Shintom Co., Ltd. v. Audiovox Corp.
2005 Del. LEXIS 421, 888 A.2d 225, 2005 WL 2871955 (2005)
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Rule of Law:
Under the Delaware General Corporation Law, preferred stock is not required to have dividend rights to be valid. So long as the stock possesses at least one genuine preference over other classes of stock, and that preference is expressly stated in the certificate of incorporation, it is legally valid.
Facts:
- In April 1981, Shintom Co., Ltd. purchased 50,000 shares of preferred stock in Audiovox New York, a predecessor to Audiovox Corporation, for $2.5 million.
- The original preferred stock entitled the holder to a noncumulative annual dividend of 10%, though Audiovox New York never paid any dividends.
- On April 16, 1986, Audiovox New York merged into Audiovox Delaware.
- As a result of the merger, Shintom's preferred stock was converted into an equal number of shares of non-dividend preferred stock in the new Audiovox Delaware entity.
- This new preferred stock explicitly stated it had no right to receive dividends but maintained a liquidation preference over the common stock.
- More than seventeen years after the merger, Shintom challenged the validity of these non-dividend preferred shares.
Procedural Posture:
- Shintom Co., Ltd. filed a complaint against Audiovox Corporation in the Delaware Court of Chancery.
- Shintom alleged that the non-dividend preferred stock it held was void under Delaware statute and sought to recover its $2.5 million investment.
- The Court of Chancery dismissed Shintom's complaint as a matter of law, concluding its statutory interpretation was incorrect.
- Shintom, as plaintiff-appellant, appealed the dismissal to the Supreme Court of Delaware, with Audiovox serving as the defendant-appellee.
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Issue:
Does title 8, section 151(c) of the Delaware Code require that preferred stock must confer dividend rights in some circumstances to be legally valid?
Opinions:
Majority - Holland, Justice
No, section 151(c) does not require that preferred stock confer dividend rights. The Delaware General Corporation Law is an enabling statute that grants corporations great flexibility in structuring their capital. The rights of preferred stockholders are contractual in nature and are strictly defined by the certificate of incorporation. The court interpreted the word 'shall' in section 151(c) as mandating that if dividend rights exist, they must be stated in the certificate, not that dividend rights must exist in the first place. Applying the principle of 'expression unius est exclusio alterius,' the statute's specific mention of rights being stated in the certificate excludes any rights not stated therein. Because the Audiovox preferred stock possessed a bona fide liquidation preference, it qualified as valid preferred stock despite having no dividend rights.
Analysis:
This decision reinforces the principle that the rights of preferred stockholders in Delaware are fundamentally a matter of contract, defined exclusively by the corporation's charter. By clarifying that 'preferred' does not inherently mean 'entitled to dividends,' the court affirmed the broad flexibility afforded to corporations in designing complex capital structures. This ruling provides certainty for corporate planners, allowing them to create specialized securities, such as non-dividend preferred stock, for various financial engineering, tax, or merger-related purposes, as long as at least one genuine preference is clearly documented.
