Opinion ID: 2159984
Heading Depth: 1
Heading Rank: 3

Heading: Stock Issuance and the Delaware General Corporation Law Statutory Scheme

Text: Grimes argues that his arrangement with Moch does not constitute a right within the meaning of 8 Del. C. § 157 and, therefore, need not be approved by the board or evidenced by a written instrument as required by that statute. Alteon argues that it does. Grimes argues that Section 157 applies only to options and option like rights. The fatal defect in Grimes' claim is that the agreement purports to grant a right that was not expressly approved by the board of directors as required by the statutory scheme of the Delaware General Corporation Law exemplified by Section 152 and Section 157. The agreement purports to bind the corporation to issue to Grimes 10% of a future issuance of stock. Grimes' right to require the issuance of stock to him arises only if and when there is a public or private offering of newly issued stock. Because Grimes claims a right to require the issuance to him of 10% of any such offering, the Corporation Law applies and requires that the agreement and the issuance of the stock must be approved by the board of directors and evidenced by a written instrument. One must read in pari materia the relevant statutory provisions of the Corporation Law. First there is the fundamental corporate governance principle set forth in 8 Del. C. § 141(a) that the business and affairs of every corporation ... shall be managed by and under the direction of the board of directors. One then turns to the board's role in stock issuance set forth in the relevant sections of Subchapter V of Title 8. The provisions in this Subchapter relate to the issuance of capital stock, subscriptions for additional shares, options and rights agreements. Taken together, they are calculated to advance two fundamental policies of the Corporation Law: (1) to consolidate in its board of directors the exclusive authority to govern and regulate a corporation's capital structure; and (2) to ensure certainty in the instruments upon which the corporation's capital structure is based. [6] As this Court has stated in requiring strict adherence to statutory formality in matters relating to the issuance of capital stock, the issuance of corporate stock is an act of fundamental legal significance having a direct bearing upon questions of corporate governance, control and the capital structure of the enterprise. The law properly requires certainty in such matters. [7] Delaware's statutory structure implements these policies through a clear and easily followed legal roadmap of statutory provisions. [8] This statutory scheme consistently requires board approval and a writing. Various provisions in Subchapter V set forth the formal requirements for the issuance of capital stock, the establishment of classes of stock, the consideration for the issuance of stock, and formalities regarding rights, options and subscriptions relating to capital stock. The statutes relating to the issuance of stock that provide the policy context that is relevant here are 8 Del. C. §§ 151, 152, 153, 157, 161 and 166. Taken together, these provisions confirm the board's exclusive authority to issue stock and regulate a corporation's capital structure. To ensure certainty, these provisions contemplate board approval and a written instrument evidencing the relevant transactions affecting issuance of stock and the corporation's capital structure. Section 151(a), relating to classes and series of stock, states that the resolution or resolutions providing for the issue of such stock [must be] adopted by the board of directors pursuant to authority expressly vested in it by the provisions of its certificate of incorporation. Section 152, relating to the issuance of stock, states, The consideration ... for subscriptions to, or the purchase of, the capital stock to be issued by a corporation shall be paid in such form and in such manner as the board of directors shall determine. Section 153, relating to the consideration for the issuance of stock, requires that such consideration shall be determined from time to time by the board of directors. Section 157, relating to rights and options respecting stock, requires board approval and a written instrument to create such rights or options. Section 161, relating to the issuance of additional stock, allows the directors to issue or take subscriptions for additional shares of its capital stock up to the amount authorized in its certificate of incorporation. Section 166, relating to the formalities required of stock subscriptions, provides that subscription agreements are not enforceable against the subscriber unless in writing and signed by the subscriber. The requirement of board approval for the issuance of stock is not limited to the act of transferring the shares of stock to the would-be stockholder, but includes an antecedent transaction that purports to bind the corporation to do so. As noted, Section 152 requires the directors to determine the consideration... for subscriptions to, or the purchase of, the capital stock of a corporation. Thus, director approval of the transaction fixing such consideration is required. Moreover, it is well established in the case law that directors must approve a sale of stock. [9] This duty is considered so important that the directors cannot delegate it to the corporation's officers. [10] Grimes argues that the contract provides only that if Alteon's board should exercise its authority to issue additional Alteon stock in a future private placement (as it did here in the private placement of 2,834,088 shares of common stock), then Mr. and Mrs. Grimes were obligated to purchase a certain percentage of that stock at whatever price Alteon's board set. That contract does not give Mr. and Mrs. Grimes the ability to force Alteon to issue additional stock (at any price), and thus does not implicate the board's right to regulate the company's capital structure. [11] This argument begs the fundamental policy question behind the statutory scheme requiring director approval for steps taken in connection with stock issuance. If the corporation is required by the Grimes agreement to issue to Grimes 10% of an offering to sell stock, the board's business judgment is or may be significantly encumbered. For example, the board would not be able to sell 91%-100% of the stock it chooses to issue to another willing purchaser or purchaser in a private placement or otherwise. It may offer those purchasers only 90% of the offering. That constraint may limit the universe of prospective investors to those who would be content to have only 90% of the stock to be issued. An agreement that binds a company to allow a 10% stockholder to remain at a 10% holding level may be a considerable sacrifice for a corporation, or it may be a good business decision for the board to consider. Focusing, however, on the problematic aspect of such a business decision, it would seem that a 10% holding in a corporation is large enough that the investor may have considerable leverage over the corporation. Such an agreement is tantamount to an agreement to permit Grimes to have a continuing influence over the future direction of the corporation. Moreover, potential investors might be deterred from investing in a corporation that had made such a commitment. Therefore, the agreement might actually decrease the capital potentially available to a company in a future stock offering. A business decision weighing the advantages and disadvantages of the Grimes transaction would be within the discretion of the board of directors. But that choice lies only in the board's province, not that of the CEO without express board approval. There is an important policy basis for this requirement. Shares of stock are a species of property right that is of foundational importance ... to our economic system. [12] Thus, it is critical that the validity of those securities, especially those that are widely traded, not be easily or capriciously called into question. [13] Explicit board approval of a stock issuance or a commitment to issue stock makes it more likely that the board will have considered thoroughly the reasons for and against the issuance. Thus, director approval of stock issuance or agreements affecting the respective rights of the corporation and a putative purchaser of stock reduces later disputes about their propriety and enhances corporate stability and certainty. This policy can be demonstrated by focusing on two of the applicable provisions in the statutory scheme of Subchapter V of the Corporation Law, Sections 152 and 157.