Waggoner v. Laster - 581 A.2d 1127 (Del. 1990)

Rule:

A certificate of incorporation is viewed as a contract among shareholders, and general rules of contract interpretation apply to its terms. Courts must give effect to the intent of the parties as revealed by the language of the certificate and the circumstances surrounding its creation and adoption.

Facts:

The CEO agreed to provide personal guarantees and stock pledges for the debt of the corporation. He received convertible preferred stock as compensation. Following a business disagreement, the CEO executed a stockholder's written consent purporting to vote his super-majority voting preferred stock to oust the directors. The directors and shareholders alleged that the CEO did not have the authority to remove the directors. The trial court entered a judgment in favor of the directors and the shareholders. The CEO and his wife appealed.

Issue:

Was the alleged creation and issuance of preferred stock with super-majority voting rights valid?

Answer:

No.

Conclusion:

The court held the board of directors lacked the authority to issue convertible preferred stock with super-majority voting rights because the certificate of incorporation did not expressly authorize the board to establish special voting rights for preferred stock. The stock preference provisions of the certificate of incorporation were subject to strict construction and thus could not be read to include special voting rights in the absence of an express reservation to the board of the power to confer such rights. The reformation of the certificate of incorporation was not warranted because there was conflicting evidence as to whether the parties originally intended for the board of directors to retain the authority to confer special voting rights.