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Keywords

contractcorporationgood faithbad faith

defendantwillcorporationbad faith

Related Cases

Davis v. Louisville Gas & Electric Co., 16 Del.Ch. 157, 142 A. 654

Facts

The Louisville Gas & Electric Company was incorporated in 1913 with a specific capital structure that included preferred and common stock. Over the years, the company amended its certificate of incorporation to change its capital structure, including a significant amendment proposed in 1928 that would alter the rights of Class A and Class B stockholders. The complainants, holders of Class B stock, contested the amendment, arguing that it was beyond the corporation's lawful power and that it constituted a fraud upon their rights. A stockholders' meeting was held, and despite a favorable vote for the amendment, the filing of the amendment was withheld pending the court's decision on the restraining order.

The Class A common has no voting rights. It is redeemable at any time at $32.50 per share.

Issue

The main legal issues were whether the corporation had the lawful power to adopt the proposed amendment to its certificate of incorporation and whether the terms of the amendment were unfair or constituted a fraud on the Class B stockholders.

The complainants contest the right of the defendant to amend its certificate of incorporation in the manner proposed for two reasons—first, because the corporation is without lawful power to adopt the amendment, and second, conceding the power to exist, the changes proposed by the amendment are nevertheless unfair, inequitable and a fraud upon the complainants, and should therefore be enjoined.

Rule

The court applied the principle that a corporation has the power to amend its certificate of incorporation as conferred by the General Corporation Law, provided that such amendments do not impair the contractual rights of stockholders without their consent.

The power to amend conferred by that section as it existed at the time this corporation was created was consequently conferred upon it by the law creating it.

Analysis

The court determined that the amendment proposed by the corporation was within its lawful powers as conferred by the amended General Corporation Law of 1927. The court noted that the original certificate of incorporation included a reservation of the right to amend, which allowed the corporation to adopt changes in accordance with future legislative amendments. The court also found that the proposed changes, while detrimental to Class B stockholders, did not constitute fraud or unfairness, as the majority of stockholders had voted in favor of the amendment and the directors acted in good faith.

The power reserved by the Legislature to amend the act under which the defendant was created, and subject to which every stockholder acquired and holds his stock, is broad enough to embrace within its purview the amendment of 1927.

Conclusion

The court concluded that the restraining order would not issue, affirming the corporation's right to amend its certificate of incorporation as proposed. The court found no evidence of bad faith or fraud in the actions of the directors or the majority stockholders.

The restraining order will not issue.

Who won?

The Louisville Gas & Electric Company prevailed in the case because the court found that it had the lawful authority to amend its certificate of incorporation and that the amendment process was conducted in good faith.

The court found no evidence of bad faith or fraud in the actions of the directors or the majority stockholders.

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