87, FedEx Compl. ¶¶ 81-86 (Count V) (the bylaws require claims to be brought where the court does not have jurisdiction over all defendants); Chevron Compl. ¶¶ 88-99, FedEx Compl. ¶¶ 87-98 (Count VI) (the bylaws impinge on jurisdiction of federal courts); Chevron Supp. ¶¶ 51-52 (Count IX) (the amended Chevron bylaw impinges on federal jurisdiction).

      153

      [52] Chevron Compl. ¶¶ 48-56, FedEx Compl. ¶¶ 49-57 (Count I); Chevron Compl. ¶¶ 73-81, FedEx Compl. ¶¶ 72-80 (Count IV) (capitalization omitted).

      154

      [53] See JANA, 954 A.2d at 344.

      155

      [54] Frantz, 501 A.2d at 407 (citation omitted); see also Hollinger Int'l, Inc. v. Black, 844 A.2d 1022, 1080-83 (Del. Ch. 2004) (distinguishing between the board's legal authority to adopt a bylaw and the board's equitable use of that authority), aff'd, 872 A.2d 559 (Del. 2005); R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations & Business Organizations § 1.10 [hereinafter Balotti & Finkelstein, Corporations] (explaining that courts attempt to interpret "by-laws in harmony" with the corporation's certificate of incorporation and positive law, and thus hold a bylaw to be invalid when a "conflict is unavoidable").

      156

      [55] Frantz, 501 A.2d at 407; Edward P. Welch et al., Folk on the Delaware General Corporation Law § 109.4 (2009) [hereinafter Welch et al., Folk on the DGCL] ("Bylaws are presumed to be valid. Courts will interpret a bylaw in a manner consistent with the law rather than striking it down. The rules of construction used to interpret statutes, contracts, and other written instruments apply to bylaws." (citations omitted)). Of course, often, claims about the facial invalidity of a provision come to the courts when a party challenges the legislature's power to enact a statute. Those principles are equally applicable here. See, e.g., Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 342-43 (Del. 1983) (noting that "the rules which are used to interpret statutes, contracts, and other written instruments are applicable when construing corporate charters and bylaws" (emphasis added)); Downs v. Jacobs, 272 A.2d 706, 707 (Del. 1970) ("Courts presume every legislative act constitutional and indulge every intendment in favor of validity."); State v. Hobson, 83 A.2d 846, 851 (Del. 1951) ("Even if the Delaware statute, read literally, were susceptible of the construction which defendant urges, it would be our duty to reject that construction, since we are required, as between two possible constructions, to adopt the one which will uphold its validity."); see also, e.g., R.M. v. V.H., 2006 WL 1389864, at *8 (Del. Fam. Ct. Jan. 19, 2006) ("A party may challenge a statute as unconstitutional on its face or as applied to a particular set of facts. A facial challenge is the most difficult to bring successfully because the challenger must establish that there is no set of circumstances under which the statute would be valid."); accord United States v. Salerno, 481 U.S. 739, 745 (1987) (describing a facial challenge as the "most difficult" challenge to succeed on because the statute must not operate lawfully in any circumstances).

      157

      [56] Stroud v. Grace, 606 A.2d 75, 79 (Del. 1992); Frantz, 501 A.2d at 407.

      158

      [57] Welch et al., Folk on the DGCL § 109.3.1 ("The party asserting that bylaws were not properly adopted bears the burden to prove it.").

      159

      [58] E.g., Stroud, 606 A.2d at 79 ("The validity of corporate action under [a bylaw] must await its actual use.").

      160

      [59] Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del. 1971); see also Moran v. Household Int'l, Inc., 500 A.2d 1346, 1357 (Del. 1985) (concluding that although the board had the power to adopt a poison pill, the "ultimate response" of the board to a takeover must be judged by the "[d]irectors' actions at that time"); accord Stroud, 606 A.2d at 96 ("It is not an overstatement to suggest that every valid by-law is always susceptible to potential misuse. Without a showing of abuse . . . we must . . . uphold the validity of [a bylaw].").

      161

      [60] Welch et al., Folk on the DGCL § 109.4; Balotti & Finkelstein, Corporations § 1.10.

      162

      [61] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972).

      163

      [62] The Frantz and Stroud approach is the traditional one. Although it differs from the approach taken by the Supreme Court in the 2008 CA case, the Supreme Court in that case cited Frantz and Stroud approvingly and as good law, stating that the novel posture of the case dictated the different standard of review. CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 238 (Del. 2008) ("Were this issue being presented in the course of litigation involving the application of the Bylaw to a specific set of facts, we would start with the presumption that the Bylaw is valid and, if possible, construe it in a manner consistent with the law. The factual context in which the Bylaw was challenged would inform our analysis, and we would `exercise caution [before] invalidating corporate acts based upon hypothetical injuries . . . .' (citing Frantz, 501 A.2d at 407, and quoting Stroud, 606 A.2d at 79)). The reason for this different approach may be intuited. In CA, the Supreme Court was operating under a novel constitutional amendment that gave it the authority to answer questions posed to it by the Securities and Exchange Commission on a limited paper record, without the full benefit of context that comes from traditional adversarial litigation. See 76 Del. Laws ch. 37, § 1 (2007) (amending Del. Const. art. IV, § 11(8)). The Supreme Court may have feared that by giving a federal regulatory body a flat indication that a bylaw was "valid" or not based on a record consisting of a long letter, it would create the false impression that bylaws of the kind at issue were immune from challenge in all circumstances. Thus, rather than risk such an overbroad implication, the court took a different approach, finding that in that unusual context the variance from the settled standard was the more modest approach. In the more traditional context here of a facial challenge to the validity of a bylaw, the more modest, restrained, and prudent approach is the traditional one under Frantz and Stroud. That approach involves judicial reticence to chill corporate freedom by condemning as invalid a bylaw that is consistent with the board's statutory and contractual authority, simply because it might be possible to imagine situations when the bylaw might operate unreasonably. By long-standing, settled law, such as-applied challenges are to be raised later, when real-world circumstances give rise to a genuine, concrete dispute requiring judicial resolution.

      164

      [63] Chevron Compl. ¶¶ 50-58, FedEx Compl. ¶¶ 49-57.

      165

      [64] Chevron Compl. ¶¶ 73-81, FedEx Compl. ¶¶ 72-80.

      166

      [65] Chevron Compl. ¶ 74; FedEx Compl. ¶ 73.

      167

      [66] 8 Del. C. § 109(b).

      168

      [67] E.g., New Cingular Wireless PCS v. Sussex Cty. Bd. of Adjustment, 65 A.3d 607, 611 (Del. 2013) ("It is axiomatic that a statute . . . is to be interpreted according to its plain and ordinary meaning." (citation omitted)); Scattered Corp. v. Chi. Stock Exch., Inc., 671 A.2d 874, 877 (Del. Ch. 1994) ("A determination of the General Assembly's intent must, where possible, be based on the language of the statute itself. In divining the legislative intent, statutory language, where possible, should be accorded its plain meaning." (citations omitted)).

      169

      [68] CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 236-37 (Del. 2008).

      170

      [69] See Grundfest & Savelle, Forum Selection Provisions, at 374.

      171

      [70] E.g., CA, Inc., 953 A.2d at 235 & n.15; Hollinger Int'l, Inc. v. Black, 844 A.2d 1022, 1078-79 & n.128 (Del. Ch. 2004), aff'd, 872 A.2d 559 (Del. 2005); Gow v. Consol. Coppermines Corp., 165 A. 136, 140 (Del. Ch. 1933).

      172

      [71] Pls.' Br. in Opp'n 39-40.

      173

      [72] Id. at 44.

      174

      [73] See, e.g., Hollinger, 844 A.2d at 1078 ("The DGCL is intentionally designed to provide directors and stockholders with flexible authority [to adopt bylaws], permitting great discretion for private ordering and adaptation. That capacious grant of power is policed in large part by the common law of equity, in the form of fiduciary duty principles."); Balotti & Finkelstein, Corporations § 1.10 ("By-laws that reasonably regulate broader [stockholder] rights may be valid, especially if courts follow the general rule of construction and attempt to harmonize the by-law regulation and the broader right." (citation omitted)).

      175

      [74] CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 236-37 (Del. 2008).

      176

      [75] Id.

      177

      [76] Gow v. Consol. Coppermines Corp., 165 A. 136, 140 (Del. Ch. 1933).

      178

      [77] 8 Del. C. § 109(b).

      179

      [78] See also Grundfest & Savelle, Forum Selection Provisions, at 369-70 ("[A]s much as contract rights can legitimately be regulated through forum selection provisions, it follows that stockholders' rights to pursue intra-corporate claims can also be regulated by [forum selection] provisions. To be sure, this conclusion would arguably not follow (or not hold as strongly) if the forum selection provision sought to regulate the right to pursue causes of action that were not intra-corporate in nature because then the provision would not be seeking to regulate the stockholder's rights as a stockholder and would be extended beyond the contract that defines and governs the stockholders' rights." (emphasis added)).

      180

      [79] JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 344 (Del. Ch. 2008) (citation omitted), aff'd, 947 A.2d 1120 (Del. 2008) (Table).

      181

      [80] The plaintiffs seek to bolster their argument that the forum selection bylaws go beyond the board's statutory authority under 8 Del. C. § 109(b) by claiming that the bylaws regulate not only the "rights and powers of [the] stockholders," as is permitted under the statutory text, but also the rights and powers of former stockholders. Chevron Compl. ¶ 51; FedEx Compl. ¶ 50. The plaintiffs cite the example of stockholders who are cashed out in a short-form merger, and, having been cashed out, sue the board for a breach of fiduciary duty. As with many of the plaintiffs' challenges to the bylaws, this is properly seen as an as-applied challenge, which should be addressed when the issue is actually ripe. But in any case, the plaintiffs do not cite any rule of statutory construction that justifies reading 8 Del. C. § 109(b) in the contorted fashion they propose. The only reason that so-called "former stockholders" can sue under 8 Del. C. § 253 is because they were stockholders at the time of the merger. In other words, it is not the case that a bylaw in effect at the time that a stockholder's internal affairs claim arose cannot bind that stockholder simply because the transaction she is challenging resulted in her no longer being a stockholder. That bylaw continues to bind her because her right to sue continues to be based on her status as a stockholder.

      182

      [81] Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286 (Del. 1999); Baker v. Impact Hldg., Inc., 2010 WL 1931032 (Del. Ch. May 13, 2010).

      183

      [82] Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del. 1985).

      184

      [83] Id. at 1351.

      185

      [84] Id. (quoting Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 957 (Del. 1985)).

      186

      [85] See Edgar v. MITE Corp., 457 U.S. 624, 645 (1982) ("The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders . . . .").

      187

      [86] Both bylaws begin: "Unless the Corporation consents in writing to the selection of an alternative forum . . . ." Chevron Supp. ¶ 1; FedEx Compl. ¶ 20.

      188

      [87] Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971).

      189

      [88] Grundfest & Savelle, Forum Selection Provisions, at 331.

      190

      [89] See 8 Del. C. § 109(a).

      191

      [90] See The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972); Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010); see also Grundfest & Savelle, Forum Selection Provisions, at 378 ("[F]orum selection bylaws are perhaps unique among all bylaws in that they can never be enforced by the corporation unless the corporation triggers prior judicial scrutiny designed to assure that the provision does not violate any legitimate stockholder right. This fact stands in sharp contrast to all other bylaw provisions that allow boards to act without first petitioning for judicial relief.").

      192

      [91] Pls.' Br. in Opp'n 49-50.

      193

      [92] Bremen, 407 U.S. at 10; Ingres, 8 A.3d 1143.

      194

      [93] Although the plaintiffs' argument suggests that a forum selection provision accomplished by a certificate amendment would be more legitimate in some normative sense because stockholders approved the amendment, the plaintiffs ignore that a certificate provision is harder for stockholders to reverse. See 8 Del. C. § 242(b)(1) (requiring a board resolution and stockholder vote for a proper amendment to the corporation's certificate of incorporation). By contrast, in the case of a board-adopted forum selection bylaw, the stockholders can act unilaterally to amend or repeal the provision. Id. § 109(a) ("After a corporation other than a nonstock corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote."). For present purposes, however, the issue is not whether someone might deem it more legitimate in some sense to proceed by an amendment to the certificate of incorporation rather than by a bylaw. That decision was for the Chevron and FedEx boards in the first instance, and the stockholders have multiple tools to hold the boards accountable if the stockholders disagree with it.

      195

      [94] See, e.g., Fed. United Corp. v. Havender, 11 A.2d 331, 335 (Del. 1940) (holding that preferred stockholders did not have a "vested" right to accrued dividends).

      196

      [95] Grundfest & Savelle, Forum Selection Provisions, at 376.

      197

      [96] Kidsco Inc. v. Dinsmore, 674 A.2d 483, 492 (Del. Ch. 1995) (emphasis added) (citing Roven v. Cotter, 547 A.2d 603, 608 (Del. Ch. 1988)); see also Willam Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 4176 (updated 2012) ("It is presumed that a person who becomes a shareholder in, or a member of, a corporation does so with knowledge and implied assent that its bylaws may be amended." (citations omitted)).

      198

      [97] Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010); Centaur P'rs, IV v. Nat'l Intergp., Inc., 582 A.2d 923, 928 (Del. 1990); Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 342-43 (Del. 1983); Lawson v. Household Fin. Corp., 152 A. 723, 726 (Del. 1930).

      199

      [98] Kidsco, 674 A.2d at 492-93.

      200

      [99] Stockholders likewise agree that a requisite majority of other stockholders may adopt bylaws with which they do not agree. A dissenting stockholder can no more object to the authority of a board to adopt a bylaw than it could object to the requisite majority of stockholders adopting a bylaw.

      201

      [100] Kidsco, 674 A.2d at 492-93 ("[T]his Court has held that where a corporation's by-laws put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment."); see also Roven, 547 A.2d at 608; accord Centaur P'rs, 582 A.2d at 928 ("Corporate charters and by-laws are contracts among the shareholders of a corporation . . . .").

      202

      [101] CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 231 (Del. 2008) (discussing the power of a board to adopt bylaws without stockholder assent under the contractual framework of the DGCL).

      203

      [102] Kidsco, 674 A.2d at 492-93; see also 8 Del. C. § 109(b).

      204

      [103] 763 F. Supp. 2d 1170, 1174 (N.D. Cal. 2011); see Grundfest & Savelle, Forum Selection Provisions, at 407 ("[I]f the Galaviz analysis stands then much of standard corporate law practice regarding the amendment of bylaws must fall, and much larger bodies of corporate law must be rewritten.").

      205

      [104] CA, Inc., 953 A.2d at 232.

      206

      [105] See 8 Del. C. § 211.

      207

      [106] E.g., MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1127 (Del. 2003) ("This Court has repeatedly stated that, if the stockholders are not satisfied with the management or actions of their elected representatives on the board of directors, the power of corporate democracy is available to the stockholders to replace the incumbent directors when they stand for re-election." (citations omitted)).

      208

      [107] E.g., Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010).

      209

      [108] E.g., Centaur P'rs, IV v. Nat'l Intergp., Inc., 582 A.2d 923, 928 (Del. 1990).

      210

      [109] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972); Nat'l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., ___ A.3d ___, 2013 WL 2325602, at *6 (Del. May 29, 2013) (applying the Bremen test); Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1146 (Del. 2010) (same).

      211

      [110] Bremen, 407 U.S. at 10 (citations omitted).

      212

      [111] Ingres, 8 A.3d at 1146 (internal quotation marks and citations omitted).

      213

      [112] Bremen, 407 U.S. at 15.

      214

      [113] Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 588 (1991).

      215

      [114] Id.

      216

      [115] Id. at 587-88.

      217

      [116] Id. at 594-95.

      218

      [117] Grundfest & Savelle, Forum Selection Provisions, at 407.

      219

      [118] See Nat'l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., ___ A.3d ___, 2013 WL 2325602, at *6 (Del. May 29, 2013).

      220

      [119] See The Bremen v. Zapata Offshore Co., 407 U.S. 1, 15 (1972).

      221

      [120] See, e.g., Doe 1 v. AOL, LLC, 552 F.3d 1077 (9th Cir. 2009) (holding that a forum selection clause was unenforceable, because it barred plaintiffs from bringing a consumer class action under California law); Cent. Nat'l-Gottesman, Inc. v. M.V. "Gertrude Oldendorff," 204 F. Supp. 2d 675 (S.D.N.Y. 2002) (holding that a forum selection clause requiring the plaintiff to litigate abroad was unenforceable because the plaintiff would be deprived of statutory remedies). See generally 14D Charles Alan Wright et al., Federal Practice & Procedure § 3803.1 n.5 (3d ed. updated 2013) (collecting federal cases where forum selection clauses were not enforced).

      222

      [121] Bremen, 407 U.S. at 17-18.

      223

      [122] El Paso Natural Gas Co. v. TransAm. Natural Gas Corp., 1994 WL 248195 (Del. Ch. May 31, 1994).

      224

      [123] El Paso Natural Gas Co. v. TransAm. Natural Gas Corp., 669 A.2d 36 (Del. 1995). For other cases in which the courts of this state have declined to enforce forum selection clauses, see Aveta, Inc. v. Colon, 942 A.2d 603, 607 n.7 (Del. Ch. 2008), in which the Court of Chancery held that a forum selection clause was unenforceable, applying a standard "probably tantamount to the federal [Bremen] standard"; and Brandywine Balloons, Inc. v. Custom Computer Service, Inc., 1989 WL 63968, at *4 (Del. Super. Ct. June 13, 1989), in which the Superior Court denied a motion to dismiss a suit under a forum selection clause, on the ground that enforcing the clause "would seriously impair the plaintiff's ability to pursue his cause of action" (citation and internal quotation marks omitted).

      225

      [124] See, e.g., Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 51 (Del. 1993) ("It is the nature of the judicial process that we decide only the case before us . . . ."); Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479 (Del. 1989) ("[T]his Court's jurisdiction . . . does not require us to entertain suits seeking an advisory opinion or an adjudication of hypothetical questions . . . ." (citation and internal quotation marks omitted)); see also Opinion of the Justices, 314 A.2d 419 (Del. 1973) (declining to issue an advisory opinion on the ground that such an opinion was not authorized under 10 Del. C. § 141).

      226

      [125] Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del. 1971).

      227

      [126] Tr. of Oral Arg. 64:13-65:6.

      228

      [127] Defs.' Opening Br. 30-31.

      229

      [128] Chevron Supp. ¶¶ 1, 28-31; FedEx Compl. ¶¶ 20-22; see also Pls.' Br. in Opp'n 4-5.

      230

      [129] See Grundfest & Savelle, Forum Selection Provisions, at 370 ("[Forum selection] provisions do not purport to regulate a stockholder's ability to bring a securities fraud claim or any other claim that is not an intra-corporate matter, and the dominant forms of [forum selection] provisions are drafted expressly to preclude such applications."); id. at 373 ("Because the substantive resolution of these intra-corporate disputes are, pursuant to the internal affairs doctrine, governed by the laws of the chartering state, [forum selection] provisions cannot at all influence the substantive law governing the resolution of the underlying disputes.").

      231

      [130] 10 Del. C. § 3114 (a)-(b) (providing that nonresident directors and top officers of Delaware corporations consent to the appointment of the corporation's agent or the Secretary of State to receive service of process).

      232

      [131] Chevron Compl. ¶¶ 82-87, FedEx Compl. ¶¶ 81-86 (Count V).

      233

      [132] See 74 Del. Laws ch. 83, § 3 (2003) (codified at 10 Del. C. § 3114(b)).

      234

      [133] These doctrines include the aiding and abetting and conspiracy theories used in conjunction with the long-arm statute, 10 Del. C. § 3104. See, e.g., Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027-28 (Del. 2012) (applying the conspiracy theory of jurisdiction in conjunction with 10 Del. C. § 3104); Hercules Inc. v. Leu Trust & Banking (Bahs.) Ltd., 611 A.2d 476, 481-82 (Del. 1992) (same); In re Am. Int'l Gp., Inc., 965 A.2d 763, 814 (Del. Ch. 2009) ("The conspiracy theory of jurisdiction has often been used by plaintiffs in concert with . . . 10 Del. C. § 3104."); see also HMG/Courtland Props., Inc. v. Gray, 729 A.2d 300, 308 (Del. Ch. 1999) (noting that the agency, alter ego, and conspiracy theories can be used in conjunction with 10 Del. C. § 3104 "to advance Delaware's interest in holding aiders and abettors accountable"). Many other potential defendants, such as merger partners, investment banks, and law firms, are often either domiciled in Delaware or have sufficient contacts with the state to be susceptible to personal jurisdiction. See, e.g., Sample v. Morgan, 935 A.2d 1046, 1063-65 (Del. Ch. 2007) (finding that Delaware had jurisdiction over a law firm that prepared an amendment to a Delaware corporation's certificate that was the subject of the lawsuit); Derdiger v. Tallman, 773 A.2d 1005 (Del. Ch. 2000) (suit against target board for breach of fiduciary duty, and acquiring corporation for aiding and abetting breach of fiduciary duty); Final Order & J., In re El Paso Corp. S'holders Litig., C.A. No. 6949-CS (Del. Ch. Dec. 3, 2012) (settlement of law suit against target company board for breach of fiduciary duty, and financial advisor for aiding and abetting breach of duty, in which the financial advisor contributed to the settlement payment); Final Order & J., In re Del Monte Foods Co. S'holders Litig., C.A. No. 6027-VCL (Del. Ch. Dec. 1, 2011) (same).

      235

      [134] Tr. of Oral Arg. 64:8-65:6.

      236

      [135] See, e.g., In re Groupon Deriv. Litig., 882 F. Supp. 2d 1043 (N.D. Ill. 2012) (staying a derivative suit pending the resolution of a motion to dismiss a related securities suit); Bach v. Amedisys, Inc., 2010 WL 4318755 (M.D. La. Oct. 22, 2010) (describing four securities class actions and four derivative suits that arose out of the same facts); Cucci v. Edwards, 2007 WL 3396234 (C.D. Cal. Oct. 31, 2007) (staying derivative action during prosecution of securities class action); Brenner v. Albrecht, 2012 WL 252286 (Del. Ch. Jan. 27, 2012) (same); Brudno v. Wise, 2003 WL 1874750 (Del. Ch. Apr. 1, 2003) (same).

      237

      [136] See, e.g., Ruggiero v. Am. Bioculture, Inc., 56 F.R.D. 93, 95 (S.D.N.Y.1972) ("[I]t is difficult to see how the . . . plaintiffs can reconcile their existing duties to [the company] and its present shareholders as derivative plaintiffs with the duties which they seek to assume on behalf of a class which attacks [the company]."); see also Fed. R. Civ. Pro. 23.1(a) ("The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.").

      238

      [137] E.g., Brenner, 2012 WL 252286; Brudno, 2003 WL 1874750.

      239

      [138] 17 C.F.R. § 240.14a-9.

      240

      [139] Grundfest & Savelle, Forum Selection Provisions, at 370.

      241

      [140] See 15 U.S.C. §78cc(a) (corresponding to Securities Exchange Act of 1934, ch. 404, § 29(a), 48 Stat. 881, 903) ("Any condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void."); see also 15 U.S.C. § 77n (codifying Securities Act of 1933, ch. 38, § 14, 48 Stat. 74, 84) (antiwaiver provision of the Securities Act of 1933); 15 U.S.C. § 80a-46(a) (codifying Investment Company Act of 1940, ch. 686, § 47, 54 Stat. 789, 845) (antiwaiver provision of the Investment Company Act of 1940).

      242

      [141] See Moran v. Household Int'l, Inc., 500 A.2d 1346, 1357 (Del. 1985) (stating that corporate action "must be evaluated when and if the issue arises").

