This is a preview of how your content will look on export. To export the complete content in DOC format, click the blue export button in the upper right corner of this page.
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.

  • 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.;

  • 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.;

  • 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.;

  • 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.;

  • 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 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.;

  • 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)).

  • 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.;

You've reached the bottom of your content preview.
To view the rest in your browser, click here.
To export the complete content in DOC format, click the blue export button in the upper right corner of this page.

(Note: If you view the entire playlist, any changes you've made to export settings will be lost. Large playlists may temporarily freeze your browser while loading, as well.)