In Boris v. Schaheen, C.A. No. 8160-VCN (Del. Ch., December 2, 2013), the Delaware Court of Chancery held that Delaware General Corporation Law (“DGCL”) requires a written instrument evidencing board approval to issue common stock, and that failure to obtain such written approval renders the issued stock void. Because stock issued without a written instrument is void (as opposed to voidable), the Court is not able to remedy any such issuance in equity. Plaintiff shareholders brought suit under DGCL Section 225 to validate several written consents replacing the board members of Numoda Corporation, Inc. and Numoda Technologies, Inc. The Court first inquired whether the plaintiffs were in fact majority shareholders of each corporation, and thus entitled under DGCL Section 228 to select new board members by written consent. Recordkeeping for both entities was lax, and the parties’ accounts differed as to the exact number and nature of outstanding shares.
In the case of Numoda Corporation, the Court refused to recognize any stock issuances beyond those recorded in the Numoda Corporation stock ledger. The defendant offered documentation showing the board had intended to issue stock at several junctures, and even honored those issuances (e.g., amendments to the charter to increase the number of authorized shares and shareholders’ personal accounting statements listing additional numbers of shares). However,the Court found that this evidence did not meet the written instrument requirement. The stock ledger entries indicated that the plaintiffs were still majority shareholders. Therefore, the Court upheld their written consent, appointing the plaintiffs as the directors of Numoda Corporation.
All parties agreed that Numoda Technologies was originally intended to be a wholly-owned subsidiary of Numoda Corporation and that, during a restructuring, stock in Numoda Technologies was to be distributed to Numoda Corporation stockholders on a pro rata basis. However, the Numoda Technologies stock ledger had no entries, and all certificates ordered were still blank in the stock book. The Court found that no valid stock had ever been issued. Because Numoda Technologies was a corporation without stockholders, the court rejected the plaintiffs’ written consent based on their position as majority stockholders.
The Boris decision illustrates the importance of timely and thorough record keeping for corporations as it relates to stock issuance, as failure to adequately document the issuance of common stock through a properly executed written instrument can have serious implications with respect to the control and governance of a company.