      243

      [142] John Coffee, Forum Selection Clauses and the Market for Settlements, N.Y. L.J., May 17, 2012, at 4.

      244

      [143] See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (citations omitted).

      245

      [144] See Grundfest & Savelle, Forum Selection Provisions, at 363-67 (discussing facial challenges to forum selection provisions).

      246

      [145] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15-17 (1972).

      247

      [146] Stroud v. Grace, 606 A.2d 75, 79, 96 (Del. 1992).

    • 4.3 Proxy Access and Expense Bylaws

      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. 

      • 4.3.1 DGCL Sec. 112 - Proxy Access Bylaw

        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.

        1

        TITLE 8

        2

        Corporations

        3

        CHAPTER 1. GENERAL CORPORATION LAW

        4

        Subchapter I. Formation

        5

         

        6 7

        The bylaws may provide that if the corporation solicits proxies with respect to an election of directors, it may be required, to the extent and subject to such procedures or conditions as may be provided in the bylaws, to include in its proxy solicitation materials (including any form of proxy it distributes), in addition to individuals nominated by the board of directors, 1 or more individuals nominated by a stockholder. Such procedures or conditions may include any of the following:

        8

        (1) A provision requiring a minimum record or beneficial ownership, or duration of ownership, of shares of the corporation's capital stock, by the nominating stockholder, and defining beneficial ownership to take into account options or other rights in respect of or related to such stock;

        9

        (2) A provision requiring the nominating stockholder to submit specified information concerning the stockholder and the stockholder's nominees, including information concerning ownership by such persons of shares of the corporation's capital stock, or options or other rights in respect of or related to such stock;

        10

        (3) A provision conditioning eligibility to require inclusion in the corporation's proxy solicitation materials upon the number or proportion of directors nominated by stockholders or whether the stockholder previously sought to require such inclusion;

        11

        (4) A provision precluding nominations by any person if such person, any nominee of such person, or any affiliate or associate of such person or nominee, has acquired or publicly proposed to acquire shares constituting a specified percentage of the voting power of the corporation's outstanding voting stock within a specified period before the election of directors;

        12

        (5) A provision requiring that the nominating stockholder undertake to indemnify the corporation in respect of any loss arising as a result of any false or misleading information or statement submitted by the nominating stockholder in connection with a nomination; and

        13

        (6) Any other lawful condition.

        14

        77 Del. Laws, c. 14, § 1.;

      • 4.3.2 DGCL Sec. 113 - Proxy Expense Bylaw

        Section 113 reduces the economic incentives against stockholders engaging in proxy contests by permitting expense reimbursement following proxy contest for successful candidates.

        1

        TITLE 8

        2

        Corporations

        3

        CHAPTER 1. GENERAL CORPORATION LAW

        4

        Subchapter I. Formation

        5

         

        6 7

        (a) The bylaws may provide for the reimbursement by the corporation of expenses incurred by a stockholder in soliciting proxies in connection with an election of directors, subject to such procedures or conditions as the bylaws may prescribe, including:

        8

        (1) Conditioning eligibility for reimbursement upon the number or proportion of persons nominated by the stockholder seeking reimbursement or whether such stockholder previously sought reimbursement for similar expenses;

        9

        (2) Limitations on the amount of reimbursement based upon the proportion of votes cast in favor of 1 or more of the persons nominated by the stockholder seeking reimbursement, or upon the amount spent by the corporation in soliciting proxies in connection with the election;

        10

        (3) Limitations concerning elections of directors by cumulative voting pursuant to § 214 of this title; or

        11

        (4) Any other lawful condition.

        12

        (b) No bylaw so adopted shall apply to elections for which any record date precedes its adoption.

        13

        77 Del. Laws, c. 14, § 2.;

  • 5 Board of Directors

    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.    

    • 5.1 DGCL Sec. 223 - Director vacanies

      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.

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4
      Subchapter VII. Meetings, Elections, Voting and Notice
      5

       

      6 7

      (a) Unless otherwise provided in the certificate of incorporation or bylaws:

      8

      (1) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director;

      9

      (2) Whenever the holders of any class or classes of stock or series thereof are entitled to elect 1 or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected.

      10

      If at any time, by reason of death or resignation or other cause, a corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the certificate of incorporation or the bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in § 211 or § 215 of this title.

      11

      (b) In the case of a corporation the directors of which are divided into classes, any directors chosen under subsection (a) of this section shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and qualified.

      12

      (c) If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10 percent of the voting stock at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by § 211 or § 215 of this title as far as applicable.

      13

      (d) Unless otherwise provided in the certificate of incorporation or bylaws, when 1 or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies.

      14

      8 Del. C. 1953, § 223; 56 Del. Laws, c. 5063 Del. Laws, c. 25, § 1073 Del. Laws, c. 298, § 877 Del. Laws, c. 253, §§ 24, 25.;

    • 5.2 DGCL Sec. 141 - Board of Directors

      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.

       

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4 5 6

      (a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

      7

      (b) The board of directors of a corporation shall consist of 1 or more members, each of whom shall be a natural person. The number of directors shall be fixed by, or in the manner provided in, the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of directors shall be made only by amendment of the certificate. Directors need not be stockholders unless so required by the certificate of incorporation or the bylaws. The certificate of incorporation or bylaws may prescribe other qualifications for directors. Each director shall hold office until such director's successor is elected and qualified or until such director's earlier resignation or removal. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. A resignation is effective when the resignation is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. A resignation which is conditioned upon the director failing to receive a specified vote for reelection as a director may provide that it is irrevocable. A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. Unless the certificate of incorporation provides otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than 1/3 of the total number of directors except that when a board of 1 director is authorized under this section, then 1 director shall constitute a quorum. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number.

      8

      (c)(1) All corporations incorporated prior to July 1, 1996, shall be governed by this paragraph (c)(1) of this section, provided that any such corporation may by a resolution adopted by a majority of the whole board elect to be governed by paragraph (c)(2) of this section, in which case this paragraph (c)(1) of this section shall not apply to such corporation. All corporations incorporated on or after July 1, 1996, shall be governed by paragraph (c)(2) of this section. The board of directors may, by resolution passed by a majority of the whole board, designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation. The board may designate 1 or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not the member or members present constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in § 151(a) of this title, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation under § 251, § 252, § 254, § 255, § 256, § 257, § 258, § 263 or § 264 of this title, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution, bylaws or certificate of incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to § 253 of this title.

      9

      (2) The board of directors may designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation. The board may designate 1 or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by this chapter to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the corporation.

      10

      (3) Unless otherwise provided in the certificate of incorporation, the bylaws or the resolution of the board of directors designating the committee, a committee may create 1 or more subcommittees, each subcommittee to consist of 1 or more members of the committee, and delegate to a subcommittee any or all of the powers and authority of the committee.

      11

      (d) The directors of any corporation organized under this chapter may, by the certificate of incorporation or by an initial bylaw, or by a bylaw adopted by a vote of the stockholders, be divided into 1, 2 or 3 classes; the term of office of those of the first class to expire at the first annual meeting held after such classification becomes effective; of the second class 1 year thereafter; of the third class 2 years thereafter; and at each annual election held after such classification becomes effective, directors shall be chosen for a full term, as the case may be, to succeed those whose terms expire. The certificate of incorporation or bylaw provision dividing the directors into classes may authorize the board of directors to assign members of the board already in office to such classes at the time such classification becomes effective. The certificate of incorporation may confer upon holders of any class or series of stock the right to elect 1 or more directors who shall serve for such term, and have such voting powers as shall be stated in the certificate of incorporation. The terms of office and voting powers of the directors elected separately by the holders of any class or series of stock may be greater than or less than those of any other director or class of directors. In addition, the certificate of incorporation may confer upon 1 or more directors, whether or not elected separately by the holders of any class or series of stock, voting powers greater than or less than those of other directors. Any such provision conferring greater or lesser voting power shall apply to voting in any committee or subcommittee, unless otherwise provided in the certificate of incorporation or bylaws. If the certificate of incorporation provides that 1 or more directors shall have more or less than 1 vote per director on any matter, every reference in this chapter to a majority or other proportion of the directors shall refer to a majority or other proportion of the votes of the directors.

      12

      (e) A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member's duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.

      13

      (f) Unless otherwise restricted by the certificate of incorporation or bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the board, or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

      14

      (g) Unless otherwise restricted by the certificate of incorporation or bylaws, the board of directors of any corporation organized under this chapter may hold its meetings, and have an office or offices, outside of this State.

      15

      (h) Unless otherwise restricted by the certificate of incorporation or bylaws, the board of directors shall have the authority to fix the compensation of directors.

      16

      (i) Unless otherwise restricted by the certificate of incorporation or bylaws, members of the board of directors of any corporation, or any committee designated by the board, may participate in a meeting of such board, or committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at the meeting.

      17

      (j) The certificate of incorporation of any nonstock corporation may provide that less than 1/3 of the members of the governing body may constitute a quorum thereof and may otherwise provide that the business and affairs of the corporation shall be managed in a manner different from that provided in this section. Except as may be otherwise provided by the certificate of incorporation, this section shall apply to such a corporation, and when so applied, all references to the board of directors, to members thereof, and to stockholders shall be deemed to refer to the governing body of the corporation, the members thereof and the members of the corporation, respectively; and all references to stock, capital stock, or shares thereof shall be deemed to refer to memberships of a nonprofit nonstock corporation and to membership interests of any other nonstock corporation.

      18

      (k) Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except as follows:

      19

      (1) Unless the certificate of incorporation otherwise provides, in the case of a corporation whose board is classified as provided in subsection (d) of this section, stockholders may effect such removal only for cause; or

      20

      (2) In the case of a corporation having cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against such director's removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors, or, if there be classes of directors, at an election of the class of directors of which such director is a part.

      21

      Whenever the holders of any class or series are entitled to elect 1 or more directors by the certificate of incorporation, this subsection shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole.

      22

      8 Del. C. 1953, § 141; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 357 Del. Laws, c. 148, §§ 5, 657 Del. Laws, c. 421, § 159 Del. Laws, c. 437, §§ 2-564 Del. Laws, c. 112, § 665 Del. Laws, c. 127, § 366 Del. Laws, c. 136, §§ 2, 370 Del. Laws, c. 79, § 770 Del. Laws, c. 186, § 170 Del. Laws, c. 349, § 2;71 Del. Laws, c. 339, §§ 11-1372 Del. Laws, c. 343, §§ 4-673 Del. Laws, c. 298, § 274 Del. Laws, c. 84, § 274 Del. Laws, c. 326, § 275 Del. Laws, c. 30, § 175 Del. Laws, c. 306, §§ 3, 476 Del. Laws, c. 145, § 177 Del. Laws, c. 253, §§ 10-12.;

    • 5.3 The Nature of the Board of Directors

      Corporations are managed by boards of directors. It's important to note that no director, acting individually, is empowered to speak or act on behalf of the corporation. Individual directors, in that sense, are not agents of the corporation, nor are they principals. The board of directors - as group - is the only party statutorily authorized to manage the corporation.

      Individual directors have no authority to speak on behalf of the corporation unless they have been specifically delegated such authority by the board. Along the same lines, unless otherwise outlined in the certificate of incorporation, no director is superior or has more rights than any other director. Each member of a corporate board has the right to consultation with the others and has the right to be heard upon all questions considered by the board. Absent a governance agreement to the contrary, each director is entitled to receive the same information furnished to his or her fellow board members.

      While stockholders are permitted to act at a stockholders meeting by "proxy" - that is they need not be present, but may authorize someone else to act on their behalf pursuant to instructions - directors are not permitted to delegate their proxy to another at a board meeting. If a director is not present at a meeting, that director's vote may not be counted.  There is important reasons for not permitting directors to act by proxy. A director cannot authorize any one to act for her, because her associates are entitled to their own judgment, experience and business ability, just as her associates cannot deprive her of her rights and powers as director.

      Delaware corporate law embraces a `board-centric' model of governance. This model expects that all directors - and not their proxies - will participate in a collective and deliberative decision-making process.

      Given that the DGCL allocates fundamental decision-making power to the board as a whole, and not to any individual director qua director, all directors must have the opportunity to participate meaningfully in any matter brought before the board and to discharge their oversight responsibilities. In more granular terms, directors must be afforded, at a minimum, (i) proper notice of all board meetings, (ii) the opportunity to attend and to express their views at board meetings, and (iii) access to all information that is necessary or appropriate to discharge their fiduciary duties, including the opportunity to consult with officers, employees, and other agents of the corporation.

      OptimisCorp v Waite (Del. Sup. Ct., April 20, 2016) at Footnote 9.

       

    • 5.4 Shlensky v. Wrigley

      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.

      1
      95 Ill. App.2d 173 (1968)
      2
      237 N.E.2d 776
      3
      William Shlensky, on Behalf of and as a Representative of Chicago National League Ball Club (Inc.), Plaintiff-Appellant,
      v.
      Philip K. Wrigley, et al., and Chicago National League Ball Club (Inc.), Defendants-Appellees.
      4
      Gen. No. 51,750.
      5

      Illinois Appellate Court — First District, Third Division.

      6
      April 25, 1968.
      7

      [174] Milton I. Shadur and Neil H. Adelman, of Chicago (Robert Plotkin, Ronald S. Miller, David J. Krupp, and Abner J. Mikva, of counsel), for appellant.

      8

      Sidley, Austin, Burgess & Smith, and Arthur Morse, of Chicago (James E.S. Baker, Edward Slovick, and Alexander C. Allison, of counsel), and Samuel W. Block and Kenneth S. Brown, of Chicago (Raymond, Mayer, Jenner & Block, of counsel), for appellees.

      9
      MR. JUSTICE SULLIVAN delivered the opinion of the court.
      10

      This is an appeal from a dismissal of plaintiff's amended complaint on motion of the defendants. The action was a stockholders' derivative suit against the directors for negligence and mismanagement. The corporation was also made a defendant. Plaintiff sought damages [175] and an order that defendants cause the installation of lights in Wrigley Field and the scheduling of night baseball games.

      11

      Plaintiff is a minority stockholder of defendant corporation, Chicago National League Ball Club (Inc.), a Delaware corporation with its principal place of business in Chicago, Illinois. Defendant corporation owns and operates the major league professional baseball team known as the Chicago Cubs. The corporation also engages in the operation of Wrigley Field, the Cubs' home park, the concessionaire sales during Cubs' home games, television and radio broadcasts of Cubs' home games, the leasing of the field for football games and other events and receives its share, as visiting team, of admission moneys from games played in other National League stadia. The individual defendants are directors of the Cubs and have served for varying periods of years. Defendant Philip K. Wrigley is also president of the corporation and owner of approximately 80% of the stock therein.

      12

      Plaintiff alleges that since night baseball was first played in 1935 nineteen of the twenty major league teams have scheduled night games. In 1966, out of a total of 1,620 games in the major leagues, 932 were played at night. Plaintiff alleges that every member of the major leagues, other than the Cubs, scheduled substantially all of its home games in 1966 at night, exclusive of opening days, Saturdays, Sundays, holidays and days prohibited by league rules. Allegedly this has been done for the specific purpose of maximizing attendance and thereby maximizing revenue and income.

      13

      The Cubs, in the years 1961-65, sustained operating losses from its direct baseball operations. Plaintiff attributes those losses to inadequate attendance at Cubs' home games. He concludes that if the directors continue to refuse to install lights at Wrigley Field and schedule [176] night baseball games, the Cubs will continue to sustain comparable losses and its financial condition will continue to deteriorate.

      14

      Plaintiff alleges that, except for the year 1963, attendance at Cubs' home games has been substantially below that at their road games, many of which were played at night.

      15

      Plaintiff compares attendance at Clubs' games with that of the Chicago White Sox, an American League club, whose weekday games were generally played at night. The weekend attendance figures for the two teams were similar; however, the White Sox week-night games drew many more patrons than did the Cubs' weekday games.

      16

      Plaintiff alleges that the funds for the installation of lights can be readily obtained through financing and the cost of installation would be far more than offset and recaptured by increased revenues and incomes resulting from the increased attendance.

      17

      Plaintiff further alleges that defendant Wrigley has refused to install lights, not because of interest in the welfare of the corporation but because of his personal opinions "that baseball is a `daytime sport' and that the installation of lights and night baseball games will have a deteriorating effect upon the surrounding neighborhood." It is alleged that he has admitted that he is not interested in whether the Cubs would benefit financially from such action because of his concern for the neighborhood, and that he would be willing for the team to play night games if a new stadium were built in Chicago.

      18

      Plaintiff alleges that the other defendant directors, with full knowledge of the foregoing matters, have acquiesced in the policy laid down by Wrigley and have permitted him to dominate the board of directors in matters involving the installation of lights and scheduling of night games, even though they knew he was not motivated [177] by a good faith concern as to the best interests of defendant corporation, but solely by his personal views set forth above. It is charged that the directors are acting for a reason or reasons contrary and wholly unrelated to the business interests of the corporation; that such arbitrary and capricious acts constitute mismanagement and waste of corporate assets, and that the directors have been negligent in failing to exercise reasonable care and prudence in the management of the corporate affairs.

      19

      The question on appeal is whether plaintiff's amended complaint states a cause of action. It is plaintiff's position that fraud, illegality and conflict of interest are not the only bases for a stockholder's derivative action against the directors. Contrariwise, defendants argue that the courts will not step in and interfere with honest business judgment of the directors unless there is a showing of fraud, illegality or conflict of interest.

      20

      The cases in this area are numerous and each differs from the others on a factual basis. However, the courts have pronounced certain ground rules which appear in all cases and which are then applied to the given factual situation. The court in Wheeler v. The Pullman Iron & Steel Co., 143 Ill. 197, 207, 32 NE 420 said:

      21
      "It is, however, fundamental in the law of corporations, that the majority of its stockholders shall control the policy of the corporation, and regulate and govern the lawful exercise of its franchise and business.... Every one purchasing or subscribing for stock in a corporation impliedly agrees that he will be bound by the acts and proceedings done or sanctioned by a majority of the shareholders, or by the agents of the corporation duly chosen by such majority, within the scope of the powers conferred by the charter, and courts of equity will not undertake to control the policy or business methods of a corporation, [178] although it may be seen that a wiser policy might be adopted and the business more successful if other methods were pursued. The majority of shares of its stock, or the agents by the holders thereof lawfully chosen, must be permitted to control the business of the corporation in their discretion, when not in violation of its charter or some public law, or corruptly and fraudulently subversive of the rights and interests of the corporation or of a shareholder."
      22

      The standards set in Delaware are also clearly stated in the cases. In Davis v. Louisville Gas & Electric Co., 6 NJ Misc 706, 142 A 654, a minority shareholder sought to have the directors enjoined from amending the certificate of incorporation. The court said on page 659:

      23
      "We have then a conflict in view between the responsible managers of a corporation and an overwhelming majority of its stockholders on the one hand and a dissenting minority on the other — a conflict touching matters of business policy, such as has occasioned innumerable applications to courts to intervene and determine which of the two conflicting views should prevail. The response which courts make to such applications is that it is not their function to resolve for corporations questions of policy and business management. The directors are chosen to pass upon such questions and their judgment unless shown to be tainted with fraud is accepted as final. The judgment of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve." (Emphasis supplied.)
      24

      Similarly, the court in Toebelman v. Missouri-Kansas Pipe Line Co., 41 F Supp 334, said at page 339:

      25
      [179] "The general legal principle involved is familiar. Citation of authorities is of limited value because the facts of each case differ so widely. Reference may be made to the statement of the rule in Helfman v. American Light & Traction Company, 121 NJ Eq 1, 187 A 540, 550, in which the Court stated the law as follows: `In a purely business corporation ... the authority of the directors in the conduct of the business of the corporation must be regarded as absolute when they act within the law, and the court is without authority to substitute its judgment for that of the directors.'"
      26

      Plaintiff argues that the allegations of his amended complaint are sufficient to set forth a cause of action under the principles set out in Dodge v. Ford Motor Co., 204 Mich 459, 170 NW 668. In that case plaintiff, owner of about 10% of the outstanding stock, brought suit against the directors seeking payment of additional dividends and the enjoining of further business expansion. In ruling on the request for dividends the court indicated that the motives of Ford in keeping so much money in the corporation for expansion and security were to benefit the public generally and spread the profits out by means of more jobs, etc. The court felt that these were not only far from related to the good of the stockholders, but amounted to a change in the ends of the corporation and that this was not a purpose contemplated or allowed by the corporate charter. The court relied on language found in Hunter v. Roberts, Throp & Co., 83 Mich 63, 47 NW 131, 134, wherein it was said:

      27
      "Courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, [180] divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud or breach of that good faith which they are bound to exercise toward the stockholders."
      28

      From the authority relied upon in that case it is clear that the court felt that there must be fraud or a breach of that good faith which directors are bound to exercise toward the stockholders in order to justify the courts entering into the internal affairs of corporations. This is made clear when the court refused to interfere with the directors' decision to expand the business. The following appears on page 684:

      29
      "We are not, however, persuaded that we should interfere with the proposed expansion of the business of the Ford Motor Company. In view of the fact that the selling price of products may be increased at any time, the ultimate results of the larger business cannot be certainly estimated. The judges are not business experts. It is recognized that plans must often be made for a long future, for expected competition, for a continuing as well as an immediately profitable venture.... We are not satisfied that the alleged motives of the directors, in so far as they are reflected in the conduct of the business, menace the interests of the shareholders." (Emphasis supplied.)
      30

      Plaintiff in the instant case argues that the directors are acting for reasons unrelated to the financial interest and welfare of the Cubs. However, we are not satisfied that the motives assigned to Philip K. Wrigley, and through him to the other directors, are contrary to the best interests of the corporation and the stockholders. For example, it appears to us that the effect on the surrounding neighborhood might well be considered by a [181] director who was considering the patrons who would or would not attend the games if the park were in a poor neighborhood. Furthermore, the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating. By these thoughts we do not mean to say that we have decided that the decision of the directors was a correct one. That is beyond our jurisdiction and ability. We are merely saying that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision.

      31

      [1, 2] While all the courts do not insist that one or more of the three elements must be present for a stockholder's derivative action to lie, nevertheless we feel that unless the conduct of the defendants at least borders on one of the elements, the courts should not interfere. The trial court in the instant case acted properly in dismissing plaintiff's amended complaint.

      32

      [3, 4] We feel that plaintiff's amended complaint was also defective in failing to allege damage to the corporation. The well pleaded facts must be taken as true for the purpose of judging the sufficiency of the amended complaint. (Highway Ins. Co. v. Korman, 40 Ill. App.2d 439, 442, 190 NE2d 124.) However, one need not accept conclusions drawn by the pleader. (Nagel v. Northern Illinois Gas Co., 12 Ill. App.2d 413, 420, 139 NE2d 810.) Furthermore, pleadings will be construed most strongly against the pleader prior to a verdict or judgment on the merits. New Amsterdam Cas. Co. v. Gerin, 9 Ill. App.2d 545, 133 NE2d 723.

      33

      There is no allegation that the night games played by the other nineteen teams enhanced their financial position or that the profits, if any, of those teams were directly related to the number of night games scheduled. There is an allegation that the installation of lights and [182] scheduling of night games in Wrigley Field would have resulted in large amounts of additional revenues and incomes from increased attendance and related sources of income. Further, the cost of installation of lights, funds for which are allegedly readily available by financing, would be more than offset and recaptured by increased revenues. However, no allegation is made that there will be a net benefit to the corporation from such action, considering all increased costs.

      34

      Plaintiff claims that the losses of defendant corporation are due to poor attendance at home games. However, it appears from the amended complaint, taken as a whole, that factors other than attendance affect the net earnings or losses. For example, in 1962, attendance at home and road games decreased appreciably as compared with 1961, and yet the loss from direct baseball operation and of the whole corporation was considerably less.

