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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