Moon v. Moon Motor Car Co.

Delaware Court of Chancery · Corporations

CorporationsCorporate governanceStockholder meetingsDirector electionsBylawsde facto officerspecial meetingstockholder notice

Facts

A majority owner of the corporation's common stock requested a special stockholders' meeting to amend the bylaws, enlarge the board from seven to fifteen, and elect eight additional directors. The secretary refused to call the meeting, and a vice-president, Walker, issued the call even though his appointment as vice-president had been somewhat irregular, though he had acted in that office with board assent. Notice of the meeting went out five days before the meeting, and voting was based on a stock list of record holders as of March 25 for an April 7 election, with no transfer-book closing or valid record date fixed under the statute or bylaws. The Burst faction challenged the meeting on the grounds of improper call, improper notice and voter list, insufficient notice period, and inability to fill newly created directorships except at the annual meeting.

Issue

Whether the special stockholders' meeting and the election of eight additional directors were valid. More specifically, the court considered whether the meeting was properly called, whether the correct stockholders received notice and voting rights under Section 17, whether five days' notice was sufficient, and whether newly created directorships could be filled at a special meeting.

Rule

A call for a stockholders' meeting by a de facto officer is valid if it would have been valid had the officer been de jure. Under Section 17, when no transfer books are closed and no valid record date is fixed, shares transferred on the books within twenty days before a director election may not be voted by either transferor or transferee, and former holders of such shares are not entitled to notice. A bylaw amendment is ineffective if not adopted in the manner required by the bylaws. Section 30's timing provisions govern regular annual elections of directors, but newly created directorships may be filled immediately by stockholders at a special meeting.

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

Red Mesa Tools, Inc., a Delaware corporation based in Phoenix, has bylaws stating that a special stockholder meeting shall be called by the president or secretary upon written request of holders of a majority of the outstanding common stock. The president is traveling in Boston and unreachable, and the secretary refuses a proper written demand. Dana Kerr, who was informally appointed vice-president at a board meeting with director assent and has since performed vice-presidential duties, issues the call.

If the validity of the call is challenged, how should a court most likely rule?

Explanation. The majority opinion treated a call by a de facto officer as valid where the person actually acted in the office, the board assented to the assumption of that office, and the act would have been proper if done by a de jure officer. With the president absent and the secretary refusing to act on a proper majority-stockholder request, a de facto vice-president could validly issue the call. (Derived from Moon v. Moon Motor Car Co. (n.d.).)