      35

      The record shows that plaintiff did not feel he could allege that the increased revenues would be sufficient to cure the corporate deficit. The only cost plaintiff was at all concerned with was that of installation of lights. No mention was made of operation and maintenance of the lights or other possible increases in operating costs of night games and we cannot speculate as to what other factors might influence the increase or decrease of profits if the Cubs were to play night home games.

      36

      [5] Nagel v. Northern Illinois Gas Co., supra, was a stockholder's derivative action for the rescission of a contract of the corporation. The court said on page 421:

      37
      "They allege that by these transactions `Edison gave to Northern assets, rights and benefits of a value in excess of $5,000,000' and received in return, under the Final Separation Contract, assets, rights and benefits of a net value of less than $50,000. These allegations are mere conclusions of the pleader and not an averment of the fact of gross inadequacy of [183] consideration, unless warranted by the provisions of the contract and the well pleaded facts in the amended complaint consistent with the contract."
      38

      Similarly, in the instant case, plaintiff's allegation that the minority stockholders and the corporation have been seriously and irreparably damaged by the wrongful conduct of the defendant directors is a mere conclusion and not based on well pleaded facts in the amended complaint.

      39

      [6, 7] Finally, we do not agree with plaintiff's contention that failure to follow the example of the other major league clubs in scheduling night games constituted negligence. Plaintiff made no allegation that these teams' night schedules were profitable or that the purpose for which night baseball had been undertaken was fulfilled. Furthermore, it cannot be said that directors, even those of corporations that are losing money, must follow the lead of the other corporations in the field. Directors are elected for their business capabilities and judgment and the courts cannot require them to forego their judgment because of the decisions of directors of other companies. Courts may not decide these questions in the absence of a clear showing of dereliction of duty on the part of the specific directors and mere failure to "follow the crowd" is not such a dereliction.

      40

      For the foregoing reasons the order of dismissal entered by the trial court is affirmed.

      41

      Affirmed.

      42

      DEMPSEY, P.J. and SCHWARTZ, J., concur.

    • 5.5 Aronson v. Lewis

      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. 


      1
      473 A.2d 805 (1984)
      2
      Senior ARONSON, et al., Defendants Below, Appellants,
      v.
      Harry LEWIS, Plaintiff Below, Appellee.
      3

      Supreme Court of Delaware.
      Submitted: November 14, 1983.
      Decided: March 1, 1984.

      4

      William T. Quillen (argued), Robert K. Payson, Peter M. Sieglaff, Potter, Anderson & Corroon, Wilmington; and Allan M. Pepper, Michael D. Braff, Kaye, Scholer, Fierman, Hays & Handler, New York City, for appellants.

      5

      Joseph A. Rosenthal (argued), Morris & Rosenthal, P.A., Wilmington; and Irving Bizar, Pincus, Ohrenstein, Bizar, D'Alessandro & Solomon, New York City, for appellee.

      6

      Before McNEILLY, MOORE and CHRISTIE, JJ.

      7
      [807] MOORE, Justice:
      8

      In the wake of Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981), this Court left a crucial issue unanswered: when is a stockholder's demand upon a board of directors, to redress an alleged wrong to the corporation, excused as futile prior to the filing of a derivative suit? We granted this interlocutory appeal to the defendants, Meyers Parking System, Inc. (Meyers), a Delaware corporation, and its directors, to review the Court of Chancery's denial of their motion to dismiss this action, pursuant to Chancery Rule 23.1, for the [808] plaintiff's failure to make such a demand or otherwise demonstrate its futility.[1] The Vice Chancellor ruled that plaintiff's allegations raised a "reasonable inference" that the directors' action was unprotected by the business judgment rule. Thus, the board could not have impartially considered and acted upon the demand. See Lewis v. Aronson, Del.Ch., 466 A.2d 375, 381 (1983).

      9

      We cannot agree with this formulation of the concept of demand futility. In our view demand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule. Because the plaintiff failed to make a demand, and to allege facts with particularity indicating that such demand would be futile, we reverse the Court of Chancery and remand with instructions that plaintiff be granted leave to amend the complaint.

      10
      I.
      11

      The issues of demand futility rest upon the allegations of the complaint. The plaintiff, Harry Lewis, is a stockholder of Meyers. The defendants are Meyers and its ten directors, some of whom are also company officers.

      12

      In 1979, Prudential Building Maintenance Corp. (Prudential) spun off its shares of Meyers to Prudential's stockholders. Prior thereto Meyers was a wholly owned subsidiary of Prudential. Meyers provides parking lot facilities and related services throughout the country. Its stock is actively traded over-the-counter.

      13

      This suit challenges certain transactions between Meyers and one of its directors, Leo Fink, who owns 47% of its outstanding stock. Plaintiff claims that these transactions were approved only because Fink personally selected each director and officer of Meyers.[2]

      14

      Prior to January 1, 1981, Fink had an employment agreement with Prudential which provided that upon retirement he was to become a consultant to that company for ten years. This provision became operable when Fink retired in April 1980.[3] Thereafter, Meyers agreed with Prudential to share Fink's consulting services and reimburse Prudential for 25% of the fees paid Fink. Under this arrangement Meyers paid Prudential $48,332 in 1980 and $45,832 in 1981.

      15

      On January 1, 1981, the defendants approved an employment agreement between Meyers and Fink for a five year term with provision for automatic renewal each year thereafter, indefinitely. Meyers agreed to pay Fink $150,000 per year, plus a bonus of 5% of its pre-tax profits over $2,400,000. Fink could terminate the contract at any time, but Meyers could do so only upon six months' notice. At termination, Fink was to become a consultant to Meyers and be paid $150,000 per year for the first three years, $125,000 for the next three years, and $100,000 thereafter for life. Death benefits were also included. Fink agreed to devote his best efforts and substantially his entire business time to advancing Meyers' interests. The agreement also provided [809] that Fink's compensation was not to be affected by any inability to perform services on Meyers' behalf. Fink was 75 years old when his employment agreement with Meyers was approved by the directors. There is no claim that he was, or is, in poor health.

      16

      Additionally, the Meyers board approved and made interest-free loans to Fink totalling $225,000. These loans were unpaid and outstanding as of August 1982 when the complaint was filed. At oral argument defendants' counsel represented that these loans had been repaid in full.

      17

      The complaint charges that these transactions had "no valid business purpose", and were a "waste of corporate assets" because the amounts to be paid are "grossly excessive", that Fink performs "no or little services", and because of his "advanced age" cannot be "expected to perform any such services". The plaintiff also charges that the existence of the Prudential consulting agreement with Fink prevents him from providing his "best efforts" on Meyers' behalf. Finally, it is alleged that the loans to Fink were in reality "additional compensation" without any "consideration" or "benefit" to Meyers.

      18

      The complaint alleged that no demand had been made on the Meyers board because:

      19
      13. ... such attempt would be futile for the following reasons:
      20
      (a) All of the directors in office are named as defendants herein and they have participated in, expressly approved and/or acquiesced in, and are personally liable for, the wrongs complained of herein.
      21
      (b) Defendant Fink, having selected each director, controls and dominates every member of the Board and every officer of Meyers.
      22
      (c) Institution of this action by present directors would require the defendant-directors to sue themselves, thereby placing the conduct of this action in hostile hands and preventing its effective prosecution.
      23

      Complaint, at ¶ 13.

      24

      The relief sought included the cancellation of the Meyers-Fink employment contract and an accounting by the directors, including Fink, for all damage sustained by Meyers and for all profits derived by the directors and Fink.

      25
      II.
      26

      Defendants moved to dismiss for plaintiff's failure to make demand on the Meyers board prior to suit, or to allege with factual particularity why demand is excused. See Del.Ch.Ct.R. 23.1, supra.

      27

      After recounting the allegations, the trial judge noted that the demand requirement of Rule 23.1 is a rule of substantive right designed to give a corporation the opportunity to rectify an alleged wrong without litigation, and to control any litigation which does arise. Lewis, 466 A.2d at 380. According to the Vice Chancellor, the test of futility is "whether the Board, at the time of the filing of the suit, could have impartially considered and acted upon the demand". Id. at 381.

      28

      As part of this formulation, the trial judge stated that interestedness is one factor affecting impartiality, and indicated that the business judgment rule is a potential defense to allegations of director interest, and hence, demand futility. Id. However, the court observed that to establish demand futility, a plaintiff need not allege that the challenged transaction could never be deemed a product of business judgment. Id. Rather, the Vice Chancellor maintained that a plaintiff "must only allege facts which, if true, show that there is a reasonable inference that the business judgment rule is not applicable for purposes of considering a pre-suit demand pursuant to Rule 23.1". Id. The court concluded that this transaction permitted such an inference. Id. at 384-86.

      29

      Upon these formulations, the Court of Chancery addressed the plaintiff's arguments [810] as to the futility of demand. Id. at 381-84. The trial judge correctly noted that futility is gauged by the circumstances existing at the commencement of a derivative suit. This disposed of plaintiff's argument that defendants' motion to dismiss established board hostility and the futility of demand. Id. at 381.

      30

      The Vice Chancellor then dealt with plaintiff's contention that Fink, as a 47% shareholder of Meyers, dominated and controlled each director, thereby making demand futile. Id. at 381-83. Plaintiff also argued that Fink's interest, when combined with the shareholdings of four other defendants, amounted to 57.5% of Meyers' outstanding shares. Id. at 381. After noting the presumptions under the business judgment rule that a board's actions are taken in good faith and in the best interests of the corporation, the Court of Chancery ruled that mere board approval of a transaction benefiting a substantial, but non-majority, shareholder will not overcome the presumption of propriety. Id. at 382. Specifically, the court observed that:

      31
      A plaintiff, to properly allege domination of the Board, particularly domination based on ownership of less than a majority of the corporation's stock, in order to excuse a pre-suit demand, must allege ownership plus other facts evidencing control to demonstrate that the Board could not have exercised its independent business judgment.
      32

      Id.

      33

      As to the combined 57.5% control claim, the court stated that there were no factual allegations regarding the alignment of the four directors with Fink, such as a claim that they were beneficiaries of the Meyers-Fink agreement. Id. at 382, 383. Because it was not alleged in the complaint, the court rejected plaintiff's argument that, as evidence of alignment with Fink, two of the directors have "similar" compensation agreements with Meyers. Id. at 383.

      34

      Turning to plaintiff's allegations of board approval, participation in, and/or acquiescence in the wrong, the trial court focused on the underlying transaction to determine whether the board's action was wrongful and not protected by the business judgment rule. Id. [citing Dann v. Chrysler, Del.Ch., 174 A.2d 696 (1961)]. The Vice Chancellor indicated that if the underlying transaction supported a reasonable inference that the business judgment rule did not apply, then the directors who approved the transaction were potentially liable for a breach of their fiduciary duty, and thus, could not impartially consider a stockholder's demand. Id.

      35

      The trial court then stated that board approval of the Meyers-Fink agreement, allowing Fink's consultant compensation to remain unaffected by his ability to perform any services, may have been a transaction wasteful on its face. Id. [citing Fidanque v. American Maracaibo Co., Del.Ch., 92 A.2d 311 (1952)]. Consequently, demand was excused as futile, because the Meyers' directors faced potential liability for waste and could not have impartially considered the demand. Id. at 384.

      36
      III.
      37

      The defendants make two arguments, one policy-oriented and the other, factual. First, they assert that the demand requirement embraces the policy that directors, rather than stockholders, manage the affairs of the corporation. They contend that this fundamental principle requires the strict construction and enforcement of Chancery Rule 23.1. Second, the defendants point to four of plaintiff's basic allegations and argue that they lack the factual particularity necessary to excuse demand. Concerning the allegation that Fink dominated and controlled the Meyers board, the defendants point to the absence of any facts explaining how he "selected each director". With respect to Fink's 47% stock interest, the defendants say that absent other facts this is insufficient to indicate domination and control. Regarding the claim of hostility to the plaintiff's suit, because defendants would have to sue themselves, the latter assert that this bootstrap argument ignores the possibility that the directors have other [811] alternatives, such as cancelling the challenged agreement. As for the allegation that directorial approval of the agreement excused demand, the defendants reply that such a claim is insufficient, because it would obviate the demand requirement in almost every case. The effect would be to subvert the managerial power of a board of directors. Finally, as to the provision guaranteeing Fink's compensation, even if he is unable to perform any services, the defendants contend that the trial court read this out of context. Based upon the foregoing, the defendants conclude that the plaintiff's allegations fall far short of the factual particularity required by Rule 23.1.

      38
      IV.
      39
      A.
      40

      A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation. 8 Del.C. § 141(a). Section 141(a) states in pertinent part:

      41
      "The business and affairs of a corporation organized under this chapter shall be managed by or under the direction of a board of directors except as may be otherwise provided in this chapter or in its certificate of incorporation."
      42

      8 Del.C. § 141(a) (Emphasis added). The existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders.[4] Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939). Moreover, a stockholder is not powerless to challenge director action which results in harm to the corporation. The machinery of corporate democracy and the derivative suit are potent tools to redress the conduct of a torpid or unfaithful management. The derivative action developed in equity to enable shareholders to sue in the corporation's name where those in control of the company refused to assert a claim belonging to it. The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.

      43

      By its very nature the derivative action impinges on the managerial freedom of directors.[5] Hence, the demand requirement of Chancery Rule 23.1 exists at the threshold, first to insure that a stockholder exhausts his intracorporate remedies, and [812] then to provide a safeguard against strike suits. Thus, by promoting this form of alternate dispute resolution, rather than immediate recourse to litigation, the demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations.

      44

      In our view the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability. The business judgment rule is an acknowledgment of the managerial prerogatives of Delaware directors under Section 141(a). See Zapata Corp. v. Maldonado, 430 A.2d at 782. It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119, 124 (1971); Robinson v. Pittsburgh Oil Refinery Corp., Del.Ch., 126 A. 46 (1924). Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption. See Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971).

      45

      The function of the business judgment rule is of paramount significance in the context of a derivative action. It comes into play in several ways — in addressing a demand, in the determination of demand futility, in efforts by independent disinterested directors to dismiss the action as inimical to the corporation's best interests, and generally, as a defense to the merits of the suit. However, in each of these circumstances there are certain common principles governing the application and operation of the rule.

      46

      First, its protections can only be claimed by disinterested directors whose conduct otherwise meets the tests of business judgment. From the standpoint of interest, this means that directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally. Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971); Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964); David J. Greene & Co. v. Dunhill International, Inc., Del.Ch., 249 A.2d 427, 430 (1968). See also 8 Del.C. § 144. Thus, if such director interest is present, and the transaction is not approved by a majority consisting of the disinterested directors, then the business judgment rule has no application whatever in determining demand futility. See 8 Del.C. § 144(a)(1).

      47

      Second, to invoke the rule's protection directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties. While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence.[6] See Veasey & Manning, Codified Standard [813] — Safe Harbor or Uncharted Reef? 35 Bus.Law. 919, 928 (1980).

      48

      However, it should be noted that the business judgment rule operates only in the context of director action. Technically speaking, it has no role where directors have either abdicated their functions, or absent a conscious decision, failed to act.[7] But it also follows that under applicable principles, a conscious decision to refrain from acting may nonetheless be a valid exercise of business judgment and enjoy the protections of the rule.

      49

      The gap in our law, which we address today, arises from this Court's decision in Zapata Corp. v. Maldonado. There, the Court defined the limits of a board's managerial power granted by Section 141(a) and restricted application of the business judgment rule in a factual context similar to this action. Zapata Corp. v. Maldonado, 430 A.2d at 782-86, rev'g, Maldonado v. Flynn, Del.Ch., 413 A.2d 1251 (1980).

      50

      By way of background, this Court's review in Zapata was limited to whether an independent investigation committee of disinterested directors had the power to cause the derivative action to be dismissed. Preliminarily, it was noted in Zapata that "[d]irectors of Delaware corporations derive their managerial decision making power, which encompasses decisions whether to initiate, or refrain from entering, litigation, from 8 Del.C. § 141(a)". Zapata, 430 A.2d at 782 (footnotes omitted). In that context, this Court observed that the business judgment rule has no relevance to corporate decision making until after a decision has been made. Id. In Zapata, we stated that a shareholder does not possess an independent individual right to continue a derivative action. Moreover, where demand on a board has been made and refused, we apply the business judgment rule in reviewing the board's refusal to act pursuant to a stockholder's demand. Id. at 784 & n. 10. Unless the business judgment rule does not protect the refusal to sue, the shareholder lacks the legal managerial power to continue the derivative action, since that power is terminated by the refusal. Id. at 784. We also concluded that where demand is excused a shareholder possesses the ability to initiate a derivative action, but the right to prosecute it may be terminated upon the exercise of applicable standards of business judgment. Id. The thrust of Zapata is that in either the demand-refused or the demand-excused case, the board still retains its Section 141(a) managerial authority to make decisions regarding corporate litigation. Moreover, the board may delegate its managerial authority to a committee of independent disinterested directors. Id. at 786. See 8 Del.C. § 141(c). Thus, even in a demand-excused case, a board has the power to appoint a committee of one or more independent disinterested directors to determine whether the derivative action should be pursued or dismissal sought. Zapata, 430 A.2d at 786. Under Zapata, the Court of Chancery, in passing on a committee's motion to dismiss a derivative action in a demand excused case, must apply a two-step test. First, the court must inquire into the independence and good faith of the committee and review the reasonableness and good faith of the committee's investigation. Id. at 788. Second, the court must apply its own independent business judgment to decide whether the motion to dismiss should be granted. Id. at 789.

      51

      After Zapata numerous derivative suits were filed without prior demand upon boards of directors. The complaints in such actions all alleged that demand was excused because of board interest, approval or acquiescence in the wrongdoing. In any event, the Zapata demand-excused/demand-refused [814] bifurcation, has left a crucial issue unanswered: when is demand futile and, therefore, excused?

      52

      Delaware courts have addressed the issue of demand futility on several earlier occasions. See Sohland v. Baker, Del. Supr., 141 A. 277, 281-82 (1927); McKee v. Rogers, Del.Ch., 156 A. 191, 193 (1931); Miller v. Loft, Del.Ch., 153 A. 861, 862 (1931); Fleer v. Frank H. Fleer Corp., Del.Ch., 125 A. 411, 414 (1924); Harden v. Eastern States Public Service Co., Del.Ch., 122 A. 705, 707 (1923); Ellis v. Penn Beef Co., Del.Ch., 80 A. 666, 668 (1911). Cf. Mayer v. Adams, Del.Supr., 141 A.2d 458, 461 (1958) (minority demand on majority shareholders). The rule emerging from these decisions is that where officers and directors are under an influence which sterilizes their discretion, they cannot be considered proper persons to conduct litigation on behalf of the corporation. Thus, demand would be futile. See, e.g., McKee v. Rogers, Del.Ch., 156 A. 191, 192 (1931) (holding that where a defendant controlled the board of directors, "[i]t is manifest then that there can be no expectation that the corporation would sue him, and if it did, it can hardly be said that the prosecution of the suit would be entrusted to proper hands"). But see, e.g., Fleer v. Frank H. Fleer Corp., Del.Ch., 125 A. 411, 415 (1924) ("[w]here the demand if made would be directed to the particular individuals who themselves are the alleged wrongdoers and who therefore would be invited to sue themselves, the rule is settled that a demand and refusal is not requisite"); Miller v. Loft, Inc., Del.Ch., 153 A. 861, 862 (1931) ("if by reason of hostile interest or guilty participation in the wrongs complained of, the directors cannot be expected to institute suit, ... no demand upon them to institute suit is requisite").

      53

      However, those cases cannot be taken to mean that any board approval of a challenged transaction automatically connotes "hostile interest" and "guilty participation" by directors, or some other form of sterilizing influence upon them. Were that so, the demand requirements of our law would be meaningless, leaving the clear mandate of Chancery Rule 23.1 devoid of its purpose and substance.

      54

      The trial court correctly recognized that demand futility is inextricably bound to issues of business judgment, but stated the test to be based on allegations of fact, which, if true, "show that there is a reasonable inference" the business judgment rule is not applicable for purposes of a pre-suit demand. Lewis, 466 A.2d at 381.

      55

      The problem with this formulation is the concept of reasonable inferences to be drawn against a board of directors based on allegations in a complaint. As is clear from this case, and the conclusory allegations upon which the Vice Chancellor relied, demand futility becomes virtually automatic under such a test. Bearing in mind the presumptions with which director action is cloaked, we believe that the matter must be approached in a more balanced way.

      56

      Our view is that in determining demand futility the Court of Chancery in the proper exercise of its discretion must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Hence, the Court of Chancery must make two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of the challenged transaction and the board's approval thereof. As to the latter inquiry the court does not assume that the transaction is a wrong to the corporation requiring corrective steps by the board. Rather, the alleged wrong is substantively reviewed against the factual background alleged in the complaint. As to the former inquiry, directorial independence and disinterestedness, the court reviews the factual allegations to decide whether they raise a reasonable doubt, as a threshold matter, that the protections of the business judgment rule are available to the board. [815] Certainly, if this is an "interested" director transaction, such that the business judgment rule is inapplicable to the board majority approving the transaction, then the inquiry ceases. In that event futility of demand has been established by any objective or subjective standard.[8] See, e.g., Bergstein v. Texas Internat'l Co., Del.Ch., 453 A.2d 467, 471 (1982) (because five of nine directors approved stock appreciation rights plan likely to benefit them, board was interested for demand purposes and demand held futile). This includes situations involving self-dealing directors. See Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971); Sterling v. Mayflower, Del.Supr., 93 A.2d 107 (1952); Trans World Airlines, Inc. v. Summa Corp., Del.Ch., 374 A.2d 5 (1977); David J. Greene & Co. v. Dunhill International, Inc., Del.Ch., 249 A.2d 427 (1968).

      57

      However, the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists. See Gimbel v. Signal Cos., Inc., Del.Ch., 316 A.2d 599, aff'd, Del.Supr., 316 A.2d 619 (1974); Cottrell v. Pawcatuck Co., Del.Supr., 128 A.2d 225 (1956). In sum the entire review is factual in nature. The Court of Chancery in the exercise of its sound discretion must be satisfied that a plaintiff has alleged facts with particularity which, taken as true, support a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. Only in that context is demand excused.

      58
      B.
      59

      Having outlined the legal framework within which these issues are to be determined, we consider plaintiff's claims of futility here: Fink's domination and control of the directors, board approval of the Fink-Meyers employment agreement, and board hostility to the plaintiff's derivative action due to the directors' status as defendants.

      60

      Plaintiff's claim that Fink dominates and controls the Meyers' board is based on: (1) Fink's 47% ownership of Meyers' outstanding stock, and (2) that he "personally selected" each Meyers director. Plaintiff also alleges that mere approval of the employment agreement illustrates Fink's domination and control of the board. In addition, plaintiff argued on appeal that 47% stock ownership, though less than a majority, constituted control given the large number of shares outstanding, 1,245,745.

      61

      Such contentions do not support any claim under Delaware law that these directors lack independence. In Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119 (1971), the Court of Chancery stated that "[s]tock ownership alone, at least when it amounts to less than a majority, is not sufficient proof of domination or control". Id. at 123. Moreover, in the demand context even proof of majority ownership of a company does not strip the directors of the presumptions of independence, and that their acts have been taken in good faith and in the best interests of the corporation. There must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person. See Mayer v. Adams, Del.Ch., 167 A.2d 729, 732, aff'd, Del.Supr., 174 A.2d 313 (1961). To date the principal decisions dealing [816] with the issue of control or domination arose only after a full trial on the merits. Thus, they are distinguishable in the demand context unless similar particularized facts are alleged to meet the test of Chancery Rule 23.1. See e.g., Kaplan, 284 A.2d at 123; Chasin v. Gluck, Del.Ch., 282 A.2d 188 (1971); Greene v. Allen, Del.Ch., 114 A.2d 916 (1955); Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225, 237 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939).

