Waggoner v. Laster
1990 Del. LEXIS 347, 581 A.2d 1127 (1990)
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Rule of Law:
Under Delaware law, a board of directors lacks the authority to grant special rights to a class of stock, such as super-majority voting rights, unless the power to grant such specific rights is expressly stated in the certificate of incorporation. Stock preferences are in derogation of common law and must be strictly construed, with any ambiguity resolved against the granting of such rights.
Facts:
- Thomas R. Waggoner founded STAAR Surgical Company ('STAAR').
- By 1987, STAAR was in severe financial distress, and its primary lender required personal guarantees on $8.5 million in corporate debt.
- Waggoner agreed to personally guarantee STAAR's debt in exchange for convertible preferred stock, which he believed would grant him voting control of the company so long as his guarantees were outstanding.
- STAAR's Delaware certificate of incorporation authorized the board to issue preferred stock and specified certain powers it could grant, such as setting dividends and conversion rights, but did not mention voting rights.
- In 1989, a dispute arose between Waggoner and the other four board members over a potential merger transaction.
- As the board prepared to remove him as CEO, Waggoner executed a stockholder's written consent, purporting to use super-majority voting rights from his preferred stock to oust the other four directors and reduce the board's size.
Procedural Posture:
- LaMar F. Laster and other directors and shareholders sued Thomas R. Waggoner in the Delaware Court of Chancery to determine the lawful members of STAAR's board of directors.
- The Vice Chancellor, assuming without deciding that the preferred stock was validly issued, ruled that the super-majority voting rights were void because they were not authorized by STAAR's certificate of incorporation.
- The Court of Chancery entered judgment for the plaintiffs, invalidating Waggoner's attempt to remove the other directors.
- Thomas R. Waggoner and Patricia L. Waggoner (appellants) appealed the judgment to the Delaware Supreme Court.
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Issue:
Does a board of directors have the authority to issue preferred stock with super-majority voting rights when the corporate certificate of incorporation enumerates specific powers the board may grant to preferred stock but does not expressly include the power to set voting rights?
Opinions:
Majority - Moore, J.
No. The board of directors lacked authority under STAAR's certificate of incorporation to issue preferred stock with super-majority voting rights. Delaware General Corporation Law sections 102(a)(4) and 151(a) require that the authority to create special stock preferences, including voting rights, must be expressly stated in the certificate of incorporation. Because stock preferences are in derogation of common law, they must be strictly construed. STAAR's certificate enumerated specific preferences the board could grant but conspicuously omitted voting rights. A general reservation clause is insufficient to confer a specific power not otherwise listed. The court also rejected Waggoner's argument for reformation of the certificate due to conflicting evidence of shareholder intent and his estoppel argument because estoppel cannot be used to validate a corporate act that is void ab initio for lack of authority.
Analysis:
This decision reinforces the bedrock principle of strict construction for stock preferences in Delaware corporate law. It establishes that corporate charters must be drafted with exacting precision, as courts will not infer the existence of significant powers, like special voting rights, that are not explicitly granted. The ruling solidifies the distinction between void acts (those beyond a corporation's power) and voidable acts (improper exercise of an existing power), clarifying that estoppel cannot validate a void act. This provides certainty for shareholders and third parties, who can rely on the plain language of the certificate of incorporation to understand the rights and limitations of corporate stock.
