Providence & Worcester Co. v. Baker
3 A.L.R. 4th 1198, 378 A. 2d 121, 1977 Del. LEXIS 733 (1977)
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Rule of Law:
A corporation's certificate of incorporation may impose voting restrictions on a stockholder based on the number of shares held, as such a provision is a valid limitation on the stockholder's voting rights under 8 Del.C. § 212(a), not an impermissible variation in the rights of the stock itself under § 151(a).
Facts:
- The Providence and Worcester Company (P & W), a Delaware corporation, had a certificate of incorporation with provisions that had been in effect since 1844.
- These provisions governed the voting rights for its single class of common stock.
- Under the charter, each stockholder was entitled to one vote for every share owned up to fifty shares.
- For shares owned in excess of fifty, a stockholder was entitled to only one vote for every twenty shares.
- The charter also stipulated that no single stockholder could vote more than one-fourth of the total number of outstanding shares.
- The trustees for Penn Central Transportation Company (Penn Central) were a large stockholder in P & W, and these charter provisions significantly diluted their voting power.
Procedural Posture:
- The trustees in bankruptcy for Penn Central Transportation Company sued Providence and Worcester Company in the Delaware Court of Chancery to invalidate certain voting and quorum provisions in P & W's charter.
- Both parties filed cross-motions for summary judgment.
- The Court of Chancery granted summary judgment in favor of Penn Central, holding that the voting restrictions were invalid under § 151(a).
- Providence and Worcester Company, the defendant, appealed the Court of Chancery's decision to the Delaware Supreme Court.
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Issue:
Does a corporate charter provision that scales voting rights based on the number of shares held by a single stockholder, granting fewer votes per share to larger holders, violate Delaware General Corporation Law § 151(a)'s requirement for uniform voting rights within a class of stock?
Opinions:
Majority - Herrmann, C.J.
No. A corporate charter provision that scales voting rights based on the number of shares held by a single stockholder does not violate § 151(a). The court reasoned that the P & W charter provision is a limitation on the voting rights of the stockholder, not a variation in the voting powers of the stock itself. The court distinguished between rights that are inherent to the stock, which must be uniform within a class under § 151(a), and limitations on a stockholder's personal right to exercise votes, which are governed by § 212(a). Section 212(a) explicitly permits a corporation's charter to deviate from the default 'one share-one vote' rule. The court found that since the voting power of any given share remains the same regardless of who holds it (i.e., its power would be restored if transferred to a smaller holder), the restriction attaches to the stockholder, not the stock. The historical context of Delaware corporate law, which included similar scaled voting provisions in early charters, further supported the conclusion that the legislature did not intend for § 151(a) to prohibit such arrangements.
Analysis:
This decision solidifies a critical distinction between rights attaching to shares versus rights attaching to shareholders in Delaware corporate law. It validates scaled voting provisions as a legitimate mechanism for a corporation to prevent the concentration of voting control in a single large stockholder, effectively serving as an anti-takeover defense embedded in the charter. By clarifying that § 212(a) provides broad latitude to customize stockholder voting rights, the ruling gives corporate planners significant flexibility to structure governance and control, distinct from the class-based uniformity mandated by § 151(a).