      62

      The requirement of director independence inhers in the conception and rationale of the business judgment rule. The presumption of propriety that flows from an exercise of business judgment is based in part on this unyielding precept. Independence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences. While directors may confer, debate, and resolve their differences through compromise, or by reasonable reliance upon the expertise of their colleagues and other qualified persons, the end result, nonetheless, must be that each director has brought his or her own informed business judgment to bear with specificity upon the corporate merits of the issues without regard for or succumbing to influences which convert an otherwise valid business decision into a faithless act.

      63

      Thus, it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director. It is the care, attention and sense of individual responsibility to the performance of one's duties, not the method of election, that generally touches on independence.

      64

      We conclude that in the demand-futile context a plaintiff charging domination and control of one or more directors must allege particularized facts manifesting "a direction of corporate conduct in such a way as to comport with the wishes or interests of the corporation (or persons) doing the controlling". Kaplan, 284 A.2d at 123. The shorthand shibboleth of "dominated and controlled directors" is insufficient. In recognizing that Kaplan was decided after trial and full discovery, we stress that the plaintiff need only allege specific facts; he need not plead evidence. Otherwise, he would be forced to make allegations which may not comport with his duties under Chancery Rule 11.[9]

      65

      Here, plaintiff has not alleged any facts sufficient to support a claim of control. The personal-selection-of-directors allegation stands alone, unsupported. At best it is a conclusion devoid of factual support. The causal link between Fink's control and approval of the employment agreement is alluded to, but nowhere specified. The director's approval, alone, does not establish control, even in the face of Fink's 47% stock ownership. See Kaplan v. Centex Corp., 284 A.2d at 122, 123. The claim that Fink is unlikely to perform any services under the agreement, because of his age, and his conflicting consultant work with Prudential, adds nothing to the control claim.[10] Therefore, we cannot conclude that the [817] complaint factually particularizes any circumstances of control and domination to overcome the presumption of board independence, and thus render the demand futile.

      66
      C.
      67

      Turning to the board's approval of the Meyers-Fink employment agreement, plaintiff's argument is simple: all of the Meyers directors are named defendants, because they approved the wasteful agreement; if plaintiff prevails on the merits all the directors will be jointly and severally liable; therefore, the directors' interest in avoiding personal liability automatically and absolutely disqualifies them from passing on a shareholder's demand.

      68

      Such allegations are conclusory at best. In Delaware mere directorial approval of a transaction, absent particularized facts supporting a breach of fiduciary duty claim, or otherwise establishing the lack of independence or disinterestedness of a majority of the directors, is insufficient to excuse demand.[11] Here, plaintiff's suit is premised on the notion that the Meyers-Fink employment agreement was a waste of corporate assets. So, the argument goes, by approving such waste the directors now face potential personal liability, thereby rendering futile any demand on them to bring suit. Unfortunately, plaintiff's claim falls in its initial premise. The complaint does not allege particularized facts indicating that the agreement is a waste of corporate assets. Indeed, the complaint as now drafted may not even state a cause of action, given the directors' broad corporate power to fix the compensation of officers.[12]

      69

      In essence, the plaintiff alleged a lack of consideration flowing from Fink to Meyers, since the employment agreement provided that compensation was not contingent on Fink's ability to perform any services. The bare assertion that Fink performed "little or no services" was plaintiff's conclusion based solely on Fink's age and the existence of the Fink-Prudential employment agreement. As for Meyers' loans to Fink, beyond the bare allegation that they were made, the complaint does not allege facts indicating the wastefulness of such arrangements. Again, the mere existence of such loans, given the broad corporate powers conferred by Delaware law, does not even state a claim.[13]

      70

      In sustaining plaintiff's claim of demand futility the trial court relied on Fidanque v. American Maracaibo Co., Del. Ch., 92 A.2d 311, 321 (1952), which held that a contract providing for payment of consulting fees to a retired president/director was a waste of corporate assets. Id. In Fidanque, the court found after trial that the contract and payments were in reality compensation for past services. Id. at 320. This was based upon facts not present here: the former president/director was a 70 year old stroke victim, neither the agreement nor the record spelled out his consulting duties at all, the consulting salary equalled the individual's salary when he was president and general manager of the corporation, and the contract was silent as to continued employment in the event that the retired president/director again became incapacitated and unable to perform his duties. Id. at 320-21. Contrasting the facts of Fidanque with the complaint here, it is apparent that plaintiff has not alleged [818] facts sufficient to render demand futile on a charge of corporate waste, and thus create a reasonable doubt that the board's action is protected by the business judgment rule. Cf. Beard v. Elster, Del.Supr., 160 A.2d 731 (1960); Lieberman v. Koppers Company Line, Inc., Del.Ch., 149 A.2d 756, aff'd, Lieberman v. Becker, Del.Supr., 155 A.2d 596 (1959).

      71
      D.
      72

      Plaintiff's final argument is the incantation that demand is excused because the directors otherwise would have to sue themselves, thereby placing the conduct of the litigation in hostile hands and preventing its effective prosecution. This bootstrap argument has been made to and dismissed by other courts. See, e.g., Lewis v. Graves, 701 F.2d 245, 248-49 (2d Cir.1983); Heit v. Baird, 567 F.2d 1157, 1162 (1st Cir. 1977); Lewis v. Anselmi, 564 F.Supp., 768, 772 (S.D.N.Y.1983). Its acceptance would effectively abrogate Rule 23.1 and weaken the managerial power of directors. Unless facts are alleged with particularity to overcome the presumptions of independence and a proper exercise of business judgment, in which case the directors could not be expected to sue themselves, a bare claim of this sort raises no legally cognizable issue under Delaware corporate law.

      73
      V.
      74

      In sum, we conclude that the plaintiff has failed to allege facts with particularity indicating that the Meyers directors were tainted by interest, lacked independence, or took action contrary to Meyers' best interests in order to create a reasonable doubt as to the applicability of the business judgment rule. Only in the presence of such a reasonable doubt may a demand be deemed futile. Hence, we reverse the Court of Chancery's denial of the motion to dismiss, and remand with instructions that plaintiff be granted leave to amend his complaint to bring it into compliance with Rule 23.1 based on the principles we have announced today.

      75
      * * *
      76

      REVERSED AND REMANDED.

      77

      [1] Chancery Rule 23.1, similar to Fed.R.Civ.P. 23.1, provides in pertinent part:

      78

      In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share of membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort. Del.Ch.Ct.R. 23.1 (Emphasis added).

      79

      [2] The Court of Chancery stated that Fink had been chief executive officer of Prudential prior to the spin-off and thereafter became chairman of Meyers' board. This was not alleged in the complaint. Lewis, 466 A.2d at 379.

      80

      [3] The trial court stated that Fink "changed his status with Prudential building from employee to consultant". Lewis, 466 A.2d at 379.

      81

      [4] The broad question of structuring the modern corporation in order to satisfy the twin objectives of managerial freedom of action and responsibility to shareholders has been extensively debated by commentators. See, e.g., Fischel, The Corporate Governance Movement, 35 Vand.L.Rev. 1259 (1982); Dickstein, Corporate Governance and the Shareholders' Derivative Action: Rules and Remedies for Implementing the Monitoring Model, 3 Cardozo L.Rev. 627 (1982); Haft, Business Decisions by the New Board: Behavioral Science and Corporate Law, 80 Mich.L.Rev. 1 (1981); Dent, The Revolution in Corporate Governance, The Monitoring Board, and The Director's Duty of Care, 61 B.U.L.Rev. 623 (1981); Moore, Corporate Officer & Director Liability: Is Corporate Behavior Beyond the Control of Our Legal System? 16 Capital U.L.Rev. 69 (1980); Jones, Corporate Governance: Who Controls the Large Corporation? 30 Hastings L.J. 1261 (1979); Small, The Evolving Role of the Director in Corporate Governance, 30 Hastings L.J. 1353 (1979).

      82

      [5] Like the broader question of corporate governance, the derivative suit, its value, and the methods employed by corporate boards to deal with it have received much attention by commentators. See, e.g., Brown, Shareholder Derivative Litigation and the Special Litigation Committee, 43 U.Pitt.L.Rev. 601 (1982); Coffee and Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform, 81 Colum.L.Rev. 261 (1981); Shnell, A Procedural Treatment of Derivative Suit Dismissals by Minority Directors, 609 Calif.L.Rev. 885 (1981); Dent, The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit? 75 N.W.U.L. Rev. 96 (1980); Jones, An Empirical Examination of the Incidence of Shareholder Derivative and Class Action Lawsuits, 1971-1978, 60 B.U. L.Rev. 306 (1980); Comment, The Demand and Standing Requirements in Stockholder Derivative Actions, 44 U.Chi.L.Rev. 168 (1976); Dykstra, The Revival of the Derivative Suit, 116 U.Pa.L.Rev. 74 (1967); Note, Demand on Directors and Shareholders as a Prerequisite to a Derivative Suit, 73 Harv.L.Rev. 729 (1960).

      83

      [6] While the Delaware cases have not been precise in articulating the standard by which the exercise of business judgment is governed, a long line of Delaware cases holds that director liability is predicated on a standard which is less exacting than simple negligence. Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 722 (1971), rev'g, Del.Ch., 261 A.2d 911 (1969) ("fraud or gross overreaching"); Getty Oil Co. v. Skelly Oil Co., Del.Supr., 267 A.2d 883, 887 (1970), rev'g, Del.Ch., 255 A.2d 717 (1969) ("gross and palpable overreaching"); Warshaw v. Calhoun, Del.Supr., 221 A.2d 487, 492-93 (1966) ("bad faith ... or a gross abuse of discretion"); Moskowitz v. Bantrell, Del.Supr., 190 A.2d 749, 750 (1963) ("fraud or gross abuse of discretion"); Penn Mart Realty Co. v. Becker, Del.Ch., 298 A.2d 349, 351 (1972) ("directors may breach their fiduciary duty ... by being grossly negligent"); Kors v. Carey, Del.Ch., 158 A.2d 136, 140 (1960) ("fraud, misconduct or abuse of discretion"); Allaun v. Consolidated Oil Co., Del.Ch., 147 A. 257, 261 (1929) ("reckless indifference to or a deliberate disregard of the stockholders").

      84

      [7] Although questions of director liability in such cases have been adjudicated upon concepts of business judgment, they do not in actuality present issues of business judgment. See Graham v. Allis-Chalmers Manufacturing Co., Del.Supr., 188 A.2d 125 (1963); Kelly v. Bell, Del.Ch., 254 A.2d 62 (1969), aff'd, Del. Supr., 266 A.2d 878 (1970); Lutz v. Boas, Del. Ch., 171 A.2d 381 (1961). See also Arsht, Fiduciary Responsibilities of Directors, Officers & Key Employees, 4 Del.J.Corp.L. 652, 659 (1979).

      85

      [8] We recognize that drawing the line at a majority of the board may be an arguably arbitrary dividing point. Critics will charge that we are ignoring the structural bias common to corporate boards throughout America, as well as the other unseen socialization processes cutting against independent discussion and decisionmaking in the boardroom. The difficulty with structural bias in a demand futile case is simply one of establishing it in the complaint for purposes of Rule 23.1. We are satisfied that discretionary review by the Court of Chancery of complaints alleging specific facts pointing to bias on a particular board will be sufficient for determining demand futility.

      86

      [9] Chancery Rule 11 provides:

      87

      Every pleading of a party represented by an attorney shall be signed by at least 1 attorney of record in his individual name, whose address shall be stated. A party who is not represented by an attorney shall sign his pleading and state his address. Except when otherwise specifically provided by statute or rule, pleadings need not be verified or accompanied by affidavit. The signature of an attorney constitutes a certificate by him that he has read the pleading; that to the best of his knowledge, information, and belief there is good ground to support it; and that it is not interposed for delay. If a pleading is not signed or is signed with intent to defeat the purpose of this rule, it may be stricken as sham and false and the action may proceed as though the pleading had not been served. For a willful violation of this rule an attorney may be subjected to appropriate disciplinary action. Similar action may be taken if scandalous or indecent matter is inserted.

      88

      Del.Ch.Ct.R. 11.

      89

      [10] Plaintiff made no legal argument that the "best efforts" provision of the agreement prohibited dual consultant duties, thereby demonstrating that the contract's approval evidenced control or was otherwise wrongful.

      90

      [11] See also In re Kauffman Mutual Fund Actions, 479 F.2d 257, 265 (1st Cir.1973); Greenspun v. Del E. Webb, 634 F.2d 1204, 1210 (9th Cir.1980); Grossman v. Johnson, 674 F.2d 115, 124 (1st Cir.1982); Lewis v. Curtis, 671 F.2d 779, 785 (3d Cir.1982); Lewis v. Graves, 701 F.2d 245, 248 (2d Cir.1983).

      91

      [12] 8 Del.C. § 122(5) provides that "[e]very corporation created under this chapter shall have the power to appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation". 8 Del.C. § 122(5).

      92

      [13] Plaintiff's allegation ignores 8 Del.C. § 143 which expressly authorizes interest-free loans to "any officer or employee of the corporation... whenever, in the judgment of the directors, such loan ... may reasonably be expected to benefit the corporation." 8 Del.C. § 143.

    • 5.6 Gagliardi v. TriFoods International Inc.

      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.

      1
      683 A.2d 1049 (1996)
      2
      Eugene D. GAGLIARDI, Jr., Plaintiff,
      v.
      TRIFOODS INTERNATIONAL, INC., et al., Nominal Defendant,
      G.J. Hart, Frank A. Adams, Grotech Capital Group, Inc., Grotech Partners II, L.P., Grotech Partners III, L.P., Grotech Partners IIID, L.P., Grotech Partners IIIC, L.P., Don J. Casturo, Point Venture Associates, L.P., Point Venture Partners Pennsylvania, L.P., and Brian Fleming, Defendants.
      3
      Civil Action No. 14725.
      4

      Court of Chancery of Delaware, New Castle County.

      5
      Submitted: June 3, 1996.
      6
      Decided: July 19, 1996.[1]
      7

      [1050] James G. Wiles, Law Offices of James G. Wiles, New Castle, for Plaintiff.

      8

      R. Franklin Balotti, Daniel A. Dreisbach, and Luke E. Dembosky, of Richards, Layton & Finger, Wilmington, for Defendant G.J. Hart.

      9

      Collins J. Seitz, Jr., of Connolly, Bove, Lodge & Hutz, Wilmington, for All Defendants except G.J. Hart.

      10
      OPINION
      11
      ALLEN, Chancellor.
      12

      Currently before the Court is a motion to dismiss a shareholders action against the directors of TriFoods International, Inc. and certain partnerships and individuals that own stock in TriFoods. In broadest terms the motion raises the question, what must a shareholder plead in order to state a derivative claim to recover corporate losses allegedly sustain by reason of "mismanagement" unaffected by directly conflicting financial interests?

      13

      Plaintiff, Eugene Gagliardi, is the founder of the TriFoods, Inc. and in 1990 he induced certain persons to invest in the company by buying its stock. In 1993 he was removed as Chairman of the board and his employment with the company terminated. He continues to own approximately 13% of the company's common stock. The business of the company has, according to the allegations of the complaint, deteriorated very badly since Mr. Gagliardi's ouster.

      14

      The suit asserts that defendants are liable to the corporation and to plaintiff individually on a host of theories, most importantly for mismanagement. The matter is before the Court on defendants' motion to dismiss the derivative aspects of the complaint for failure to show that the preconditions established by Rule 23.1 for litigation of a derivative suit have been satisfied in this instance and, with respect to any alleged direct or individual claims, to dismiss those allegations for failure to state a claim.

      15

      To structure discussion of the issues raised by this motion, I address each of the six counts of the amended complaint seriatim, ruling on the legal sufficiency under Rule 12(b)(6) or Rule 23.1 as the case may be, before turning to the next count of the complaint. For the reasons set forth below, I conclude that, with the exception of a single claim that survives when read sympathetically in the light of a recent Supreme Court precedent (see Count II infra respecting [1051] breach of employment contract), the amended complaint is subject to dismissal at this time. To a very limited extent, as indicated below, I will permit the filing of a further amendment to correct deficiencies that may be correctable. (See Count III infra, respecting ¶ 67(e) of the Amended Complaint).

      16

      Count IV: Negligent Mismanagement:

      17

      This count, which is asserted against all defendants, alleges that "implementation of their grandiose scheme for TriFoods' future growth ... in only eighteen months destroyed TriFoods." Plaintiff asserts that the facts alleged, which sketch that "scheme" and those results, constitute mismanagement and waste.

      18

      The allegations of Count IV are detailed.

      19

      They assert most centrally that prior to his dismissal Gagliardi disagreed with Hart concerning the wisdom of TriFoods manufacturing its products itself and disagreed strongly that the company should buy a plant in Pomfret, Connecticut and move its operations to that state. Plaintiff thought it foolish (and he alleges that it was negligent judgment) to borrow funds from CDA for that purpose. ¶¶ 71-74; 77-81.

      20

      Plaintiff also alleges that Hart caused the company to acquire and fit-out a research or new product facility in Chadds Ford Pennsylvania, which "duplicated one already available and under lease to Designer Foods [the predecessor name of TriFoods], and which was therefore, a further waste of corporate assets." ¶ 76.

      21

      Next, it is alleged that "defendants either acquiesced in or approved a reckless or grossly negligent sales commission to build volume." ¶ 82.

      22

      Next, it is alleged that "Hart and the other defendants caused TriFoods to purchase [the exclusive rights to produce and sell a food product known as] Steak-umms from Heinz in April 1994." ¶ 85. The price paid compared unfavorably with a transaction in 1980 in which this product had been sold and which earlier terms are detailed. ¶ 86. "Defendants recklessly caused TriFoods to pay $15 million for Steak-umms alone (no plant, no equipment, etc) which was then doing annual sales of only $28 million." Id.

      23

      Next, it is alleged that "Hart caused TriFoods... to pay $125,000 to a consultant for its new name, logo and packaging." ¶ 87.

      24

      Next, it is alleged that Hart destroyed customer relationships by supplying inferior products. ¶¶ 88-91.

      25

      Next, it is alleged that "Hart refused to pay key manufacturers and suppliers ... thus injuring TriFoods' trade relations." ¶ 92.

      26

      Next, it is alleged that "defendants entered into a transaction whereby TriFoods was to acquire "Lloyd's Ribs" at a grossly excessive price, knowing (or recklessly not knowing) that the Company could not afford the transaction." ¶ 93.

      27

      Lastly, with respect to the mismanagement count, it is alleged that defendants ignored plaintiff's warnings as to each of the above; that Hart was fired in May 1995; and that a settlement was reached between Hart and the Company. ¶¶ 94-97. All of the foregoing lead to the current condition of the company, which is very weak financially.

      28

      Do these allegations of Count IV state a claim upon which relief may be granted? In addressing that question, I start with what I take to be an elementary precept of corporation law: in the absence of facts showing self-dealing or improper motive, a corporate officer or director is not legally responsible to the corporation for losses that may be suffered as a result of a decision that an officer made or that directors authorized in good faith.[2] There is a theoretical exception [1052] to this general statement that holds that some decisions may be so "egregious" that liability for losses they cause may follow even in the absence of proof of conflict of interest or improper motivation. The exception, however, has resulted in no awards of money judgments against corporate officers or directors in this jurisdiction and, to my knowledge only the dubious holding in this Court of Gimbel v. Signal Companies, Inc., (Del. Ch.) 316 A.2d 599 aff'd (Del.Supr.) 316 A.2d 619 (1974), seems to grant equitable relief in the absence of a claimed conflict or improper motivation.[3] Thus, to allege that a corporation has suffered a loss as a result of a lawful transaction, within the corporation's powers, authorized by a corporate fiduciary acting in a good faith pursuit of corporate purposes, does not state a claim for relief against that fiduciary no matter how foolish the investment may appear in retrospect.

      29

      The rule could rationally be no different. Shareholders can diversify the risks of their corporate investments. Thus, it is in their economic interest for the corporation to accept in rank order all positive net present value investment projects available to the corporation, starting with the highest risk adjusted rate of return first. Shareholders don't want (or shouldn't rationally want) directors to be risk averse. Shareholders' investment interests, across the full range of their diversifiable equity investments, will be maximized if corporate directors and managers honestly assess risk and reward and accept for the corporation the highest risk adjusted returns available that are above the firm's cost of capital.

      30

      But directors will tend to deviate from this rational acceptance of corporate risk if in authorizing the corporation to undertake a risky investment, the directors must assume some degree of personal risk relating to ex post facto claims of derivative liability for any resulting corporate loss.

      31

      Corporate directors of public companies typically have a very small proportionate ownership interest in their corporations and little or no incentive compensation. Thus, they enjoy (as residual owners) only a very small proportion of any "upside" gains earned by the corporation on risky investment projects. If, however, corporate directors were to be found liable for a corporate loss from a risky project on the ground that the investment was too risky (foolishly risky! stupidly risky! egregiously risky! — you supply the adverb), their liability would be joint and several for the whole loss (with I suppose a right of contribution). Given the scale of operation of modern public corporations, this stupefying disjunction between risk and reward for corporate directors threatens undesirable effects. Given this disjunction, only a very small probability of director liability based on "negligence", "inattention", "waste", etc., could induce a board to avoid authorizing risky investment projects to any extent! Obviously, it is in the shareholders' economic interest to offer sufficient protection to directors from liability for negligence, etc., to allow directors to conclude that, as a practical matter, there is no risk that, if they act in good faith and meet minimal proceduralist standards of attention, they can face liability as a result of a business loss.

      32

      The law protects shareholder investment interests against the uneconomic consequences that the presence of such second-guessing risk would have on director action and shareholder wealth in a number of ways. It authorizes corporations to pay for director and officer liability insurance and authorizes corporate indemnification in a broad range of cases, for example. But the first protection against a threat of sub-optimal risk acceptance is the so-called business judgment rule. That "rule" in effect provides that where a [1053] director is independent and disinterested, there can be no liability for corporate loss, unless the facts are such that no person could possibly authorize such a transaction if he or she were attempting in good faith to meet their duty. Saxe v. Brady, Del.Ch., 184 A.2d 602 (1962).

      33

      Thus, for example it does not state a claim to allege that: (1) Hart caused the corporation to pay $125,000 to a consultant for the design of a new logo and packaging. On what possible basis might a corporate officer or director be put to the expense of defending such a claim? Nothing is alleged except that an expenditure of corporate funds for a corporate purpose was made. Whether that expenditure was wise or foolish, low risk or high risk is of no concern to this Court. What is alleged certainly does not bring the allegation to within shouting distance of the Saxe v. Brady principle. (2) Nor does an allegation that defendants acquiesced in a reckless commission structure "in order to build volume" state a claim; it alleges no conflicting interest or improper motivation, nor does it state facts that might come within the Saxe v. Brady principle. It alleges only an ordinary business decision with a pejorative characterization added. (3) The allegation of "duplication" of existing product research facilities similarly simply states a matter that falls within ordinary business judgment; that plaintiff regards the decision as unwise, foolish, or even stupid in the circumstances is not legally significant; indeed that others may look back on it and agree that it was stupid is legally unimportant, in my opinion. (4) That the terms of the purchase of "Steak-umms" seem to plaintiff unwise (especially when compared to the terms of a 1980 transaction involving that product) again fail utterly to state any legal claim. No self-interest, nor facts possibly disclosing improper motive or judgment satisfying the waste standard are alleged. Similarly, (5) the allegations of corporate loss resulting from harm to customer relations by delivery of poor product and (6) harm to supplier relations by poor payment practices, again state nothing that constitutes a legal claim. Certainly these allegations state facts that, if true, constitute either mistakes, poor judgment, or reflect hard choices facing a cash-pressed company, but where is the allegation of conflicting interest or suspect motivation? In the absence of such, where are the facts that, giving the pleader all reasonable inferences in his favor, might possibly make the Saxe v. Brady principle applicable? There are none. Nothing is alleged other than poor business practices. To permit the possibility of director liability on that basis would be very destructive of shareholder welfare in the long-term.

