Opinion ID: 2113062
Heading Depth: 1
Heading Rank: 2

Heading: Statute Enables Preferred Stock Contracts

Text: The Delaware General Corporation Law is an enabling statute that provides great flexibility for creating the capital structure of a Delaware corporation. The primary authority to issue stock and designate the powers, rights or preferences of certain stock classes is set forth in section 151. [1] Consistent with the enabling nature of the statutory scheme, section 151(a) affords Delaware corporations considerable latitude in creating classes of stock: Every corporation may issue 1 or more classes of stock ... which classes ... 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. [2] Although authority to create different classes of stock is expressly permitted by section 151(a), section 102(a)(4) also governs that subject. Section 102(a)(4) states: The certificate of incorporation shall also set forth a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, which are permitted by § 151 of this title in respect of any class or classes of stock or any series of any class of stock of the corporation and the fixing of which by the certificate of incorporation is desired, and an express grant of such authority as it may then be desired to grant to the board of directors to fix by resolution or resolutions any thereof that may be desired but which shall not be fixed by the certificate of incorporation. [3] Accordingly, the rights of the preferred shareholders, vis-à-vis other shareholders, are fixed by the contractual terms agreed upon between the private parties and are set forth in the certificate of incorporation and/or applicable resolution(s). [4] Preferred stock, as the term implies, is entitled to certain preferences over other stock. The word preferred conveys no special meaning in the abstract. The preferences must be specifically defined in the governing instruments. [5] Preferred stock may have a priority as to dividends or as to the distribution of assets and frequently has a priority as to both. Preferred stock may also include other rights, e.g., to demand redemption or to be redeemed by the corporation at a specified price. It is well established that the rights of a preferred shareholder are least affected by rules of law and most dependent on the share contract. [6] Nevertheless, the provisions for preferred shares set forth in the certificate of incorporation must be lawful. [7] Preferred shares that do not comport with the statutory requirements of the Delaware General Corporation law are void. [8]