Norbert Ruttenberg and Stephen A. Cohen for appellant.

Lawrence Lauer and John Winston for respondent.

Chief Judge DESMOND and Judges VAN VOORHIS, BURKE and SCILEPPI concur with Judge FULD; Judge KEATING dissents and votes to affirm in an opinion in which Judge BERGAN concurs.

[416] FULD, J.

This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi fleet in many corporations, each owning only one or two cabs.

The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Although seemingly independent of one another, these corporations are alleged to be "operated * * * as a single entity, unit and enterprise" with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants.^[1] The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt "to defraud members of the general public" who might be injured by the cabs.

[417] The defendant Carlton has moved, pursuant to CPLR 3211(a)7, to dismiss the complaint on the ground that as to him it "fails to state a cause of action". The court at Special Term granted the motion but the Appellate Division, by a divided vote, reversed, holding that a valid cause of action was sufficiently stated. The defendant Carlton appeals to us, from the nonfinal order, by leave of the Appellate Division on a certified question.

The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability (see, e.g., Bartle v. Home Owners Co-op., 309 N.Y. 103, 106) but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, "pierce the corporate veil", whenever necessary "to prevent fraud or to achieve equity". (International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292.) In determining whether liability should be extended to reach assets beyond those belonging to the corporation, we are guided, as Judge CARDOZO noted, by "general rules of agency". (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95.) In other words, whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts "upon the principle of respondeat superior applicable even where the agent is a natural person". (Rapid Tr. Subway Constr. Co. v. City of New York, 259 N.Y. 472, 488.) Such liability, moreover, extends not only to the corporation's commercial dealings (see, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233; Quaid v. Ratkowsky, 224 N.Y. 624; Luckenbach S. S. Co. v. Grace & Co., 267 F. 676, 681, cert. den. 254 U. S. 644; Weisser v. Mursam Shoe Corp., 127 F.2d 344) but to its negligent acts as well. (See Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, supra; Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687; Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676.)

In the Mangan case (247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra), the plaintiff was injured as a result of the negligent operation of a cab owned and operated by one of four corporations affiliated with the defendant Terminal. Although the defendant was not a stockholder of any of the operating [418] companies, both the defendant and the operating companies were owned, for the most part, by the same parties. The defendant's name (Terminal) was conspicuously displayed on the sides of all of the taxis used in the enterprise and, in point of fact, the defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil of the operating company — the nominal owner of the cab which injured the plaintiff — and holding the defendant liable. The operating companies were simply instrumentalities for carrying on the business of the defendant without imposing upon it financial and other liabilities incident to the actual ownership and operation of the cabs. (See, also, Callas v. Independent Taxi Owners Assn., 66 F.2d 192 [D. C. Ct. App.], cert. den. 290 U. S. 669; Association of Independent Taxi Operators v. Kern, 178 Md. 252; P. & S. Taxi & Baggage Co. v. Cameron, 183 Okla. 226; cf. Black & White v. Love, 236 Ark. 529; Economy Cabs v. Kirkland, 127 Fla. 867, adhered to on rearg. 129 Fla. 309.)

In the case before us, the plaintiff has explicitly alleged that none of the corporations "had a separate existence of their own" and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343, 348-350.) It is quite another to claim that the corporation is a "dummy" for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, 85.) Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible (see, e.g., Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra; Luckenbach S. S. Co. v. Grace & Co., 267 F.2d 676, 881, cert. den. 254 U. S. 644, supra; cf. Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687, supra) while, in the other, the stockholder would be personally liable. (See, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233, supra; Quaid v. Ratkowsky, 224 N.Y. 624, supra; [419] Weisser v. Mursam Shoe Corp., 127 F.2d 344, supra.) Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter — insofar as his personal liability is concerned — that the enterprise is actually being carried on by a larger "enterprise entity". (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343.)

At this stage in the present litigation, we are concerned only with the pleadings and, since CPLR 3014 permits causes of action to be stated "alternatively or hypothetically", it is possible for the plaintiff to allege both theories as the basis for his demand for judgment. In ascertaining whether he has done so, we must consider the entire pleading, educing therefrom "`whatever can be implied from its statements by fair and reasonable intendment.'" (Condon v. Associated Hosp. Serv., 287 N.Y. 411, 414; see, also, Kober v. Kober, 16 N Y 2d 191, 193-194; Dulberg v. Mock, 1 N Y 2d 54, 56.) Reading the complaint in this case most favorably and liberally, we do not believe that there can be gathered from its averments the allegations required to spell out a valid cause of action against the defendant Carlton.