      34

      A similar analysis holds for the allegations concerning a contract to acquire the product "Lloyd's Ribs" (7); nothing is alleged other than that the price was excessive and the directors knew (or recklessly didn't know) that "the company could not afford such a transaction." More importantly, the complaint does not allege that the contract was ever closed! Indeed in Count V it is alleged that certain defendants diverted the opportunity to acquire Lloyd's Ribs from TriFoods! Thus, with respect to this possible transaction, not only does the amended complaint contain no allegation of conflict of interest or improper motivation in TriFoods' acquiring "Lloyd's Ribs," but it contains no allegation that a transaction involving the company ever occurred.

      35

      Finally, (8) there is the allegation that despite warnings from plaintiff and despite the alleged fact that the Pomfret facility "was not reasonably fit" for the purpose, the directors authorized the purchase of the facility at a "grossly excessive" price in order to implement a business plan that would have the company manufacture some or all of its food products and that defendants caused the company to borrow substantial funds to accomplish that task. Once more there is no allegation of conflict of interest with respect to this transaction[4], nor is there any allegation [1054] of improper motivation in authorizing the transactions. There is, in effect, only an allegation that plaintiff believes the transaction represents poor business judgment and the conclusion that "no reasonable business person would have engaged in it." ¶ 81. Thus this claim does attempt to plead the Saxe v. Brady test of corporate waste.

      36

      Does this attempt to plead a claim respecting the Pomfret move survive a motion to dismiss? Under the general notice pleading rules this conclusory addition to allegations that otherwise clearly fall within the ambit of the business judgment rule might perhaps be regarded as sufficient to proceed to discovery. CHARLES A. WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE & PROCEDURE: Civil 2d § 1215 (1990 and 1995 Supp.). But it is not clear that, where derivative claims are involved, good policy supports the same result. Asserting a derivative claim allows an attorney in the role of agent for shareholders to exert substantially magnified settlement pressure on a defendant. The risk/reward situation of the individual director defendants (discussed above), coupled with the ordinary workings of indemnification rights and insurance, means that very, very few derivative suits reach trial. Strike suits are a greater threat in this context than in civil litigation between two principals. Thus, in such cases the consequences of surviving a motion to dismiss are, as a practical matter, substantially more significant than in garden variety civil litigation.

      37

      It is rational and good policy for the law to filter such cases at an early stage more finely than the Rule 12(b)(6) test permits. This in effect can be done through the operation of Rule 23.1, which modifies the notice pleading standard by requiring plaintiff to plead with particularity either that plaintiff has sought to induce the board to bring the action and that the board has failed or refused to do so for no good reason or the reason plaintiff has not sought the board's action. See generally Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984); Rales v. Blasband, Del.Supr., 634 A.2d 927 (1993); Spiegel v. Buntrock, Del. Supr., 571 A.2d 767 (1990).

      38

      Defendants have moved to dismiss Count IV on the basis that plaintiff has failed to satisfy the pleading requirements of Rule 23.1. With respect to most of the allegations of this count, I grant the motion to dismiss on the fundamental ground that without regard to Rule 23.1 plaintiff has simply failed to allege facts from which a valid cause of action can be inferred, but with respect to the claim (8) that attempts to plead a waste or mismanagement claim premised on the facts relating to the decision to expend funds and enter into transactions in connection with the acquisition of the Pomfret facility, I grant the motion on the basis that plaintiff has admittedly made a demand upon the board, that the board has indicated both in its response to plaintiff and equally importantly through its motion to dismiss this suit, that in its judgment the corporation's interests will not be advanced by pursuing this litigation and no good reason not to respect that judgment has been alleged.[5] The test for whether derivative adjudication of this claim may proceed is whether the TriFoods board was so situated with respect to the Pomfret transactions that any exercise of business judgment by the board with respect to those transactions (i.e., the loan, the purchase, the moving, etc.) was inherently subject to reasonable doubt as to whether it was affected by an interest or motive disqualifying it from business judgment protection. [1055] Aronson, 473 A.2d at 814; Spiegel, 571 A.2d at 774; Rales, 634 A.2d at 933. Of course no such interest or motive is alleged and thus no reason to permit the shareholder to second-guess the board decision not to prosecute this claim is alleged. I should note that it is well established that the simple expedient of naming a majority of otherwise disinterested and well motivated directors as defendants and charging them with laxity or conspiracy etc., will not itself satisfy the standards for permitting a shareholder to be excused from demand or to override a board decision not to litigate a corporate claim. See Aronson, 473 A.2d at 815; Pogostin v. Rice, Del.Supr., 480 A.2d 619, 625 (1984).

      39

      For the foregoing reason Count IV of the amended complaint will be dismissed.

      40
      * * *
      41

      Defendants may submit a form of order, on notice, in conformity with the foregoing.

      42

      [1] Under Delaware Supreme Court Rule 93(b)(ii) the Committee on Opinions approved a portion of the original opinion for publication. [Editor's Note: Counts I-III, V and VI were not approved for publication.]

      43

      [2] I include within the category of improper motivation those cases in which particularized claims of director entrenchment are made. E.g. Cheff v. Mathes, Del.Supr., 199 A.2d 548 (1964); Unitrin, Inc. v. American General Corp., Del.Supr., 651 A.2d 1361 (1995); Or in which, relatedly, transfers of corporate control by the board, as described in Revlon v. MacAndrews & Forbes Holdings, Del.Supr., 506 A.2d 173 (1986) or more pertinently Paramount Communications v. QVC Network, Del.Supr., 637 A.2d 34 (1994) are involved. Finally, I note that in making this simple statement, I count Smith v. Van Gorkom, Del.Supr., 488 A.2d 858 (1985), not as a "negligence" or due care case involving no loyalty issues, but as an early and, as of its date, not yet fully rationalized, "Revlon" or "change in control" case. See Jonathan Macey and Geoffrey Miller, TransUnion Reconsidered, 98 YALES L.J. 127. As such I see it as reflecting a concern with the TransUnion board's independence and loyalty to the company's shareholders in a critical "sale of the company" context.

      44

      [3] Interestingly, the obviously problematic nature of entering an injunction (even a preliminary injunction) against directors, while at the same time holding that they were neither suffering from any conflicting interest nor acting in bad faith, caused the Gimbel court to impose a bond that was unprecedented in size especially for the period ($25 million) and which, in fact, was never satisfied. Therefore, while the court indicated its conditional willingness in Gimbel to enter an injunction, in fact no relief ever issued.

      45

      [4] It was suggested at oral argument by plaintiff's counsel that the investors who controlled the board at this time were driven by a desire to make the company appear attractive to a future IPO market (i.e. an initial public offering of its stock) and that the desire to have some "bricks and mortar" for that purpose motivated them with respect to the Pomfret transaction, even though it was a poor deal from a business point of view. While one may disagree with the wisdom of any such strategy, if it existed, any interest in making the company appear attractive as an IPO investment, if present, was an interest that all shareholders shared and did not represent a financial conflict of interest with respect to the Pomfret transaction.

      46

      [5] Plaintiff seeks to survive this motion with an allegation that the board itself never did address his demand, but that an officer and corporate attorney did so without board involvement. Thus he says any such purported denial of his request will be proven to be ineffective. He asserts that in all events there is now a factual issue with respect to the effectiveness of the board rejection that precludes termination of his suit on the basis of Rule 23.1 at this stage. It is, however, undisputed that Mr. Gagliardi made a pre-suit demand, that the corporation did not institute the suit, that plaintiff did and that the corporation has moved to dismiss under Rule 23.1. These undisputed facts establish the board's official response to the demand and make irrelevant the issue that plaintiff seeks to explore through discovery.

    • 5.7 DGCL Sec. 145 - Indemnification of Directors and Other Agents

      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.

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4 5 6

      (a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person's conduct was unlawful.

      7

      (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

      8

      (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith.

      9

      (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer of the corporation at the time of such determination:

      10

      (1) By a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum; or

      11

      (2) By a committee of such directors designated by majority vote of such directors, even though less than a quorum; or

      12

      (3) If there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion; or

      13

      (4) By the stockholders.

      14

      (e) Expenses (including attorneys' fees) incurred by an officer or director of the corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents of the corporation or by persons serving at the request of the corporation as directors, officers, employees or agents of another corporation, partnership, joint venture, trust or other enterprise may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.

      15

      (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. A right to indemnification or to advancement of expenses arising under a provision of the certificate of incorporation or a bylaw shall not be eliminated or impaired by an amendment to the certificate of incorporation or the bylaws after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission has occurred.

      16

      (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.

      17

      (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.

      18

      (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section.

      19

      (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

      20

      (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees).

      21

      8 Del. C. 1953, § 145; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 657 Del. Laws, c. 421, § 259 Del. Laws, c. 437, § 763 Del. Laws, c. 25, § 164 Del. Laws, c. 112, § 765 Del. Laws, c. 289, §§ 3-667 Del. Laws, c. 376, § 369 Del. Laws, c. 261, §§ 1, 270 Del. Laws, c. 186, § 171 Del. Laws, c. 120, §§ 3-1177 Del. Laws, c. 14, § 377 Del. Laws, c. 290, §§ 5, 678 Del. Laws, c. 96, § 6.;

  • 6 Stock and Dividends

    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.

    • 6.1 DGCL Sec. 151- Classes and series of stock

      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.

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4
      Subchapter V. Stock and Dividends
      5 6

      (a) Every corporation may issue 1 or more classes of stock or 1 or more series of stock within any class thereof, any or all of which classes may be of stock with par value or stock without par value and which classes or series may have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the certificate of incorporation or of any amendment thereto, or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by the provisions of its certificate of incorporation. Any of the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of any such class or series of stock may be made dependent upon facts ascertainable outside the certificate of incorporation or of any amendment thereto, or outside the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by its certificate of incorporation, provided that the manner in which such facts shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such class or series of stock is clearly and expressly set forth in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors. The term "facts," as used in this subsection, includes, but is not limited to, the occurrence of any event, including a determination or action by any person or body, including the corporation. The power to increase or decrease or otherwise adjust the capital stock as provided in this chapter shall apply to all or any such classes of stock.

      7

      (b) Any stock of any class or series may be made subject to redemption by the corporation at its option or at the option of the holders of such stock or upon the happening of a specified event; provided however, that immediately following any such redemption the corporation shall have outstanding 1 or more shares of 1 or more classes or series of stock, which share, or shares together, shall have full voting powers. Notwithstanding the limitation stated in the foregoing proviso:

      8

      (1) Any stock of a regulated investment company registered under the Investment Company Act of 1940 [15 U.S.C. § 80 a-1 et seq.], as heretofore or hereafter amended, may be made subject to redemption by the corporation at its option or at the option of the holders of such stock.

      9

      (2) Any stock of a corporation which holds (directly or indirectly) a license or franchise from a governmental agency to conduct its business or is a member of a national securities exchange, which license, franchise or membership is conditioned upon some or all of the holders of its stock possessing prescribed qualifications, may be made subject to redemption by the corporation to the extent necessary to prevent the loss of such license, franchise or membership or to reinstate it.

      10

      Any stock which may be made redeemable under this section may be redeemed for cash, property or rights, including securities of the same or another corporation, at such time or times, price or prices, or rate or rates, and with such adjustments, as shall be stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to subsection (a) of this section.

      11

      (c) The holders of preferred or special stock of any class or of any series thereof shall be entitled to receive dividends at such rates, on such conditions and at such times as shall be stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors as hereinabove provided, payable in preference to, or in such relation to, the dividends payable on any other class or classes or of any other series of stock, and cumulative or noncumulative as shall be so stated and expressed. When dividends upon the preferred and special stocks, if any, to the extent of the preference to which such stocks are entitled, shall have been paid or declared and set apart for payment, a dividend on the remaining class or classes or series of stock may then be paid out of the remaining assets of the corporation available for dividends as elsewhere in this chapter provided.

      12

      (d) The holders of the preferred or special stock of any class or of any series thereof shall be entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the corporation as shall be stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors as hereinabove provided.

      13

      (e) Any stock of any class or of any series thereof may be made convertible into, or exchangeable for, at the option of either the holder or the corporation or upon the happening of a specified event, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation, at such price or prices or at such rate or rates of exchange and with such adjustments as shall be stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors as hereinabove provided.

      14

      (f) If any corporation shall be authorized to issue more than 1 class of stock or more than 1 series of any class, the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in § 202 of this title, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or § 156, § 202(a) or § 218(a) of this title or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated stock and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.

      15

      (g) When any corporation desires to issue any shares of stock of any class or of any series of any class of which the powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions thereof, if any, shall not have been set forth in the certificate of incorporation or in any amendment thereto but shall be provided for in a resolution or resolutions adopted by the board of directors pursuant to authority expressly vested in it by the certificate of incorporation or any amendment thereto, a certificate of designations setting forth a copy of such resolution or resolutions and the number of shares of stock of such class or series as to which the resolution or resolutions apply shall be executed, acknowledged, filed and shall become effective, in accordance with § 103 of this title. Unless otherwise provided in any such resolution or resolutions, the number of shares of stock of any such series to which such resolution or resolutions apply may be increased (but not above the total number of authorized shares of the class) or decreased (but not below the number of shares thereof then outstanding) by a certificate likewise executed, acknowledged and filed setting forth a statement that a specified increase or decrease therein had been authorized and directed by a resolution or resolutions likewise adopted by the board of directors. In case the number of such shares shall be decreased the number of shares so specified in the certificate shall resume the status which they had prior to the adoption of the first resolution or resolutions. When no shares of any such class or series are outstanding, either because none were issued or because no issued shares of any such class or series remain outstanding, a certificate setting forth a resolution or resolutions adopted by the board of directors that none of the authorized shares of such class or series are outstanding, and that none will be issued subject to the certificate of designations previously filed with respect to such class or series, may be executed, acknowledged and filed in accordance with § 103 of this title and, when such certificate becomes effective, it shall have the effect of eliminating from the certificate of incorporation all matters set forth in the certificate of designations with respect to such class or series of stock. Unless otherwise provided in the certificate of incorporation, if no shares of stock have been issued of a class or series of stock established by a resolution of the board of directors, the voting powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions thereof, may be amended by a resolution or resolutions adopted by the board of directors. A certificate which:

      16

      (1) States that no shares of the class or series have been issued;

      17

      (2) Sets forth a copy of the resolution or resolutions; and

      18

      (3) If the designation of the class or series is being changed, indicates the original designation and the new designation,

      19

      shall be executed, acknowledged and filed and shall become effective, in accordance with § 103 of this title. When any certificate filed under this subsection becomes effective, it shall have the effect of amending the certificate of incorporation; except that neither the filing of such certificate nor the filing of a restated certificate of incorporation pursuant to § 245 of this title shall prohibit the board of directors from subsequently adopting such resolutions as authorized by this subsection.

      20

      8 Del. C. 1953, § 151; 56 Del. Laws, c. 5057 Del. Laws, c. 148, §§ 8, 957 Del. Laws, c. 421, §§ 3, 459 Del. Laws, c. 106, § 164 Del. Laws, c. 112, §§ 8-1065 Del. Laws, c. 127, § 466 Del. Laws, c. 136, § 467 Del. Laws, c. 376, § 469 Del. Laws, c. 264, § 170 Del. Laws, c. 587, § 1271 Del. Laws, c. 339, § 18.;

    • 6.2 DGCL Sec. 157 - Rights and options

      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.

      1 2

      (a) Subject to any provisions in the certificate of incorporation, every corporation may create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to acquire from the corporation any shares of its capital stock of any class or classes, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the board of directors.

      3

      (b) The terms upon which, including the time or times which may be limited or unlimited in duration, at or within which, and the consideration (including a formula by which such consideration may be determined) for which any such shares may be acquired from the corporation upon the exercise of any such right or option, shall be such as shall be stated in the certificate of incorporation, or in a resolution adopted by the board of directors providing for the creation and issue of such rights or options, and, in every case, shall be set forth or incorporated by reference in the instrument or instruments evidencing such rights or options. In the absence of actual fraud in the transaction, the judgment of the directors as to the consideration for the issuance of such rights or options and the sufficiency thereof shall be conclusive.

      4

      (c) The board of directors may, by a resolution adopted by the board, authorize 1 or more officers of the corporation to do 1 or both of the following: (i) designate officers and employees of the corporation or of any of its subsidiaries to be recipients of such rights or options created by the corporation, and (ii) determine the number of such rights or options to be received by such officers and employees; provided, however, that the resolution so authorizing such officer or officers shall specify the total number of rights or options such officer or officers may so award. The board of directors may not authorize an officer to designate himself or herself as a recipient of any such rights or options.

      5

      (d) In case the shares of stock of the corporation to be issued upon the exercise of such rights or options shall be shares having a par value, the consideration so to be received therefor shall have a value not less than the par value thereof. In case the shares of stock so to be issued shall be shares of stock without par value, the consideration therefor shall be determined in the manner provided in § 153 of this title.

      6

      8 Del. C. 1953, § 157; 56 Del. Laws, c. 5070 Del. Laws, c. 186, § 173 Del. Laws, c. 82, §§ 4-774 Del. Laws, c. 326, §§ 5-7.;

    • 6.3 DGCL Sec. 160 - Corporate ownership of its own stock

      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.

      1 2

      (a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; provided, however, that no corporation shall:

      3

      (1) Purchase or redeem its own shares of capital stock for cash or other property when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation, except that a corporation other than a nonstock corporation may purchase or redeem out of capital any of its own shares which are entitled upon any distribution of its assets, whether by dividend or in liquidation, to a preference over another class or series of its stock, or, if no shares entitled to such a preference are outstanding, any of its own shares, if such shares will be retired upon their acquisition and the capital of the corporation reduced in accordance with §§ 243 and 244 of this title. Nothing in this subsection shall invalidate or otherwise affect a note, debenture or other obligation of a corporation given by it as consideration for its acquisition by purchase, redemption or exchange of its shares of stock if at the time such note, debenture or obligation was delivered by the corporation its capital was not then impaired or did not thereby become impaired;

      4

      (2) Purchase, for more than the price at which they may then be redeemed, any of its shares which are redeemable at the option of the corporation; or

      5

      (3)a. In the case of a corporation other than a nonstock corporation, redeem any of its shares, unless their redemption is authorized by § 151(b) of this title and then only in accordance with such section and the certificate of incorporation, or

      6

      b. In the case of a nonstock corporation, redeem any of its membership interests, unless their redemption is authorized by the certificate of incorporation and then only in accordance with the certificate of incorporation.

      7

      (b) Nothing in this section limits or affects a corporation's right to resell any of its shares theretofore purchased or redeemed out of surplus and which have not been retired, for such consideration as shall be fixed by the board of directors.

      8

      (c) Shares of its own capital stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes. Nothing in this section shall be construed as limiting the right of any corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.

      9

      (d) Shares which have been called for redemption shall not be deemed to be outstanding shares for the purpose of voting or determining the total number of shares entitled to vote on any matter on and after the date on which written notice of redemption has been sent to holders thereof and a sum sufficient to redeem such shares has been irrevocably deposited or set aside to pay the redemption price to the holders of the shares upon surrender of certificates therefor.

      10

      8 Del. C. 1953, § 160; 56 Del. Laws, c. 5057 Del. Laws, c. 649, § 159 Del. Laws, c. 106, § 359 Del. Laws, c. 437, § 970 Del. Laws, c. 349, § 377 Del. Laws, c. 253, §§ 16, 17.;

    • 6.4 DGCL Sec. 161 - Issuance of stock

      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.

      1 2

      The directors may, at any time and from time to time, if all of the shares of capital stock which the corporation is authorized by its certificate of incorporation to issue have not been issued, subscribed for, or otherwise committed to be issued, issue or take subscriptions for additional shares of its capital stock up to the amount authorized in its certificate of incorporation.

      3

      8 Del. C. 1953, § 161; 56 Del. Laws, c. 50.;

    • 6.5 DGCL Sec. 170 - Dividends

      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. 

      1 2

      (a) The directors of every corporation, subject to any restrictions contained in its certificate of incorporation, may declare and pay dividends upon the shares of its capital stock either:

      3

      (1) Out of its surplus, as defined in and computed in accordance with §§ 154 and 244 of this title; or

      4

      (2) In case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

      5

      If the capital of the corporation, computed in accordance with §§ 154 and 244 of this title, shall have been diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, the directors of such corporation shall not declare and pay out of such net profits any dividends upon any shares of any classes of its capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired. Nothing in this subsection shall invalidate or otherwise affect a note, debenture or other obligation of the corporation paid by it as a dividend on shares of its stock, or any payment made thereon, if at the time such note, debenture or obligation was delivered by the corporation, the corporation had either surplus or net profits as provided in (a)(1) or (2) of this section from which the dividend could lawfully have been paid.

      6

      (b) Subject to any restrictions contained in its certificate of incorporation, the directors of any corporation engaged in the exploitation of wasting assets (including but not limited to a corporation engaged in the exploitation of natural resources or other wasting assets, including patents, or engaged primarily in the liquidation of specific assets) may determine the net profits derived from the exploitation of such wasting assets or the net proceeds derived from such liquidation without taking into consideration the depletion of such assets resulting from lapse of time, consumption, liquidation or exploitation of such assets.

      7

      8 Del. C. 1953, § 170; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 959 Del. Laws, c. 106, § 564 Del. Laws, c. 112, § 1767 Del. Laws, c. 376, § 569 Del. Laws, c. 61, § 372 Del. Laws, c. 123, § 377 Del. Laws, c. 253, § 18.;

    • 6.6 DGCL Sec. 202 - Restrictions on transfer of stock

      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.

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4
      Subchapter VI. Stock Transfers
      5 6

      (a) A written restriction or restrictions on the transfer or registration of transfer of a security of a corporation, or on the amount of the corporation's securities that may be owned by any person or group of persons, if permitted by this section and noted conspicuously on the certificate or certificates representing the security or securities so restricted or, in the case of uncertificated shares, contained in the notice or notices sent pursuant to § 151(f) of this title, may be enforced against the holder of the restricted security or securities or any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate or certificates representing the security or securities so restricted or, in the case of uncertificated shares, contained in the notice or notices sent pursuant to § 151(f) of this title, a restriction, even though permitted by this section, is ineffective except against a person with actual knowledge of the restriction.

      7

      (b) A restriction on the transfer or registration of transfer of securities of a corporation, or on the amount of a corporation's securities that may be owned by any person or group of persons, may be imposed by the certificate of incorporation or by the bylaws or by an agreement among any number of security holders or among such holders and the corporation. No restrictions so imposed shall be binding with respect to securities issued prior to the adoption of the restriction unless the holders of the securities are parties to an agreement or voted in favor of the restriction.

      8

      (c) A restriction on the transfer or registration of transfer of securities of a corporation or on the amount of such securities that may be owned by any person or group of persons is permitted by this section if it:

      9

      (1) Obligates the holder of the restricted securities to offer to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing, a prior opportunity, to be exercised within a reasonable time, to acquire the restricted securities; or

      10

      (2) Obligates the corporation or any holder of securities of the corporation or any other person or any combination of the foregoing, to purchase the securities which are the subject of an agreement respecting the purchase and sale of the restricted securities; or

      11

      (3) Requires the corporation or the holders of any class or series of securities of the corporation to consent to any proposed transfer of the restricted securities or to approve the proposed transferee of the restricted securities, or to approve the amount of securities of the corporation that may be owned by any person or group of persons; or

      12

      (4) Obligates the holder of the restricted securities to sell or transfer an amount of restricted securities to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing, or causes or results in the automatic sale or transfer of an amount of restricted securities to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing; or

      13

      (5) Prohibits or restricts the transfer of the restricted securities to, or the ownership of restricted securities by, designated persons or classes of persons or groups of persons, and such designation is not manifestly unreasonable.

