May 23, 2006
Shareholder v. Stockholder: The Delaware Canard
Posted by Gordon Smith

Bill Sjostrom is one of my favorite bloggers, but I have to call him out for endorsing one of the biggest canards in corporate law:

While in Minnesota and other MBCA states, owners of common stock are referred to as "shareholders," the Delaware corporate code uses the term "stockholder." Hence, my references to owners of stock in the Delaware corporation should have been to stockholders not shareholders. Fair enough and easy to fix, but I wonder how many people are aware of the distinction. I read articles and opinions (some of them by Delaware judges) all the time where the author seems to be blissfully unaware—he or she either refers to owners of Delaware stock as shareholders, or, more horrific (because it violates the golden rule of contract drafting), he or she refers to them in one place as shareholders and in another place as stockholders.

Bill, all of your sackcloth and ashes were in vain. There was no need to "fix" anything because the distinction between shareholders and stockholders under Delaware law is a myth.

It is not true of the Delaware corporations code, where there are four references to shareholders:

  • Section 141(k): "Unless the certificate of incorporation otherwise provides, in the case of a corporation whose board is classified as provided in subsection (d) of this section, shareholders may effect such removal only for cause;"
  • Section 144(a):
    "(2) The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or
    "(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the shareholders."
  • Section 251(g): "references to members rather than stockholders or shareholders"

The word also appears myriad times in other chapters of the Delaware Code.

It also appears frequently in Delaware cases. I just searched for "shareholder*" in Delaware Supreme Court cases and got 430 hits. Lots more can be found in the Court of Chancery. Some of these are limited to West's summaries or keynotes, but many such references appear in the cases.

Lawyers who insist on enforcing this mythical distinction -- and I admit to having been one of them earlier in my career -- are simply misguided.

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Comments (11)

1. Posted by Bill Sjostrom on May 23, 2006 @ 7:12 | Permalink

Thanks for pointing this out. I was blissfully unaware. Any idea why they use two different terms to mean the same thing?

2. Posted by Fred Tung on May 23, 2006 @ 8:17 | Permalink

When I was a young corporate associate, it was a clear mark of amateurishness if you couldn't keep stockholders (DE) and shareholders (CA) straight. If I only knew then what I know now. . . .

3. Posted by KipEsquire on May 23, 2006 @ 8:20 | Permalink

For what it's worth, on Wall Street we almost always use "shareholder" rather than "stockholder."

The far more important point, in any event, is to continue to fight the nonsensical and invidious concept of the "stakeholder," a cutesy anti-capitalist term bandied about since the 1970s.

4. Posted by Gordon Smith on May 23, 2006 @ 8:39 | Permalink

Bill, I don't have any idea why they would use both. Just sloppy drafting, perhaps? The Delaware code is not a model of precision.

In my experience, most people in Delaware just use the two terms interchangably, without much thought. Occasionally, someone mentions the "stockholder" thing, but it was never a huge deal.

5. Posted by Robert Schwartz on May 23, 2006 @ 11:51 | Permalink

Just because the DGCL is sloppy, does not mean you should be sloppy. Pick one term and use it, that way no one can quibble with you about what you meant.

6. Posted by Gordon Smith on May 23, 2006 @ 12:57 | Permalink

But the point, Robert, is that it doesn't matter which term you use. They mean the same thing.

7. Posted by Robert Schwartz on May 23, 2006 @ 13:07 | Permalink

I didn't say which one to pick, I said pick one.

8. Posted by Franklin Gevurtz on May 23, 2006 @ 18:19 | Permalink

I stumbled across this discussion and thought I would add some background. First, by way of confession, some years ago, in reviewing a draft Chapter in my Business Planning book, Hodge O'Neal commented on my inconsistent use of "shareholder" versus "stockholder". I assumed he was correct and removed the variation. Since then, I have done a bit of work on corporate history and now realize that these terms are equivalents. The orginal usage comes from the joint stock company in which the members held shares in the joint stock (the capital of the company). This then became reduced to shareholders (as the members held shares) or stockholders (as the members held shares in the joint stock).

9. Posted by Steven A. O'Rourke on June 28, 2006 @ 13:04 | Permalink

The real reason "they" use both terms is that there is no "they"; corporations are creatures of state law. Local lawyers and legislators love that; foreigners can't understand the inefficaiency. I have been creating DE, NY, CA, and NV corporations for almost 30 years. California, where I now practice (though 90% of the corporations I create/govern are still DE) uses terms different from DE because CA loves to demonstrate that it is independent of that East Coast monolithic "Law". So CA has shareholders. It also has "Articles of Incorporation" instead of "Certificate of Incorporation". CA describes a voting process for directors but never refers to it as "plurality" voting, because referring to "plurality" is what DE does. The most famous and controversial "battle" between CA and DE is the draconian Section 2115 of the CA Corporations Code, which says, in effect, that CA will ignore the "internal affairs doctrine" and the fact that "foreign" corps are not formed under the law of CA; if the corp has major ties to CA then an entire list of CA Corp Code sections apply to supercede, e.g., the DE CGL on the topics covered. In 2005, the DE Supreme Court essentially told CA, on the basis of (at least) the Fourteenth Amendment to Go Fly a Kite; later in 2005 one CA court of appeal agreed with DE. The cat fight continues.

10. Posted by Gordon Smith on June 28, 2006 @ 17:14 | Permalink

Steven: "foreigners can't understand the inefficaiency."

Nor can I. ;-)

Actually, you make an interesting point. I asked a member of the drafting committee of the MBCA why they had a certain provision, and his response was: "There is no functional explanation. We just wanted to distinguish ourselves from Delaware." Obviously, that doesn't explain all of the differences between statutes, but I thought it was pretty revealing.

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