Curing Defects in Stock Issuances - American Bar Association

Curing Defects in Stock Issuances Under Delaware Law 1123
issue. It is true that Rice & Hutchins purchased its fi rst block of shares after the
stockholder vote on the certifi cate amendment but before the amendment had
been fi led. However, the court’s analysis above states a categorical rule to the effect
that void stock cannot be cured; it does not appear that the timing of the purchase
of stock by Rice & Hutchins played any role in the legal analysis. 76 Moreover, Rice
& Hutchins purchased two further blocks of (preferred and common) stock after
the certifi cate amendment was fi led. Certainly, at that point, it knew, or should
have known, exactly what fractional interest in the equity of the corporation it had
purchased under the then in-force as-amended certifi cate. 77 Absent inequitable
circumstances, if there had been a fully informed unanimous stockholder vote, it
76. The lower court’s opinion strongly suggests that its result was infl uenced by the self-interested
nature of the vote, i.e., the vote may have been unanimous, but only insiders knew the purpose and
legal consequences of the vote (or the vote’s failure) vis-à-vis the shares held by the insiders. See Triplex,
147 A. at 317.
There is no evidence which contradicts that adduced by the petitioner to the effect that it never
had knowledge of the facts upon which its present contentions touching [on] the invalidity of the
common stock are based, until just preceding the annual meeting now under review, and that as
soon as it became advised thereof objection to the validity of the common stock and its right to
vote was presented by it and overruled by those conducting the meeting.
Id. at 321–22. The Delaware Supreme Court was less equivocal about what the petitioner might have
known when it purchased its stock. See Triplex, 152 A. at 348 (“The resolution of amendment [to the
certifi cate] . . . recited ‘that a question has arisen as to the validity of the stock by reason of the imperfections
in the original certifi cate of incorporation.’ ”). However, the Triplex court also stated that it “is
reasonable to believe that the appellants knew that all the no par value stock . . . was invalid” in light
of the subsequent stockholders’ meeting to rectify the problem. Id. at 347. The court did not explain
the signifi cance of this fact. Cf. id. at 349 (“[T]he appellees did not participate in the illegal issuance
of stock to the appellants under the original certifi cate of incorporation.”). Perhaps the court’s point
was that although the stockholders (preferred and common) knew that the charter failed to conform to
the DGCL, the preferred stockholders were not fully informed, i.e., they were not told that they were
the only holders capable of voting on the proposed certifi cate amendment, or that, by allowing the
common stockholders to vote on the amendment at the meeting, the preferred stockholders had been,
in effect, misinformed in regard to their actual voting power. Triplex, 147 A. at 321 (“Such [common]
stock had no right to vote.”). See also supra note 49; infra note 85.
77. This assumes that the as-amended certifi cate was actually in force. See Triplex, 152 A. at 347
(“We will assume then, that the amendment was legally adopted by the vote of the ‘preferred’ stock
which was the only valid stock then outstanding.”). It is unclear why the court put preferred in quotation
marks. Perhaps it was because, in contravention of the DGCL, no preferences with regard to the
preferred stock were in the certifi cate prior to its amendment. See, e.g., Telvest, Inc. v. Olson, C.A.
No. 5798, 1979 WL 1759 (Del. Ch. Mar. 8, 1979), appeal denied, 1979 WL 178117 (Del. Ch. Mar. 22,
1979). The court in Telvest stated:
Thus any supposed preference as to dividends or liquidation rights seems illusory at best. If any
preference is created, it would seem to lie almost entirely in the voting rights. In this regard, Starring
v. Am. Hair & Felt Co., . . . 191 A. 887[, 890–91] ([Del. Ch.] 1937) casts some doubt on the
proposition that a stock can be classifi ed as ‘special’ or ‘preferred’ under § 151 solely because it is
given a favored voting position [i.e., absent preferential dividends or liquidation rights].
Telvest, 1979 WL 1759, at *5. In other words, the Triplex preferred stock was a class of stock issued
absent any grant from the state to issue that kind of stock. But the court was unwilling to hold that
the preferred (like the common) was void or voidable. The two cases are distinguishable: at least with
regard to the preferred stock, a calculation of the franchise tax owed the state was possible. But cf.
Shintom Co., Ltd. v. Audiovox Corp., C.A. No. 693-N, 2005 WL 1138740, at *3 n.7 (Del. Ch. May 4,
2005) (“[T]he preferred stockholders must have some preferred right over the common, otherwise the
stock is considered illusory.”), aff’d, 888 A.2d 225, 230 (Del. 2005) (same).