      14

      (d) Any restriction on the transfer or the registration of transfer of the securities of a corporation, or on the amount of securities of a corporation that may be owned by a person or group of persons, for any of the following purposes shall be conclusively presumed to be for a reasonable purpose:

      15

      (1) Maintaining any local, state, federal or foreign tax advantage to the corporation or its stockholders, including without limitation:

      16

      a. Maintaining the corporation's status as an electing small business corporation under subchapter S of the United States Internal Revenue Code [26 U.S.C. § 1371 et seq.], or

      17

      b. Maintaining or preserving any tax attribute (including without limitation net operating losses), or

      18

      c. Qualifying or maintaining the qualification of the corporation as a real estate investment trust pursuant to the United States Internal Revenue Code or regulations adopted pursuant to the United States Internal Revenue Code, or

      19

      (2) Maintaining any statutory or regulatory advantage or complying with any statutory or regulatory requirements under applicable local, state, federal or foreign law.

      20

      (e) Any other lawful restriction on transfer or registration of transfer of securities, or on the amount of securities that may be owned by any person or group of persons, is permitted by this section.

      21

      8 Del. C. 1953, § 202; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 1164 Del. Laws, c. 112, §§ 19, 2072 Del. Laws, c. 123, § 4.;

    • 6.7 Henry v. Phixios Holdings

       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.

      1
      JON HENRY, Plaintiff,
      v.
      PHIXIOS HOLDINGS, INC., a Delaware corporation, Defendant.
      2
      C.A. No. 12504-VCMR.
      3

      Court of Chancery of Delaware.

      4
      Submitted: April 10, 2017.
      5
      Decided: July 10, 2017.
      6

      Michael W. McDermott, BERGER HARRIS LLP, Wilmington, Delaware; Attorney for Plaintiff.

      7

      Carl D. Neff and E. Chaney Hall, FOX ROTHSCHILD LLP, Wilmington, Delaware; Attorneys for Defendant.

      9
      OPINION
      10
      MONTGOMERY-REEVES, Vice Chancellor.
      11

      In this action, an alleged stockholder seeks books and records for the purpose of investigating mismanagement of the company, communicating with other stockholders, and valuing his shares. He points to the chief operating officer's own in-court admissions of using corporate funds for personal expenses and the company's precarious financial situation as a credible basis to infer mismanagement sufficient to establish a proper purpose under 8 Del. C. § 220.

      12

      The company has rebuffed all examination efforts because it alleges that the plaintiff is no longer a stockholder. According to the company, its initial three directors adopted bylaws that contain stock transfer restrictions, and all company stock certificates were issued after that time and are subject to those restrictions. Under the restrictions, stock may be revoked by a majority of all voting stockholders if a stockholder is found to be engaging in acts that are damaging to the company. The company admits that the stock transfer restrictions are not noted on the stock certificate. Instead, the company asserts that the stockholder plaintiff knew about these restrictions and consented to be bound before he obtained stock in the company. The chief operating officer (who is partially the subject of the investigation) purportedly explained the restrictions multiple times and provided the bylaws to the stockholder before he accepted stock in the company. Thereafter, she sent the bylaws again, and the stockholder acknowledged receipt. Thus, according to the company, the stockholder was bound by the restrictions. The company contends that after the stock was issued, the stockholder engaged in efforts to compete with the company, and, in response, the company validly rescinded his stock under the bylaws. As such, the company claims he has no right to the documents except to value his shares.

      13

      The plaintiff stockholder responds that he did not have actual knowledge of the stock transfer restrictions before he acquired the stock and never assented to the restrictions after he acquired the stock, which is required under 8 Del. C. § 202. Through this action, the plaintiff stockholder requests that the Court: (1) declare that his stock is not subject to the restrictions and that he is still a stockholder of the company; (2) order the company to grant him access to all documents sought in his demand letter; and (3) award the plaintiff attorneys' fees.

      14

      I hold that under Section 202, in order for a stockholder to be bound by stock transfer restrictions that are not "noted conspicuously on the certificate or certificates representing the security," he must have actual knowledge of the restrictions before he acquires the stock. If the stockholder does not have actual knowledge of the stock transfer restrictions at the time he acquires the stock, he can become bound by the stock transfer restrictions after the acquisition of the stock only if he affirmatively assents to the restrictions, either by voting to approve the restrictions or by agreeing to the restrictions.

      15

      After a full trial, I find that the plaintiff stockholder did not have actual knowledge of the restrictions prior to acquiring his stock. Although the plaintiff stockholder may have received knowledge after he was granted stock, he did not assent to be bound by the restrictions. Therefore, the company could not rescind his stock under the bylaws, and he remains a stockholder of the company. As a valid stockholder, he is entitled to inspect the books and records of the company for any proper purpose. The stockholder has stated a proper purpose for inspection, and the company has failed to prove any of its defenses. Thus, the company must produce the requested documents as they are necessary to effectuate the stockholder's stated purpose. The plaintiff, however, is not entitled to attorneys' fees.

      17
      I. BACKGROUND
      18

      These are my findings of fact based on the parties' stipulations, documentary evidence, and the testimony of two witnesses during a half-day trial. I accord the evidence the weight and credibility I find it deserves.[1]

      20
      A. Parties and Relevant Non-Parties
      21

      Plaintiff Jon Henry became a stockholder of Phixios Holdings, Inc. in March 2015. Non-party Rhonda S. Henry is Jon Henry's wife. Non-party RSH Business Consulting Services ("RSH") is a consulting company owned by Rhonda.

      22

      Defendant Phixios Holdings, Inc. ("Phixios" or the "Company") is a Delaware corporation formed in July 2013 as a holding company to build product lines, make them successful, and sell them. Non-parties James Walker ("Walker"), Delbert Walker, and Michael Jacobson were the initial directors of Phixios. Walker is the Chief Executive Officer of Phixios. Non-party Jacobson was the Chief Information Officer during all relevant times. Non-party Penni Blake is the Chief Operating Officer of Phixios. Non-party Condor Monitoring, Inc. ("Condor") is a subsidiary of Phixios.

      24
      B. Facts

      26
      1. The directors adopt bylaws that contain stock transfer restrictions
      27

      On July 18, 2013, the board of directors of Phixios, Walker, Delbert, and Jacobson, approved and executed the Phixios Holdings, Inc. Stockholder Agreement (the "Stockholder Agreement").[2] The purpose of the Stockholder Agreement was to "protect the company and everybody in it from somebody who would potentially do something that could be harmful" to the Company.[3] The Stockholder Agreement provides, in relevant part:

      28
      Stock maybe [sic] surrendered only by the registered owner except in the following circumstances:
      29
      • A stockholder is found to be engaging in acts, or has previously engaged in acts, that are damaging to Phixios. Examples include but are not limited to:
      30
      • Working for a competitor.
      31
      • Willfully disclosing proprietary information.
      32
      • Other willful acts that are harmful to Phixios as determined by a majority vote of the board of directors and all voting stockholders.
      33
      In these circumstances, by a majority vote of all voting stockholders, the ownership of the stock will be revoked and returned to Phixios Treasury and may be redistributed.. . . Phixios will pay par value of the stock at the time of revocation to the registered stock holder.[4]
      34

      The Company did not retain legal counsel but rather Googled how to draft a stockholder agreement.[5] Blake was advised by a "justanswer.com" lawyer "that the majority of the directors had to sign it and that this would be what every shareholder was bound by" so long as Phixios explained the agreement to each potential stockholder before stock in the Company was issued to that stockholder.[6] Blake testified that Phixios had corporate controls in place to ensure every stockholder received an explanation. The Company would e-mail the agreement to every potential stockholder, and Blake would explain each provision to each potential stockholder prior to the issuance of any stock certificate.[7] The Company, however, did not require any written evidence of the potential stockholder's knowledge of or assent to the Stockholder Agreement because the Company "operated on trust."[8]

      36
      2. The Company hires Henry and issues stock to him
      37

      In February 2015, Jacobson contacted Henry to see if he would consider becoming involved with Phixios.[9] On February 27, 2015, Blake e-mailed Henry an employment offer.[10] The offer stated, in relevant part:

      38
      . . . understanding our limited funds right now, I'd like to propose the following:
      39
      1) We will give you 50,000 shares of Phixios Holdings, Inc. stock immediately.
      40
      2) Salary of $130,000 per year beginning day you start.
      41
      3) 30% yearly bonus (based on personal performance, company performance, and customer sat)
      42
      4) We can only pay you $1,000 per month right now until revenue is high enough to cover your full salary.
      43
      5) 100% of back pay will be paid as soon as we get to the revenue point to pay your full salary.
      44
      We understand we are asking for a fulltime commitment with a deferred salary. Hence, the 50,000 shares of stock.[11]
      45

      Henry accepted the offer and was "officially onboard" as of March 5, 2015.[12]

      46

      On March 25, 2015, Walker signed and issued Henry's stock certificate for 50,000 shares of Phixios.[13] The certificate does not contain or note any stock transfer restriction, and there is nothing in writing to show the restrictions were provided to Henry by March 25th. In a March 25, 2015 e-mail exchange titled "Stock Certificates," Blake provided Henry with a tracking number, and Henry responded, ". . . thanks for the discussion today, it made me feel much more comfortable with everything."[14] That e-mail does not attach or reference the Stockholder Agreement. In an affidavit submitted on September 6, 2016 in support of Phixios's opposition to Henry's motion for summary judgment, Blake stated that the "discussion" referenced in Henry's e-mail was a telephone conversation in which she explained "each and every section of the Stockholder Agreement to Henry."[15] Blake testified at trial that she e-mailed Henry the Stockholder Agreement on the same day she sent the stock certificate.[16] Blake did not provide any credible explanation for why one e-mail exchange from March 25, 2015 could be produced but another exchange from the same day that purportedly attached the Stockholder Agreement could not be produced. She merely stated that the "e-mail has gone missing," presumably because she "switched computers."[17] No explanation was provided as to why "switch[ing] computers" would affect the availability of certain e-mails and not others.

      47

      Additionally, Blake's testimony regarding when and how many conversations occurred regarding the Stockholder Agreement changed throughout trial. Initially, there were two conversations between Blake and Henry before February 27, 2015.[18] One conversation was at a "high-level," and the other went through "every single paragraph."[19] Blake testified that she specifically discussed the terms of the Stockholder Agreement, including the stock transfer restrictions, and that Henry said "he was fine, he was happy" and that "it sound[ed] good. He understood."[20] Then Blake testified that there was a conversation on February 27, 2015 and another on March 25, 2015.[21] Later Blake said she had at least three phone calls with Henry.[22] Finally, Blake explained that she didn't "have the dates right in [her] mind," but there were "a bunch" of telephone conversations.[23]

      48

      Henry testified that he and Blake did not discuss the Stockholder Agreement before his employment offer.[24] The purpose of their conversation was to address Henry's concern that Phixios had delayed the issuance of shares.

      49

      On August 10, 2015, Blake sent an e-mail titled "Stockholder Agreement" to multiple Phixios stockholders attaching the Stockholder Agreement.[25] Blake wrote, "I think everyone already has this, but just sending again as I'm trying to get everything in order with documentation and such to get ready for growth."[26] Henry responded, "Thank you for getting a copy out for my records" and forwarded the e-mail to his wife, Rhonda.[27] Henry testified at trial that he did not look at the Stockholder Agreement when he received it but rather sent it to his wife to print a copy and put it with their "important paperwork."[28] He thought this document was a "set of instructions" that would tell him what day Phixios stockholders had the ability to tender their stock if they wanted to and how to go about tendering if the occasion ever came up.[29]

      51
      3. Business begins to suffer and the Company explores further opportunities
      52

      By the end of 2015, things at the Company were "slowing down significantly," and there "weren't nearly as many prospects."[30] To deal with these concerns, Walker and Jacobson discussed alternatives to increase the business's lagging revenue.[31] Henry testified that Walker asked Jacobson to explore the Federal Business Opportunities ("FBO") process and to use Henry's services for the "documentation of those processes."[32] That testimony is corroborated by a January 2016 e-mail exchange between Henry, Jacobson, and Walker, in which Henry stated to Jacobson: "Based upon the brief text message you sent me last weekend you've asked me to look into and define to [sic] new processes that would allow us to take advantage of Contract Proposals (RFP's) issued by the Federal Government."[33] The e-mail further stated: "After some research and direct communications, I've put together a process."[34] Jacobson responded by stating, in part:

      53
      Jon & James
      54
      FBO website needs to be utilized until I can figure when/if paying for the actual gov contract web site is a more viable option. Concur?
      55
      James
      56
      That said why is [sic] Phixios representatives unable to login to FBO and is this going to be rectified?[35]
      57

      On March 10, 2016, Rhonda registered an account for RSH with the FBO Vendor System, and Henry e-mailed Jacobson the information.[36] Henry testified that this registration was necessary in order to obtain an FBO access ID.[37] Henry never attempted to register Phixios through the FBO, and to his knowledge, neither did Jacobson.[38]

      58

      After completing the FBO registration process, throughout March and April, RSH began to receive numerous requests for proposals and requests for quotations for various contracts.[39] Henry and Jacobson communicated through their Phixios e-mail accounts, considered many of these solicitations, and worked to document the processes that would be required to pursue these opportunities.[40] Phixios points to several exchanges in particular that it believes evidence RSH's, and thus Henry's, competition with the Company. For example, on March 31, 2016, Jacobson e-mailed Henry about a potential FBO opportunity and told Henry: "So I figure it is something you should check out or we should look into together . . . You know turn the other check[.] [sic]"[41] Additionally, in response to a discussion regarding a government on-boarding call, Henry told Jacobson:

      59
      We need to keep in mind that the business is registered as a Sole Proprietorship owned by a women. [sic] If you and I attempt to make the call without my wife being on the line, it could quickly go against us. We might need to do the on boarding call with her present in the event they expect to speak to the owner?[42]
      60

      In an e-mail chain titled "NASA Mentor Protégé Program," Jacobson tells Henry to call him about this NASA opportunity. An attachment highlights the requirement that a protégé "must meet one of the eligibility requirements," and the attachment highlights the "Woman-Owned Small Businesses (WOSBs)" category.[43] Henry testified that Phixios did not qualify as a woman-owned small business or any of the additional categories mentioned in the attachment. This meant Phixios would not have been able to receive "preferential points to awardment of a contract potentially."[44] Henry testified at trial that he was using RSH to explore potential revenue sources and opportunities for Phixios and reporting his findings back to Jacobson. Ultimately, because the Company was so overwhelmed in other areas, Phixios did not pursue any of these potential contracts.

      62
      4. Conflicts with Blake surface
      63

      On January 28, 2016, Walker sent an e-mail to Jacobson attaching 60 days of Wells Fargo Bank statements stating, "As you can see I need to have a talk with Penni."[45] The attached statements included various seemingly personal purchases, such as iTunes and Target transactions. Blake reviewed these communications at trial and confirmed that they related to her. She testified at trial that she was "a signer on the account," and she "got to decide how money was spent and when it was spent."[46] She explained that because finances were tight, she did not take her full salary and used the debit card when she "had to buy something or pay something."[47] She paid herself "$6,000 less that year" and "1099'd" herself for everything she spent.[48] She testified that during a discussion about this behavior Walker said, "Your heart was in the right place, but that was really dumb, so don't do it again."[49] Walker also told her that if she did it again, he would have to fire her.[50] Blake further testified that Walker made her "do a full accounting of all the money that was spent against all the bank accounts and show him" in the March-April 2016 timeframe.[51]

      65
      5. Henry is fired and the litigation begins
      66

      On May 6, 2016, Walker sent Henry an e-mail stating, in part:

      67
      Jon, I tried to reach you this morning to discuss a layoff. Effective immediately. As a company we can no longer financially support outside contractors. If the company sells or starts making money you will receive what is owed to you.[52]
      68

      Henry replied that he had "stopped billing [Phixios] as of April 1st since things had slowed down due to the cut backs in available revenue. This blocked our ability to purchase any parts needed to test, build or deliver anything to sales or the customer base."[53] He also stated that he understood the situation and thanked Walker for the opportunity to work with him for the past year.[54] Henry testified that he went back to being retired after he left Phixios.[55] On October 14, 2016, Blake submitted an affidavit in support of Phixios's opposition to Henry's motion to quash and stated her understanding that "Henry, through RSH, is continuing to compete with Phixios now."[56] At trial, she admitted that her belief was based solely on a conversation with Chuck Nash, a person with whom Phixios suspected Henry and Jacobson were continuing to do business.[57] Blake has no first-hand basis for believing that Henry continues to compete with the Company and no proof to support the statement in her affidavit.[58]

      69

      In June 2016, Henry, Rhonda, and Jacobson received a cease-and-desist letter from counsel representing Phixios.[59] The letter addressed to Henry alleged that he was "conspiring with Mr. Jacobson to defraud the Company and misappropriate Company assets for [his] own personal gain."[60] On June 8, 2016, Jacobson delivered a Section 220(d) demand to the Company requesting inspection of certain books and records.[61] On June 19, 2016, the Company sent notice to stockholders of a special meeting to be held June 30, 2016.[62] On June 21, 2016, Henry sent a request under Section 219 to examine the list of the Company's stockholders entitled to vote at the special meeting.[63]

      70

      On June 23, 2016, Henry and Jacobson delivered a written demand (the "Demand Letter") to the Company requesting that the Company allow Jacobson and Henry "to examine a list of the Company stockholders in connection with a special meeting the [C]ompany has purportedly noticed to take place on June 30, 2016" pursuant to Section 219.[64] The Demand Letter also seeks the inspection of books and records "(i) to communicate with other stockholders concerning the June 30 special meeting; (ii) to value their stock; and (iii) to investigate mismanagement and wrongdoing" pursuant to Section 220(b).[65] The Demand Letter asks for the following specific documents:

      71
      • All executed stockholder agreements, any amendments thereto, and any current capitalization table, and the stockholder list described above;
      72
      • Annual, quarterly and monthly financial statements, including both audited and internally-prepared income statements, balance sheets, cash flows and stockholders' equity statements, from the Company's 2013 inception through the present;
      73
      • Federal, state and local income tax returns and reports together with supporting documentation;
      74
      • General ledger, check registry and related journal entries for the years 2013 to the present;
      75
      • Schedule of current Company debt;
      76
      • Schedule of compensation paid to the officers, managers and board of directors;
      77
      • Payroll records from July 2013 to present;
      78
      • Bank statements from July 2013 through the present for all Company bank accounts;
      79
      • Documents constituting budgets, projections, or business plans; and
      80
      • Documents relating to any actual, potential or contemplated transaction resulting in a merger or other business combination, or the sale of the Company's assets.[66]
      81

      On June 30, 2016, the Company held a special meeting of the stockholders and voted to remove Jacobson as a director.[67] On July 12, 2016, the Company held another special meeting of the stockholders and purported to revoke all of the common stock held by Henry and Jacobson under Section 11 of the Stockholder Agreement.[68] Henry testified that he never received notice of the July 12, 2016 meeting.[69] In a letter dated July 19, 2016, Phixios notified Henry and Jacobson that their common stock had been revoked on July 12, 2016.[70] On July 22, 2016, Henry was added as a plaintiff to this action.[71]

      83
      II. ANALYSIS OF THE STOCK TRANSFER RESTRICTIONS
      84

      In this case, the Company alleges that the Stockholder Agreement was adopted as part of the bylaws of the Company long before Henry was issued stock in the Company. The Company further maintains that although the restrictions were not noted conspicuously on the stock certificate representing Henry's stock, Henry had actual knowledge both before and after the shares were issued, either of which is adequate under 8 Del. C. § 202(a). Henry concedes that the Stockholder Agreement was in place before Henry's stock was issued. But he contends that the provisions contained in the Stockholder Agreement are not bylaws of the Company. Even accepting as true that the provisions in the Stockholder Agreement are bylaws, Henry argues that he is not bound under Section 202 because he did not have actual knowledge of the restrictions before the stock was issued, and he did not consent to be bound after the stock was issued.

      85

      I need not decide whether the provisions in the Stockholder Agreement constituted bylaws because whether the restrictions were adopted through bylaws, through an agreement, or otherwise does not change the analysis. Instead, I must determine whether Henry had actual knowledge by the time the stock was issued. If the answer is no, I must also determine whether under Section 202 Henry may be bound by restrictions that were in place before the securities were issued to him if he gained actual knowledge of the restrictions after the securities were issued to him. If the answer to that question is no, I must determine whether Henry otherwise consented to be bound by a subsequent agreement or vote in favor of the restrictions.

      86

      In order to obtain a declaratory judgment, the plaintiff bears the burden of proving each element of his claim by a preponderance of the evidence.[72] "Proof by a preponderance of the evidence means proof that something is more likely than not. It means that certain evidence, when compared to the evidence opposed to it, has the more convincing force and makes you believe that something is more likely true than not."[73]

      88
      A. Principles of Statutory Interpretation
      89

      Under Delaware law, "a statute or an ordinance is to be interpreted according to its plain and ordinary meaning."[74] "Where a statute contains unambiguous language that clearly reflects the intent of the legislature, then the language of the statute controls."[75] Delaware courts "construe statutes `to give a sensible and practical meaning to a statute as a whole in order that it may be applied in future cases without difficulty.'"[76] The courts also "read each relevant section of the statute in light of all the others to produce a harmonious whole."[77] "Words in a statute should not be construed as surplusage if there is a reasonable construction which will give them meaning, and the courts must ascribe a purpose to the use of statutory language, if reasonably possible."[78]

      91
      B. Knowledge and Consent Requirements Under Section 202
      92

      Section 202(a) of the Delaware General Corporation Law provides:

      93
      A written restriction or restrictions on the transfer or registration of transfer of a security of a corporation . . . if permitted by this section and noted conspicuously on the certificate or certificates representing the security or securities so restricted . . . may be enforced against the holder of the restricted security or securities or any successor or transferee of the holder. Unless noted conspicuously on the certificate or certificates representing the security or securities so restricted . . . a restriction, even though permitted by this section, is ineffective except against a person with actual knowledge of the restriction.[79]
      94

      Thus, a written restriction on the transfer of a security may be enforceable against a particular stockholder if: (1) it is noted conspicuously on the certificate representing the security in the case of certificated shares; or (2) the person against whom enforcement is sought had actual knowledge of the restriction.

      95

      Section 202(b) states:

      96
      A restriction on the transfer or registration of transfer of securities of a corporation . . . may be imposed by the certificate of incorporation or by the bylaws or by an agreement among any number of security holders or among such holders and the corporation. No restrictions so imposed shall be binding with respect to securities issued prior to the adoption of the restriction unless the holders of the securities are parties to an agreement or voted in favor of the restriction.[80]
      97

      Therefore, a stock transfer restriction may be binding on existing securities through one of three ways: (1) by inclusion in the certificate of incorporation; (2) by inclusion in the bylaws of the corporation; or (3) by agreement among stockholders or among stockholders and the corporation. An existing stockholder must affirmatively assent to the restriction in order to be bound either by becoming a party to an agreement or by voting in favor of the restriction.[81] A restriction cannot be retroactively imposed on a current stockholder without his express consent.

