Davis v. Louisville Gas & Electric Company

Delaware Court of Chancery · 1928 · Corporations

142 A. 654 (Del. Ch. 1928)

Updated August 22, 2026

Corporationscharter amendmentreserved powerSection 26Section 82stock rightsclass A stockclass B stock

Facts

The complainants held Class B stock and challenged a proposed amendment to the corporation's certificate of incorporation. The amendment would eliminate Class B's existing right to retire Class A stock at $32.50 per share and would change post-threshold dividend participation from a 4-to-1 ratio favoring B over A to equal participation. The corporation had been created in 1913 under Delaware's General Corporation Law, and in 1927 Section 26 was amended to confer broader charter-amendment power; the corporation's original certificate also reserved the right to amend in the manner 'now or hereafter prescribed by statute.' The corporation justified the amendment as necessary to make Class A stock more marketable so it could raise funds for expansion.

Issue

Whether the corporation had power to adopt the proposed amendment under the 1927 amendment to Section 26 and under its own certificate's reservation clause, notwithstanding existing Class B stock rights. If so, whether the amendment should nevertheless be enjoined as unfair, inequitable, or a fraud on Class B stockholders.

Rule

Where the corporation statute reserves to the legislature power to amend and makes such amendments part of every corporation's charter, and the certificate itself reserves the right to amend in the manner 'now or hereafter prescribed by statute,' later-enacted statutory amendment authority is available to the corporation and binds stockholders who took subject to that reservation. A court will not interfere with a charter amendment approved as a matter of corporate policy unless facts show fraud, bad faith, or lack of bona fides by directors or the controlling majority; honest business judgment is not reviewable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In 1915, Harbor Vale Transit, a Delaware corporation based in Wilmington, issued two classes of common stock. In 1930, after Delaware expanded its charter-amendment statute to allow corporations to alter relative dividend rights among classes, Harbor Vale proposed an amendment reducing Class R's dividend advantage over Class S so it could market new shares more easily for expansion into New Jersey.

If Class R holders sue to block the vote, arguing that the corporation lacked power because their stock rights were fixed when the corporation was formed, which is the strongest answer?

Explanation. The majority held that where the corporation law reserves legislative power to amend and states that the chapter and all amendments become part of every corporation's charter, later-enacted amendment authority applies to existing corporations. The court treated capital structure, stock classes, and relative rights as sufficiently connected to corporate welfare and financing to fall within that reserved power.