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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.

  • 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.;

  • 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 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.

  • 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
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    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.;

  • 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. 

    • 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.

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

       

       

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      SUBCHAPTER XV

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      PUBLIC BENEFIT CORPORATIONS

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

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      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.

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

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      (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.

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

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      (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.

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                      (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.

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                      (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.

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

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                      § 364.  Stock certificates; notices regarding uncertificated stock.

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                      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.

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                      § 365.  Duties of directors.

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                      (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.

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                      (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.

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                      § 366. Periodic statements and third party certification.

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                      (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.

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                      (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.

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                      (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.

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                      § 367.  Derivative suits.

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                      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.

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                      § 368.  No effect on other corporations.

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                      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.

  • 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.
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