      98

      "The purpose of § 202 is to protect a shareholder's investment from diminishment through post-purchase restrictions placed on the shareholder's shares by the corporation or its other shareholders."[82] "Otherwise, others might circumscribe the stockholder's ability to transfer his or her shares, reducing the investment's liquidity and value."[83] The phrasing in Section 202 was modeled after Section 8-204 of the Uniform Commercial Code,[84] to which the official comments state, "A purchaser who takes delivery of a certificated security is entitled to rely on the terms stated on the certificate."[85] Section 202(a) thus is intended to provide notice such that encumbered securities are easily identified.[86] A stockholder who bargains for a security is entitled to use the certificate's terms as evidence of his economic rights and as proof of the value he bargained for.

      99

      Reading the statute holistically to give it its intended purpose, the statute must be read to mean that an existing restriction on the transfer of a security is binding on subsequent purchasers of the securities if: (1) it is noted conspicuously on the certificate representing the security; (2) the stockholder has actual knowledge of the restriction at the time he acquires the stock; or (3) the stockholder consents to be bound by the restriction either through a vote or through a subsequent agreement with the stockholders or with the company.[87] To allow otherwise would "produce the incongruous result of allowing the Board of Directors [or other stockholders] unilaterally to impose stock transfer restrictions, which might be of significant economic consequence, on existing shares without the [knowledge before purchase or] consent [after purchase] of the corporation's stockholders."[88]

      100

      Taken to its logical conclusion, the Company's position would allow it to entice an investor into purchasing securities with the expectation that transfer is unrestricted because no restrictions are noted on the certificate representing the securities, while withholding the existence of potentially value-reducing restrictions. "[T]he Legislature could not have intended to produce such onerous results."[89] This absurd result would completely undercut the purpose of Section 202 to protect the stockholder's bargained-for rights.

      102
      1. Henry did not have actual knowledge of the restrictions when he received Company stock
      103

      Phixios argues that Henry had actual knowledge of the restrictions before stock was issued to him because Blake discussed the Stockholder Agreement with Henry before issuing his stock and sent him the Stockholder Agreement on March 25, 2015 (the day she issued the stock). Blake's testimony that she explained each provision to Henry and sent him the Stockholder Agreement prior to the issuance of stock is dubious at best.[90] She claims in her September 7, 2016 affidavit that she discussed the Stockholder Agreement with Henry and sent him the agreement on March 25, 2015.[91] The affidavit does not mention any conversation occurring before March 25, 2015. At trial, however, she contradicted her own sworn affidavit.[92] She stated she had multiple conversations with Henry regarding the Stockholder Agreement. She testified that she could not remember the exact dates of these conversations, but she also testified that she had a phone call about the Stockholder Agreement prior to February 27, 2015, on February 27, 2015, and on March 25, 2015.[93] Her only explanation for why these additional conversations were not included in her affidavit is that she "didn't author this document," but merely "approved" it.[94] Finally, although Blake testified at trial that she e-mailed Henry the Stockholder Agreement on the same day she sent the stock certificate,[95] she did not provide any credible explanation for why the purported e-mail containing the agreement could not be produced when other e-mails from the same day were produced. And she did not produce any documentation showing that she sent the Stockholder Agreement to Henry prior to March 2015.[96] Thus, Phixios offers nothing to rebut Henry's credible testimony that he did not have actual knowledge of the restrictions when he became a stockholder in March 2015.

      105
      2. Henry did not assent to the stock transfer restrictions
      106

      Both sides acknowledge that the Stockholder Agreement was sent to Henry on August 10, 2015.[97] Even assuming, arguendo, that after this date Henry had actual knowledge of the Stockholder Agreement, as discussed above, to impose transfer restrictions on a stockholder who did not have actual knowledge of those restrictions when he became a stockholder and who did not affirmatively assent to the restrictions after he became a stockholder would run afoul of the legislative purpose of Section 202.[98] Thus, the question becomes whether Henry affirmatively assented or became a party to a subsequent agreement containing these restrictions.[99]

      107

      "The use of the internet as the vehicle for contract formation `has not fundamentally changed the principles of contract.'"[100] "The `threshold issue is the same: did the party who assented online have reasonable notice, either actual or constructive, of the terms of the putative agreement and did that party manifest assent to those terms.'"[101] "A party may assent to an agreement on the internet [or through email] without reading its terms and still be bound by it if she is on notice that she is modifying her legal rights, just as she may with a physical written contract."[102]

      108

      On August 10, 2015, Blake sent an e-mail titled "Stockholder Agreement," and wrote "I think everyone already has this, but just sending again as I'm trying to get everything in order with documentation."[103] Henry responded, "Thank you for getting a copy out for my records."[104] The Newell Rubbermaid Inc. v. Storm[105] case provides an example of the type of language that gives adequate notice of the modification of legal rights. There, the Court held that a clickwrap agreement modifying an employee's post-employment rights was enforceable because the defendant had to affirmatively click a box next to a bolded, conspicuous sentence stating that she "read and agree[d] to the terms of the" agreement.[106] She also had to affirmatively assent on an additional screen with an "Accept" button that stated in order to complete the agreement, she must "read and accept the terms outlined in the document" and that her "grant acceptance will be final once [she] click[ed] Accept."[107] Although the precise language in Newell Rubbermaid is not mandatory to manifest assent, there is no evidence that Henry was on notice that he was modifying his legal rights when he acknowledged receipt of the August 10, 2015 e-mail. To the contrary, Henry credibly testified at trial that he did not open the attachment because he thought it was a set of instructions describing how Phixios stockholders could tender their stock.[108] Phixios does not provide any credible evidence to the contrary. Therefore, Henry did not assent to be bound by the stock transfer restrictions contained in the Stockholder Agreement; his stock was revoked invalidly; and Henry remains a stockholder of Phixios.[109]

      110
      III. ANALYSIS OF THE BOOKS AND RECORDS CLAIM
      111

      A stockholder of a Delaware corporation may inspect the corporation's books and records under Section 220 for any proper purpose. "A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder,"[110] and "a stockholder has the burden of proof to demonstrate a proper purpose by a preponderance of the evidence."[111] A stockholder who seeks inspection of books or records in order to investigate wrongdoing also must state "a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation—a showing that `may ultimately fall well short of demonstrating that anything wrong occurred.'"[112] A plaintiff seeking inspection must also prove that "each category of the books and records requested is essential and sufficient to the party's stated purpose."[113] "The plaintiff can obtain books and records that `address the crux of the shareholder's purpose and if that information is unavailable from another source.'"[114] And, this Court "may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper."[115]

      112

      Henry's Demand Letter states that his purposes are to (1) communicate with other stockholders regarding the June 30 meeting; (2) value his shares; and (3) investigate mismanagement.[116] All three are proper purposes under Section 220, and Phixios does not argue otherwise.

      113

      Instead, Phixios argues that: (1) Henry's true purpose is not to value his shares but to retaliate against the Company and to further his competitive scheme against the Company; (2) the inspection demand as it relates to the valuation of shares should be appropriately tailored; (3) Henry has failed to provide a credible basis for investigating mismanagement and wrongdoing; and (4) the purpose for the stockholder list has been mooted because the June 30, 2016 meeting has come and gone.

      115
      A. Henry Has Alleged a Proper Purpose
      116

      Phixios contends that Henry's primary purpose is to compete with the Company through RSH and to aid and abet Jacobson in his breaches of fiduciary duties. As evidence of this, Phixios argues that Henry never requested access to financial records of the Company before making the demand, and he seeks to know the value of his shares for estate planning purposes, not to sell or buy more shares.[117] But Henry never stated in the Demand Letter or in this litigation that he did not want to value his stock to decide whether to sell.[118] And, more importantly, Phixios has not provided any reason why Henry's valuation of his shares for estate planning purposes would be improper.

      117

      Phixios also has not shown that Henry is competing or plans to compete with Phixios. Phixios points to e-mail exchanges regarding the FBO account registered to RSH as evidence of Henry's competition with the Company. Phixios argues that Henry created the account for RSH's benefit and solicitation of FBO opportunities. Phixios contends that if Henry was working on behalf of Phixios he would have created a new FBO account for Phixios or fixed Phixios's existing account, which he did not do. Also, Phixios points to Henry's and Jacobson's e-mail correspondence considering FBO opportunities of which Phixios would not be able to take advantage. The most damning e-mails refer to certain requests for proposals that require the company to be a woman-owned business.[119] These e-mails prove improper competition, according to Phixios, because Phixios did not fit into this category, and it would not be able to take advantage of an opportunity limited to woman-owned businesses, while RSH could. Although I recognize the reality that Phixios could not take advantage of certain of the opportunities explored by Henry and Jacobson, Henry credibly testified that Walker set the mandate and knew about the plan to explore the FBO process.[120] Walker also knew about the problems with Phixios's FBO account. Henry credibly testified that he and Jacobson were identifying potential sources of revenue for Phixios. And Walker was aware that Henry was reporting to Jacobson, the Chief Information Officer of the Company, regarding the documentation of these processes for the future. Phixios did not bring Walker to trial to refute any of Henry's statements.

      118

      Further, these exchanges stopped before May 6, 2016 (Henry's termination date), which comports with Henry's testimony that the exploration of the FBO process was all done for the benefit of Phixios. This also confirms Henry's testimony that after leaving the Company, he retired and is currently not working. And the record contains no reliable evidence of any current plans to compete, much less actual competition. Although Blake stated in her October 14, 2016 affidavit that Henry is continuing to compete with Phixios, at trial she testified that she in fact had no knowledge of RSH's dealings after Henry and Jacobson left in May 2016.[121] Therefore, any argument that Henry seeks to compete with Phixios is unsubstantiated, as Phixios has not proven any scheme, conspiracy, or competitive conduct by Henry. And Phixios concedes, as it must, that communicating with other stockholders, valuing shares, and investigating mismanagement each states a proper purpose for inspection.

      120
      B. Henry Has Stated a Credible Basis to Infer Wrongdoing
      121

      Phixios argues that Henry has not shown a credible basis to infer mismanagement or wrongdoing because (1) a lack of liquidity does not form a credible basis for mismanagement, and (2) Blake's use of the company credit card for personal expenses did not harm the Company and the issue was resolved. The "credible basis" standard "sets the lowest possible burden of proof."[122] To state a credible basis to support investigation of possible mismanagement, the stockholder must show "some evidence" from which the "Court of Chancery can infer there is possible mismanagement that would warrant further investigation."[123] This "threshold may be satisfied by a credible showing, through documents, logic, testimony, or otherwise, that there are legitimate issues of wrongdoing."[124]

      122

      Henry testified that Phixios had insufficient funds to purchase "inexpensive components needed to do some of the development and prototyping work that Mr. Jacboson was doing," and his requests for such items were never satisfied.[125] Furthermore, he testified that he "had seen text messages, e-mails, and an assortment of other documentation specifically showing that there were expenditures taking place that had nothing to do with business, and they were far outside the realm of anything that should have had anything to do with the business."[126] At trial, Blake admitted that, because Phixios's finances were tight, she would "take some variation" of her full pay by using "the debit card out of the bank account when I had to buy something or pay something."[127] These purchases included iTunes purchases, Target purchases, home furnishing purchases, and various restaurant transactions, to name a few.[128] She and Walker discussed this conduct, and by her own admission, Walker told her "that was really dumb, so don't do it again."[129] Walker also warned that if she engaged in this type of behavior again, "he would have to let [her] go because he was telling [her] not to do it."[130] Blake claims she "1099'd herself" for everything she spent.[131] These allegations are sufficient to establish a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation.

      124
      C. Henry Is Entitled to the Documents He Seeks
      125

      Phixios argues that Henry's inspection demand should be appropriately tailored and not used to give access to overly broad categories of documents. I agree. "A stockholder who states a proper purpose for inspection is entitled to inspect only those records that are `essential and sufficient' to achieve his purpose."[132] A document is "essential" if "it addresses the crux of the shareholder's purpose," and the `information the document contains is unavailable from another source.'"[133] "[A] stockholder seeking to inspect books and records must specifically and discretely identify, with `rifled precision,' the documents sought."[134]

      126

      Phixios points to the Bizzari v. Suburban Waste Services, Inc. case, where Judge LeGrow, sitting by designation as a Vice Chancellor, ruled that financial statements, tax returns, and certain agreements encumbering the company's assets were necessary and essential for the purpose of valuing his stock in two companies.[135] But Judge LeGrow also ruled that Bizzari did not prove how the remaining requests for compensation paid to employees, monthly cash flow statements, sales and expenses, credit, security, and pledge agreements would "aid in valuing his interests beyond the aggregate information" contained in the financial statements.[136] Importantly, Judge LeGrow found that Bizzari had ulterior motives, including competing directly with the company, which are not present here, and Bizzari did not adequately allege a proper purpose of investigating mismanagement.[137]

      127

      Here, Henry may only need the financial statements and tax information to value the Company; but, Henry has adequately alleged a credible basis for investigating mismanagement, and the other documents are essential to this purpose. Blake is the Chief Operating Officer of the Company who testified that she was a signer on the Company accounts, and she "got to decide how money was spent and when it was spent."[138] She also admitted that she used Company funds to pay her personal expenses.[139]

      128

      Henry's request for check ledgers, a schedule of compensation paid to officers, managers and board of directors, payroll records, and bank statements are necessary to properly investigate Blake's mismanagement. Henry is entitled to all the documents he seeks through this litigation.

      130
      D. Henry is Not Entitled to Have the Court Void the Results of the June 30, 2016 Stockholder Meeting
      131

      Under Section 219(a):

      132
      The officer who has charge of the stock ledger of a corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting . . . . Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least 10 days prior to the meeting. . . .[140]
      133

      Section 219(b) states:

      134
      If the corporation, or an officer or agent thereof, refuses to permit examination of the list by a stockholder, such stockholder may apply to the Court of Chancery for an order to compel the corporation to permit such examination. The burden of proof shall be on the corporation to establish that the examination such stockholder seeks is for a purpose not germane to the meeting. The Court may summarily order the corporation to permit examination of the list upon such conditions as the Court may deem appropriate, and may make such additional orders as may be appropriate, including, without limitation, postponing the meeting or voiding the results of the meeting.[141]
      135

      Phixios did not provide the stockholder lists because of its belief that Henry was attempting to harass and compete with the Company. I find these reasons insufficient to justify the denial of Henry's inspection request. Phixios also argues that this Court should not exercise its discretion to void the results of that meeting because Henry could have, but did not, petition this Court to obtain the list before the meeting. Henry's initial Section 219 request was sent on June 21, 2016; his Demand Letter was delivered on June 23, 2016; and yet he did not become a plaintiff in this action until July 22, 2016, nearly a month later and well after the June 30, 2016 meeting came and went. Henry did not respond to Phixios's argument in his post-trial briefing or at oral argument. Therefore, I decline to exercise the discretion granted under the statute to void the results of the June 30, 2016 stockholder meeting.

      137
      IV. ANALYSIS OF THE FEES REQUEST
      138

      Henry seeks the award of costs and attorneys' fees for this litigation. As an initial matter, Henry did not brief his fees request in his opening post-trial brief.[142] Additionally, "[a]lthough . . . fee-shifting awards may be merited in exceptional cases in order to deter abusive litigation, avoid harassment, and protect the integrity of the judicial process,"[143] in order to warrant the Court's departure from the American Rule requiring each party to bear their own costs and fees regardless of the outcome of the case, the plaintiff must show that defendants "`unnecessarily required the institution of litigation, delayed the litigation, and asserted frivolous motions,' or, put another way, [that] defendants' bad faith has `made the procession of the case unduly complicated and expensive.'"[144] Although I have ruled against Phixios, Henry has not convinced me that Phixios engaged in bad faith litigation conduct that would justify a fee award to Henry.

      140
      V. CONCLUSION
      141

      For the foregoing reasons, I find that Henry is not subject to the stock transfer restrictions contained in the Stockholder Agreement and, therefore, is a stockholder of Phixios. Henry is entitled to inspect the books and records he seeks in this litigation. While Henry was entitled to inspect the stock ledger of the Company before the June 30, 2016 stockholder meeting, and the Company withheld this list without justification, Henry has not provided any substantive response to the Company's argument that this Court should not exercise its discretion to void the results of the June 30, 2016 meeting. Thus, I deny Henry's request to void the results of the meeting. Henry also is not entitled to fee shifting. The parties shall submit an order consistent with this opinion within ten (10) days.

      142

      IT IS SO ORDERED.

      144

      [1] Citations to testimony presented at trial are in the form "Tr. # (X)" with "X" representing the surname of the speaker, if not clear from the text. After being identified initially, individuals are referenced herein by their surnames without regard to formal titles such as "Dr." This opinion refers to certain individuals by first name for clarity only. No disrespect is intended. Exhibits are cited as "JX #." Unless otherwise indicated, citations to the parties' briefs are to post-trial briefs.

      145

      [2] JX 2. Walker, Delbert, and Jacobson also were stockholders. Blake testified that she, David Byars, Derek Walker, and Daniel Diaz were also stockholders at the time the Stockholder Agreement was approved. No stock certificates were issued until 2014. Tr. 127, 130.

      146

      [3] Tr. 129 (Blake).

      147

      [4] JX 2, at 2.

      148

      [5] Tr. 127 (Blake).

      149

      [6] Blake Dep. 99-100; Tr. 197-98 (Blake).

      150

      [7] Tr. 130-32, 196-98 (Blake).

      151

      [8] Id. at 196-98.

      152

      [9] Tr. 8 (Henry).

      153

      [10] JX 5; Tr. 9 (Henry).

      154

      [11] JX 5.

      155

      [12] JX 6.

      156

      [13] JX 9.

      157

      [14] JX 10.

      158

      [15] JX 91.

      159

      [16] Tr. 140-41.

      160

      [17] Blake Aff. Ex. A; Tr. 199-200.

      161

      [18] Tr. 137.

      162

      [19] Id. at 136-38.

      163

      [20] Id. at 139-40.

      164

      [21] Id. at 187.

      165

      [22] Id. at 190.

      166

      [23] Id. at 192-93, 199.

      167

      [24] Id. at 20-21.

      168

      [25] JX 13.

      169

      [26] Id.

      170

      [27] Id.; JX 14; Tr. 48.

      171

      [28] Tr. 22.

      172

      [29] Id. at 22-23.

      173

      [30] Id. at 26.

      174

      [31] Id.

      175

      [32] Id. at 27.

      176

      [33] JX 24.

      177

      [34] Id.

      178

      [35] Id.

      179

      [36] JX 43; JX 44.

      180

      [37] Tr. 68-71.

      181

      [38] Tr. 83-84.

      182

      [39] JX 46; JX 47; JX 53; JX 60; JX 62; JX 65; JX 68; JX 69; JX 73; JX 74.

      183

      [40] JX 46; JX 47; JX 53; JX 60; JX 62; JX 65; JX 68; JX 69; JX 73; JX 74.

      184

      [41] JX 46.

      185

      [42] JX 69.

      186

      [43] JX 73; JX 74.

      187

      [44] Tr. 95-96.

      188

      [45] JX 26.

      189

      [46] Tr. 160.

      190

      [47] Id. at 160-61.

      191

      [48] Id. at 161.

      192

      [49] Id.

      193

      [50] Id.

      194

      [51] Id. at 162-63.

      195

      [52] JX 75.

      196

      [53] Id.

      197

      [54] Id.

      198

      [55] Tr. 31-32.

      199

      [56] JX 93; Tr. 218-22.

      200

      [57] Tr. 218-20.

      201

      [58] Id.

      202

      [59] JX 76; JX 77.

      203

      [60] JX 76.

      204

      [61] Joint Pre-Trial Stipulation 24.

      205

      [62] Id.

      206

      [63] Id.

      207

      [64] JX 79, at 1.

      208

      [65] Joint Pre-Trial Stipulation 24; JX 79, at 3.

      209

      [66] JX 79, at 2-3. In connection with post-trial briefing, Henry narrowed his request to documents from March 2015 through the present. Pl.'s Reply Br. 12-14.

      210

      [67] Joint Pre-Trial Stipulation 25, 28.

      211

      [68] Id.

      212

      [69] Tr. 37.

      213

      [70] Joint Pre-Trial Stipulation 25.

      214

      [71] Id.

      215

      [72] Prizm Gp., Inc. v. Anderson, 2010 WL 1850792, at *4 (Del. Ch. May 10, 2010).

      216

      [73] Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010) (quoting Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch. Oct. 23, 2002)) (internal quotation marks omitted).

      217

      [74] New Cingular Wireless PCS v. Sussex County Bd. of Adjustment, 65 A.3d 607, 611 (Del. 2013).

      218

      [75] State Farm Mut. Auto. Ins. Co. v. Kelty, 126 A.3d 631, 635 (Del. 2015) (quoting Hoover v. State, 958 A.2d 816, 820 (Del. 2008)) (internal quotation marks omitted).

      219

      [76] Rapposelli v. State Farm Mut. Auto. Ins. Co., 988 A.2d 425, 427 (Del. 2010) (quoting Nationwide Mut. Ins. Co. v. Krongold, 318 A.2d 606, 609 (Del. 1974)).

      220

      [77] Kelty, 126 A.3d at 635 (quoting Progressive N. Ins. Co. v. Mohr, 47 A.3d 492, 496 (Del. 2012)).

      221

      [78] Cingular, 65 A.3d at 611 (quoting Oceanport Indus., Inc. v. Wilm. Stevedores, Inc., 636 A.2d 892, 900 (Del. 1994)) (internal quotation marks omitted).

      222

      [79] 8 Del. C. § 202(a).

      223

      [80] Id. § 202(b).

      224

      [81] Id.; see Joseph E. Seagram & Sons, Inc. v. Conoco, Inc., 519 F. Supp. 506, 513-14 & nn.4-5 (D. Del. 1981); EDWARD P. WELCH ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 202.06, at 6-20 (6th ed. 2016); R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, DELAWARE LAW OF CORPORATIONS & BUSINESS ORGANIZATIONS § 6.6, at 6-10 (3rd ed. 2013); FOLK, THE DELAWARE GENERAL CORPORATION LAW: A COMMENTARY AND ANALYSIS 197-98 (1972).

      225

      [82] Di Loreto v. Tiber Hldg. Corp., 1999 WL 1261450, at *6 (Del. Ch. Jun. 29, 1999).

      226

      [83] Id.

      227

      [84] WELCH ET AL., supra note 81, § 202.06, at 6-19; FOLK, supra note 81.

      228

      [85] UCC § 8-204.

      229

      [86] BALOTTI & FINKELSTEIN, supra note 81 § 6.6, at 6-9 to 6-10.

      230

      [87] 8 Del. C. § 202(a); see also Agranoff v. Miller, 1999 WL 219650, at *12 (Del. Ch. Apr. 12, 1999); Joseph E. Seagram & Sons, Inc. v. Conoco, Inc., 519 F. Supp. 506, 513-14 (D. Del. 1981); BALOTTI & FINKELSTEIN, supra note 81, § 6.6, at 6-10.

      231

      [88] Seagram, 519 F. Supp. at 513.

      232

      [89] Id. at 514.

      233

      [90] See supra Section I.B.2.

      234

      [91] JX 91.

      235

      [92] Tr. 136-38.

      236

      [93] Id. at 190-92.

      237

      [94] Id. at 192.

      238

      [95] Id. at 140-41.

      239

      [96] Id. at 199-200.

      240

      [97] JX 13; Pl.'s Opening Br. 11; Def.'s Answering Br. 9.

      241

      [98] See Di Loreto v. Tiber Hldg. Corp., 1999 WL 1261450, at *6 (Del. Ch. Jun. 29, 1999); Joseph E. Seagram & Sons, Inc. v. Conoco, Inc., 519 F. Supp. 506, 513-14 (D. Del. 1981); Harlamert v. World Finer Foods, Inc., 494 F. Supp. 2d 681, 687 (S.D. Ohio 2006) ("As can be seen, a restriction on the transferability of shares of stock is permissible under Delaware law, if the shareholder agrees to such a restriction or has actual knowledge of the restriction when the securities are issued to him."); UCC § 8-204; WELCH ET AL., supra note 81, § 202.06, at 6-19.

