John Henry v. Phixios Holdings, Inc.
(2017)
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Rule of Law:
Under 8 Del. C. § 202, a stock transfer restriction not noted conspicuously on the stock certificate is ineffective against a stockholder unless the stockholder had actual knowledge of the restriction before acquiring the stock, or affirmatively assented to be bound by it after acquiring the stock.
Facts:
- In July 2013, the directors of Phixios Holdings, Inc. adopted a 'Stockholder Agreement' containing a provision allowing the company to revoke the stock of any stockholder found to be engaging in acts damaging to the company.
- In February 2015, Phixios offered Jon Henry an employment position that included 50,000 shares of company stock as compensation for a deferred salary.
- On March 25, 2015, Phixios issued a stock certificate to Henry for 50,000 shares, which did not contain any mention or notation of the transfer or revocation restrictions.
- On August 10, 2015, Phixios's COO, Penni Blake, emailed the Stockholder Agreement to Henry and others, to which Henry replied, 'Thank you for getting a copy out for my records.'
- During his employment, Henry, at the direction of Phixios executives, used his wife's company to research federal business opportunities for Phixios.
- On May 6, 2016, Phixios terminated Henry's employment, citing financial reasons.
- On July 12, 2016, Phixios held a stockholder meeting and voted to revoke all of Henry's stock, alleging he had competed against the company, thereby engaging in a damaging act under the Stockholder Agreement.
Procedural Posture:
- Jon Henry filed suit against Phixios Holdings, Inc. in the Delaware Court of Chancery, a trial court with jurisdiction over corporate matters.
- Henry sought a declaratory judgment that he was a stockholder and that the company's purported revocation of his shares was invalid.
- Henry also filed a demand under 8 Del. C. § 220 to inspect the company's books and records to investigate mismanagement, value his shares, and communicate with other stockholders.
- The case proceeded to a half-day trial where the court heard testimony from Henry and Phixios's COO, Penni Blake.
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Issue:
Does a stock transfer restriction, not noted on the stock certificate, bind a stockholder who lacked actual knowledge of the restriction upon receiving the stock and did not subsequently assent to it, under 8 Del. C. § 202?
Opinions:
Majority - Montgomery-Reeves, Vice Chancellor
No, the stock transfer restriction does not bind the stockholder. Under 8 Del. C. § 202, for a restriction not noted on the certificate to be effective, the holder must have actual knowledge of it. The court interprets this to mean the stockholder must have actual knowledge before acquiring the stock. The court found the testimony of Phixios's COO, Penni Blake, claiming she informed Henry of the restriction prior to his stock issuance to be not credible. If a stockholder acquires shares without prior knowledge of a restriction, they can only be bound by it if they later affirmatively assent. Henry’s polite email acknowledging receipt of the agreement months after receiving his stock did not constitute affirmative assent to be bound by its terms, as he was not on notice that he was modifying his legal rights. Therefore, the company's revocation of his stock was invalid, and Henry remains a stockholder.
Analysis:
This opinion clarifies the 'actual knowledge' and 'assent' requirements of 8 Del. C. § 202 for stock restrictions not noted on a certificate. It establishes that knowledge must be contemporaneous with or prior to the acquisition of the securities for the restriction to be automatically effective. More significantly, it sets a high bar for demonstrating subsequent assent, holding that mere acknowledgement of receipt of a document is insufficient. The ruling reinforces the statute's protective purpose, ensuring stockholders are not stripped of their bargained-for rights by restrictions they did not knowingly and voluntarily accept.
