Monday, September 26, 2016

Delaware Chancery Court Addresses Standard For Who is a Shareholder

Delaware Chancery Court Addresses Standard For Who is a Shareholder

      In a recent decision issued by the Chancery Court of Delaware (Vice Chancellor Glasscock), there was address the standard for determining whether a particular person is a shareholder with the right to inspect corporate books and records.  While the plaintiff argued that the share transfer ledger was conclusive, the court found that, other evidence could be considered.  Pogue v. Hybrid Energy, Inc., C.A. No. 11563-VCG (Del. Ch. Aug. 5, 2016).  

      In this instance, Pogue, who held a share certificate representing 1 million shares of Hybrid stock and whose name was listed on the share transfer ledger, sought to inspect company books and records.  The problem was that, at the time those 1 million shares were issued to him, the company was only authorized to issue 1,500 shares, and those shares were already outstanding to the corporation’s sole director/president, Thomas Lull.  When Pogue brought this action to inspect those books and records, the company defended on the fact that he is not a shareholder. Pogue, in response, argued that because he was named on the stock ledger, that should be the sole evidence assessed.  The corporation argued that a broader review of the records, which would demonstrate that the shares never existed and therefore could not have been issued, was appropriate.  Vice Chancellor Glasscock would adopt that rule, distinguishing, based upon developments in the statute, prior decisions such as Rainbow Navigation, Inc. v. Pan Ocean Navigation, Inc., 535 A.2d 1357 (Del. 1987).  On that basis, Pogue is not a shareholder, and is not entitled to the statutory right to inspect books and records.
      All that said, Vice Chancellor Glasscock went out of his way to emphasize that he was only addressing this narrow question.  Pointedly, he characterized the corporation’s defense that Pogue is not a shareholder as “chutzpah,” applying it here as when “a company that issues a void stock certificate to an employee to defraud him of his services, defending a books and records request on the ground that said employee is no stockholder. He went on to provide that:
[I]t is important, in my mind, to stay with this Memorandum Opinion is not about. It does not concern whether Pogue is entitled to relief under Section 205 of the DGCL. It does not concern whether Pogue has an action sounding in fraud or contract, as the facts alleged in his complaint, if raised in a proper forum, would indicate. And, because Pogue has not sought such relief here, it does not address whether, under the facts pled, Hybrid should be estopped from denying Pogue's stockholder status.
     Clearly Lull and Hybrid have some explaining to do.

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