      242

      [99] Phixios points to Agranoff v. Miller where the Court held that a restriction on stock was valid, even where not noted on the stock certificate, because the stockholder had actual knowledge of the restriction. 1999 WL 219650, at *12-13 (Del. Ch. Apr. 12, 1999); Def.'s Answering Br. 20-22. In Agranoff, then-Vice Chancellor Strine found that the stockholder had actual knowledge of the restriction years before he acquired the stock. 1999 WL 219650, at *12. There, the stockholder "purposely refrained from obtaining a copy" of the pertinent agreement until after he purchased some of the stock. But, his agents had a copy of the pertinent agreement prior to his purchase of any shares, and he received a copy of the agreement prior to his further purchase of a majority stake in the company. Id. at *12 & n.14. No such facts exist here. Henry did not receive or have knowledge of the agreement prior to his purchase. There are no credible allegations that he was purposely avoiding knowledge of the restrictions. And there are no allegations that he purchased more shares after he knew of the restrictions.

      243

      [100] Newell Rubbermaid v. Storm, 2014 WL 1266827, at *6 (Del. Ch. Mar. 27, 2014) (quoting Van Tassell v. United Mktg. Gp., LLC, 795 F. Supp. 2d. 770, 790 (N.D. Ill. 2011)).

      244

      [101] Id. (quoting Vernon v. Qwest Commc'ns Int'l, Inc., 857 F. Supp. 2d. 1135, 1149 (D. Colo. 2012)).

      245

      [102] Id. at *7.

      246

      [103] JX 13.

      247

      [104] Id.

      248

      [105] Newell Rubbermaid, 2014 WL 1266827, at *6-7.

      249

      [106] Id.

      250

      [107] Id.

      251

      [108] Tr. 22-23.

      252

      [109] Phixios argues that Henry acquiesced to the terms of the Stockholder Agreement or, in the alternative, is equitably estopped from denying the restrictions contained therein. Def.'s Answering Br. 24-29. In support of its arguments, Phixios cites Henry's reply to the August 10, 2015 e-mail attaching the Stockholder Agreement saying "Thank you for getting a copy out for my records." JX 13. Acquiescence requires that a plaintiff "has full knowledge of his rights and the material facts and (1) remains inactive for a considerable time; or (2) freely does what amounts to recognition of the complained act; or (3) acts in a manner inconsistent with the subsequent repudiation, which leads the other party to believe the act has been approved." Klaassen v. Allegro Dev. Corp., 2013 WL 5739680, at *20 (Del. Ch. Oct. 11, 2013) (quoting NTC Gp., Inc. v. West-Point Pepperell, Inc., 1990 WL 143842, at *5 (Del. Ch. Sept. 26, 1990)). Estoppel requires that a "party by his conduct intentionally or unintentionally leads another, in reliance upon that conduct, to change position to his detriment." Wilson v. Am. Ins. Co., 209 A.2d 902, 903-04 (Del. 1965). "To establish an estoppel, it must appear that the party claiming the estoppel lacked knowledge and the means of knowledge of the truth of the facts in question, that he relied on the conduct of the party against whom the estoppel is claimed, and that he suffered a prejudicial change of position in consequence thereof." Id. at 904. But Phixios fails to prove that it was misled or changed its position in any way in reliance on Henry's acknowledgement of receipt of the attachment. And Phixios has put forth no other evidence to prove acquiescence or estoppel.

      253

      [110] 8 Del. C. § 220.

      254

      [111] Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 121 (Del. 2006).

      255

      [112] Id. at 123 (quoting Khanna v. Covad Commc'ns Gp., Inc., 2004 WL 187274, at *6 n. 25 (Del. Ch. Jan. 23, 2004)).

      256

      [113] Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996).

      257

      [114] Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 788 (Del. Ch. 2016) (quoting Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014)).

      258

      [115] Id. at 796 (quoting 8 Del. C. § 220(c)).

      259

      [116] JX 79.

      260

      [117] Def.'s Answering Br. 31-32.

      261

      [118] Id. at 53-54.

      262

      [119] JX 69; JX 73; JX 74.

      263

      [120] Tr. 26-27.

      264

      [121] Id. at 217; JX 93.

      265

      [122] Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 123 (Del. 2006).

      266

      [123] Id.

      267

      [124] Id. (quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 568 (Del. 1997)) (internal quotation marks omitted).

      268

      [125] Tr. 38-39.

      269

      [126] Id. at 39.

      270

      [127] Id. at 160.

      271

      [128] JX 26.

      272

      [129] Tr. 161.

      273

      [130] Id.

      274

      [131] Id.

      275

      [132] Bizzari v. Suburban Waste Servs., Inc., 2016 WL 4540292, at *7 (Del. Ch. Aug. 30, 2016) (quoting Macklowe v. Planet Hollywood, Inc., 1994 WL 560804, at *6 (Del. Ch. Sept. 29, 1994)).

      276

      [133] Bizzari, 2016 WL 4540292, at *7 (quoting Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 371-72 (Del. 2011)).

      277

      [134] Id. (quoting Sec. First Corp. v. U.S. Die Casting and Dev. Co., 687 A.2d 563, 570 (Del. 1997)).

      278

      [135] Id.

      279

      [136] Id. at *7-8.

      280

      [137] Id. at *5-6.

      281

      [138] Tr. 160.

      282

      [139] Id.

      283

      [140] 8 Del. C. § 219(a).

      284

      [141] Id. § 219(b).

      285

      [142] In re IBP, Inc. S'holders Litig., 789 A.2d 14, 62 (Del. Ch. 2001) ("In its opening post-trial brief, Tyson did not argue that these issues would in themselves be sufficient to give it a reason not to close in the event that the DFG-related issues in the Restated Financials were carved out by Schedule 5.11. As a result, I consider Tyson to have waived any arguments about these issues."); Emerald P'rs v. Berlin, 726 A.2d 1215 (Del. 1999) ("Issues not briefed are deemed waived.").

      286

      [143] Fairthorne Maint. Corp. v. Ramunno, 2007 WL 2214318, at *9 (Del. Ch. July 20, 2007).

      287

      [144] Id. (quoting Johnston v. Arbitrium (Cayman Islands) Handels, 720 A.2d 542, 545-46 (Del. 1998); ATR-Kim Eng Fin. Corp. v. Araneta, 2006 WL 3783520, at *23 (Del. Ch. 2006), aff'd 2007 WL 1704647 (Del. 2007)).

    • 6.8 DGCL Sec. 203 - State anti-takeover legislation

      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. 

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4
      Subchapter VI. Stock Transfers
      5 6

      (a) Notwithstanding any other provisions of this chapter, a corporation shall not engage in any business combination with any interested stockholder for a period of 3 years following the time that such stockholder became an interested stockholder, unless:

      7

      (1) Prior to such time the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

      8

      (2) Upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

      9

      (3) At or subsequent to such time the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

      10

      (b) The restrictions contained in this section shall not apply if:

      11

      (1) The corporation's original certificate of incorporation contains a provision expressly electing not to be governed by this section;

      12

      (2) The corporation, by action of its board of directors, adopts an amendment to its bylaws within 90 days of February 2, 1988, expressly electing not to be governed by this section, which amendment shall not be further amended by the board of directors;

      13

      (3) The corporation, by action of its stockholders, adopts an amendment to its certificate of incorporation or bylaws expressly electing not to be governed by this section; provided that, in addition to any other vote required by law, such amendment to the certificate of incorporation or bylaws must be approved by the affirmative vote of a majority of the shares entitled to vote. An amendment adopted pursuant to this paragraph shall be effective immediately in the case of a corporation that both (i) has never had a class of voting stock that falls within any of the 2 categories set out in paragraph (b)(4) of this section, and (ii) has not elected by a provision in its original certificate of incorporation or any amendment thereto to be governed by this section. In all other cases, an amendment adopted pursuant to this paragraph shall not be effective until 12 months after the adoption of such amendment and shall not apply to any business combination between such corporation and any person who became an interested stockholder of such corporation on or prior to such adoption. A bylaw amendment adopted pursuant to this paragraph shall not be further amended by the board of directors;

      14

      (4) The corporation does not have a class of voting stock that is: (i) Listed on a national securities exchange; or (ii) held of record by more than 2,000 stockholders, unless any of the foregoing results from action taken, directly or indirectly, by an interested stockholder or from a transaction in which a person becomes an interested stockholder;

      15

      (5) A stockholder becomes an interested stockholder inadvertently and (i) as soon as practicable divests itself of ownership of sufficient shares so that the stockholder ceases to be an interested stockholder; and (ii) would not, at any time within the 3-year period immediately prior to a business combination between the corporation and such stockholder, have been an interested stockholder but for the inadvertent acquisition of ownership;

      16

      (6) The business combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which (i) constitutes 1 of the transactions described in the second sentence of this paragraph; (ii) is with or by a person who either was not an interested stockholder during the previous 3 years or who became an interested stockholder with the approval of the corporation's board of directors or during the period described in paragraph (b)(7) of this section; and (iii) is approved or not opposed by a majority of the members of the board of directors then in office (but not less than 1) who were directors prior to any person becoming an interested stockholder during the previous 3 years or were recommended for election or elected to succeed such directors by a majority of such directors. The proposed transactions referred to in the preceding sentence are limited to (x) a merger or consolidation of the corporation (except for a merger in respect of which, pursuant to § 251(f) of this title, no vote of the stockholders of the corporation is required); (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in 1 transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the corporation or of any direct or indirect majority-owned subsidiary of the corporation (other than to any direct or indirect wholly-owned subsidiary or to the corporation) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; or (z) a proposed tender or exchange offer for 50% or more of the outstanding voting stock of the corporation. The corporation shall give not less than 20 days' notice to all interested stockholders prior to the consummation of any of the transactions described in clause (x) or (y) of the second sentence of this paragraph; or

      17

      (7) The business combination is with an interested stockholder who became an interested stockholder at a time when the restrictions contained in this section did not apply by reason of any of paragraphs (b)(1) through (4) of this section, provided, however, that this paragraph (b)(7) shall not apply if, at the time such interested stockholder became an interested stockholder, the corporation's certificate of incorporation contained a provision authorized by the last sentence of this subsection (b).

      18

      Notwithstanding paragraphs (b)(1), (2), (3) and (4) of this section, a corporation may elect by a provision of its original certificate of incorporation or any amendment thereto to be governed by this section; provided that any such amendment to the certificate of incorporation shall not apply to restrict a business combination between the corporation and an interested stockholder of the corporation if the interested stockholder became such prior to the effective date of the amendment.

      19

      (c) As used in this section only, the term:

      20

      (1) "Affiliate" means a person that directly, or indirectly through 1 or more intermediaries, controls, or is controlled by, or is under common control with, another person.

      21

      (2) "Associate," when used to indicate a relationship with any person, means: (i) Any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.

      22

      (3) "Business combination," when used in reference to any corporation and any interested stockholder of such corporation, means:

      23

      (i) Any merger or consolidation of the corporation or any direct or indirect majority-owned subsidiary of the corporation with (A) the interested stockholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation subsection (a) of this section is not applicable to the surviving entity;

      24

      (ii) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in 1 transaction or a series of transactions), except proportionately as a stockholder of such corporation, to or with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the corporation or of any direct or indirect majority-owned subsidiary of the corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation;

      25

      (iii) Any transaction which results in the issuance or transfer by the corporation or by any direct or indirect majority-owned subsidiary of the corporation of any stock of the corporation or of such subsidiary to the interested stockholder, except: (A) Pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which securities were outstanding prior to the time that the interested stockholder became such; (B) pursuant to a merger under § 251(g) of this title; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of such corporation subsequent to the time the interested stockholder became such; (D) pursuant to an exchange offer by the corporation to purchase stock made on the same terms to all holders of said stock; or (E) any issuance or transfer of stock by the corporation; provided however, that in no case under items (C)-(E) of this subparagraph shall there be an increase in the interested stockholder's proportionate share of the stock of any class or series of the corporation or of the voting stock of the corporation;

      26

      (iv) Any transaction involving the corporation or any direct or indirect majority-owned subsidiary of the corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation or of any such subsidiary which is owned by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; or

      27

      (v) Any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of such corporation), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in paragraphs (c)(3)(i)-(iv) of this section) provided by or through the corporation or any direct or indirect majority-owned subsidiary.

      28

      (4) "Control," including the terms "controlling," "controlled by" and "under common control with," means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary; Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this section, as an agent, bank, broker, nominee, custodian or trustee for 1 or more owners who do not individually or as a group have control of such entity.

      29

      (5) "Interested stockholder" means any person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the corporation, or (ii) is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and associates of such person; provided, however, that the term "interested stockholder" shall not include (x) any person who (A) owned shares in excess of the 15% limitation set forth herein as of, or acquired such shares pursuant to a tender offer commenced prior to, December 23, 1987, or pursuant to an exchange offer announced prior to the aforesaid date and commenced within 90 days thereafter and either (I) continued to own shares in excess of such 15% limitation or would have but for action by the corporation or (II) is an affiliate or associate of the corporation and so continued (or so would have continued but for action by the corporation) to be the owner of 15% or more of the outstanding voting stock of the corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such a person is an interested stockholder or (B) acquired said shares from a person described in item (A) of this paragraph by gift, inheritance or in a transaction in which no consideration was exchanged; or (y) any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the corporation; provided that such person shall be an interested stockholder if thereafter such person acquires additional shares of voting stock of the corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of paragraph (9) of this subsection but shall not include any other unissued stock of such corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

      30

      (6) "Person" means any individual, corporation, partnership, unincorporated association or other entity.

      31

      (7) "Stock" means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.

      32

      (8) "Voting stock" means, with respect to any corporation, stock of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity. Every reference to a percentage of voting stock shall refer to such percentage of the votes of such voting stock.

      33

      (9) "Owner," including the terms "own" and "owned," when used with respect to any stock, means a person that individually or with or through any of its affiliates or associates:

      34

      (i) Beneficially owns such stock, directly or indirectly; or

      35

      (ii) Has (A) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person's affiliates or associates until such tendered stock is accepted for purchase or exchange; or (B) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any stock because of such person's right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more persons; or

      36

      (iii) Has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (B) of subparagraph (ii) of this paragraph), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.

      37

      (d) No provision of a certificate of incorporation or bylaw shall require, for any vote of stockholders required by this section, a greater vote of stockholders than that specified in this section.

      38

      (e) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all matters with respect to this section.

      39

      66 Del. Laws, c. 204, § 170 Del. Laws, c. 79, §§ 8-1073 Del. Laws, c. 298, §§ 4-676 Del. Laws, c. 145, § 2.;

  • 7 Stockholder Meetings and Voting for Directors

    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.

    • 7.1 DGCL Sec. 211 - Stockholder meetings

      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. 

       

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4
      Subchapter VII. Meetings, Elections, Voting and Notice
      5

       

      6 7

      (a)(1) Meetings of stockholders may be held at such place, either within or without this State as may be designated by or in the manner provided in the certificate of incorporation or bylaws, or if not so designated, as determined by the board of directors. If, pursuant to this paragraph or the certificate of incorporation or the bylaws of the corporation, the board of directors is authorized to determine the place of a meeting of stockholders, the board of directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by paragraph (a)(2) of this section.

      8

      (2) If authorized by the board of directors in its sole discretion, and subject to such guidelines and procedures as the board of directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication:

      9

      a. Participate in a meeting of stockholders; and

      10

      b. Be deemed present in person and vote at a meeting of stockholders, whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.

      11

      (b) Unless directors are elected by written consent in lieu of an annual meeting as permitted by this subsection, an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided in the bylaws. Stockholders may, unless the certificate of incorporation otherwise provides, act by written consent to elect directors; provided, however, that, if such consent is less than unanimous, such action by written consent may be in lieu of holding an annual meeting only if all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action. Any other proper business may be transacted at the annual meeting.

      12

      (c) A failure to hold the annual meeting at the designated time or to elect a sufficient number of directors to conduct the business of the corporation shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation except as may be otherwise specifically provided in this chapter. If the annual meeting for election of directors is not held on the date designated therefor or action by written consent to elect directors in lieu of an annual meeting has not been taken, the directors shall cause the meeting to be held as soon as is convenient. If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director. The shares of stock represented at such meeting, either in person or by proxy, and entitled to vote thereat, shall constitute a quorum for the purpose of such meeting, notwithstanding any provision of the certificate of incorporation or bylaws to the contrary. The Court of Chancery may issue such orders as may be appropriate, including, without limitation, orders designating the time and place of such meeting, the record date or dates for determination of stockholders entitled to notice of the meeting and to vote thereat, and the form of notice of such meeting.

      13

      (d) Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws.

      14

      (e) All elections of directors shall be by written ballot unless otherwise provided in the certificate of incorporation; if authorized by the board of directors, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxy holder.

      15

      8 Del. C. 1953, § 211; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 1263 Del. Laws, c. 25, § 471 Del. Laws, c. 120, §§ 12, 1372 Del. Laws, c. 343, §§ 7, 877 Del. Laws, c. 14, § 4.;

    • 7.2 DGCL. Sec. 228 - Action by written consent

      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. 

      1
      TITLE 8
      2
      Corporations
      3
      CHAPTER 1. GENERAL CORPORATION LAW
      4
      Subchapter VII. Meetings, Elections, Voting and Notice
      5

       

      6 7

      (a) Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

      8

      (b) Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at a meeting of the members of a nonstock corporation, or any action which may be taken at any meeting of the members of a nonstock corporation, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members having a right to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of members are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

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      (c) Every written consent shall bear the date of signature of each stockholder or member who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this section to the corporation, written consents signed by a sufficient number of holders or members to take action are delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders or members are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

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      (d)(1) A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder, member or proxyholder, or by a person or persons authorized to act for a stockholder, member or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (A) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder, member or proxyholder or by a person or persons authorized to act for the stockholder, member or proxyholder and (B) the date on which such stockholder, member or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders or members are recorded. Delivery made to a corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Notwithstanding the foregoing limitations on delivery, consents given by telegram, cablegram or other electronic transmission, may be otherwise delivered to the principal place of business of the corporation or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders or members are recorded if, to the extent and in the manner provided by resolution of the board of directors or governing body of the corporation.

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      (2) Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.

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      (e) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders or members who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that written consents signed by a sufficient number of holders or members to take the action were delivered to the corporation as provided in subsection (c) of this section. In the event that the action which is consented to is such as would have required the filing of a certificate under any other section of this title, if such action had been voted on by stockholders or by members at a meeting thereof, the certificate filed under such other section shall state, in lieu of any statement required by such section concerning any vote of stockholders or members, that written consent has been given in accordance with this section.

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      8 Del. C. 1953, § 228; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 1457 Del. Laws, c. 148, § 1658 Del. Laws, c. 235, § 466 Del. Laws, c. 136, §§ 12-1467 Del. Laws, c. 376, §§ 7, 870 Del. Laws, c. 349, § 472 Del. Laws, c. 343, § 1573 Del. Laws, c. 82, § 1177 Del. Laws, c. 14, § 11.;

    • 7.3 DGCL Sec. 212 - Stockholder voting rights

      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.  

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      (a) Unless otherwise provided in the certificate of incorporation and subject to § 213 of this title, each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder. If the certificate of incorporation provides for more or less than 1 vote for any share, on any matter, every reference in this chapter to a majority or other proportion of stock, voting stock or shares shall refer to such majority or other proportion of the votes of such stock, voting stock or shares.

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      (b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after 3 years from its date, unless the proxy provides for a longer period.

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      (c) Without limiting the manner in which a stockholder may authorize another person or persons to act for such stockholder as proxy pursuant to subsection (b) of this section, the following shall constitute a valid means by which a stockholder may grant such authority:

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      (1) A stockholder may execute a writing authorizing another person or persons to act for such stockholder as proxy. Execution may be accomplished by the stockholder or such stockholder's authorized officer, director, employee or agent signing such writing or causing such person's signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature.

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      (2) A stockholder may authorize another person or persons to act for such stockholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied.

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      (d) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to subsection (c) of this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.

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      (e) 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.

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      8 Del. C. 1953, § 212; 56 Del. Laws, c. 5057 Del. Laws, c. 148, § 1267 Del. Laws, c. 376, § 671 Del. Laws, c. 339, §§ 28-3173 Del. Laws, c. 298, § 7.;

    • 7.4 Stock with Multiple Voting Classes

      According to §212, the default is that every share of stock has one vote.  However, because the corporate code provides for parties to tailor their arrangements, it is possible for boards to issue different classes or series of stock with different rights.  The most common, though certainly not the only, customization of stock in recent years is the creation of multiple classes of stock with different voting power.  In recent years, multiple class voting structures have become popular with founder-led tech companies when they go public. For example, corporations like Alphabet (Google), Facebook, Twitter, and Snap, among others, all have multiple classes of stock, each with different voting rights.  High vote stock, held by the controlling stockholders in these corporations, typically have ten votes per share, while stock held by the public has stock with a lower number of votes per share. 

      Alphabet (Google) has a relative complex share structure. Alphabet's Class A shares are the shares commonly held by the public. These shares have one vote each. Alphabet's Class B shares are high vote shares held by the founders.  These shares have 10 votes each. The final Class of shares in Alphabet at no-vote Class C shares. Class C shares do not have the right to vote. Alphabet uses these shares as acquisition currency. Class C shares permit the founders to purchase other companies for using Alphabet stock as the currency without risking reduction in the voting power of the founders. By holding high vote Class B shares, Google's founders can control the outcome of stockholder votes without holding an equivalent economic interest in the corporation.  

      Snap went public last year with its own version of multiple classes of shares. In Snap's case, the company has three classes of common stock: Class A, Class B, and Class C. Holders of Snap's Class A common stock are not entitled to vote on matters submitted to the stockholders. Holders of Snap's Class B common stock (mostly made up of employees and venture investors) are entitled to one vote per share. And holders of Snap's Class C common stock (held by Snap's founders: Evan Spiegal and Robert Murphy) and  are entitled to ten votes per share. Holders of shares of Class B common stock and Class C common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders. As a result of this voting structure Evan Spiegel and Robert Murphyare able to exercise voting rights with respect to approximately 88.5% of the voting power of Snap's outstanding capital stock.

      Pursuant to Section 212(a), where a corporation has multiple classes of stock with different voting power, then the entire code should be re-read and where the code calls for "share" (with respect to required votes or quorum, etc) that must be read to read "votes".   

    • 7.5 DGCL Sec. 213 - Record dates

      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. 

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      (a) In order that the corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If the board of directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the board of directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance with the foregoing provisions of this subsection (a) at the adjourned meeting.

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      (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by this chapter, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by this chapter, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action.

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      (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.

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      8 Del. C. 1953, § 213; 56 Del. Laws, c. 5057 Del. Laws, c. 148, § 1366 Del. Laws, c. 136, §§ 7-977 Del. Laws, c. 14, § 5.;

    • 7.6 DGCL Sec. 222 - Notice of meetings

      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. 

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      (a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, the record date for determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

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      (b) Unless otherwise provided in this chapter, the written notice of any meeting shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

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      (c) When a meeting is adjourned to another time or place, unless the bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting, the board of directors shall fix a new record date for notice of such adjourned meeting in accordance with § 213(a) of this title, and shall give notice of the adjourned meeting to each stockholder of record entitled to vote at such adjourned meeting as of the record date fixed for notice of such adjourned meeting.

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      8 Del. C. 1953, § 222; 56 Del. Laws, c. 5058 Del. Laws, c. 235, § 371 Del. Laws, c. 339, § 4072 Del. Laws, c. 343, §§ 11-1377 Del. Laws, c. 14, §§ 7-9.;