The individual defendant is charged with having "organized, managed, dominated and controlled" a fragmented corporate entity but there are no allegations that he was conducting business in his individual capacity. Had the taxicab fleet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation's stockholders. The fact that the fleet ownership has been deliberately split up among many corporations does not ease the plaintiff's burden in that respect. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insufficient to assure him the recovery sought. If Carlton were to be held individually liable on those facts alone, the decision would apply equally to the thousands of cabs which are owned by their individual drivers who conduct their businesses through corporations organized pursuant to section 401 of the Business Corporation Law and carry the minimum insurance required by subdivision 1 (par. [a]) of section 370 of the Vehicle and Traffic Law. These [420] taxi owner-operators are entitled to form such corporations (cf. Elenkrieg v. Siebrecht, 238 N.Y. 254), and we agree with the court at Special Term that, if the insurance coverage required by statute "is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature." It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, § 1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of taxi corporations that they carry automobile liability insurance over and above that mandated by the Vehicle and Traffic Law.^[2]

This is not to say that it is impossible for the plaintiff to state a valid cause of action against the defendant Carlton. However, the simple fact is that the plaintiff has just not done so here. While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any "sufficiently particular[ized] statements" (CPLR 3013; see 3 Weinstein-Korn-Miller, N. Y. Civ. Prac., par. 3013.01 et seq., p. 30-142 et seq.) that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations "without regard to formality and to suit their immediate convenience." (Weisser v. Mursam Shoe Corp., 127 F.2d 344, 345, supra.) Such a "perversion of the privilege to do business in a corporate form" (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95, supra) would justify imposing personal liability on the individual stockholders. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, supra.) Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon [421] Cab Corporation may actually be carried on by a larger corporate entity composed of many corporations which, under general principles of agency, would be liable to each other's creditors in contract and in tort.^[3]

In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff's injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a fleet with ownership fragmented among many corporations. Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents.

In sum, then, the complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity.

The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, the certified question answered in the negative and the order of the Supreme Court, Richmond County, reinstated, with leave to serve an amended complaint.

KEATING, J. (dissenting).

The defendant Carlton, the shareholder here sought to be held for the negligence of the driver of a taxicab, was a principal shareholder and organizer of the defendant corporation which owned the taxicab. The corporation was one of 10 organized by the defendant, each containing [422] two cabs and each cab having the "minimum liability" insurance coverage mandated by section 370 of the Vehicle and Traffic Law. The sole assets of these operating corporations are the vehicles themselves and they are apparently subject to mortgages.^[*]

From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet having cars out on the street 24 hours a day and engaged in public transportation. And during the course of the corporations' existence all income was continually drained out of the corporations for the same purpose.

The issue presented by this action is whether the policy of this State, which affords those desiring to engage in a business enterprise the privilege of limited liability through the use of the corporate device, is so strong that it will permit that privilege to continue no matter how much it is abused, no matter how irresponsibly the corporation is operated, no matter what the cost to the public. I do not believe that it is.

Under the circumstances of this case the shareholders should all be held individually liable to this plaintiff for the injuries he suffered. (See Mull v. Colt Co., 31 F. R. D. 154, 156; Teller v. Clear Serv. Co., 9 Misc 2d 495.) At least, the matter should not be disposed of on the pleadings by a dismissal of the complaint. "If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks [423] of loss, this is a ground for denying the separate entity privilege." (Ballantine, Corporations [rev. ed., 1946], § 129, pp. 302-303.)

In Minton v. Cavaney (56 Cal. 2d 576) the Supreme Court of California had occasion to discuss this problem in a negligence case. The corporation of which the defendant was an organizer, director and officer operated a public swimming pool. One afternoon the plaintiffs' daughter drowned in the pool as a result of the alleged negligence of the corporation.

Justice ROGER TRAYNOR, speaking for the court, outlined the applicable law in this area. "The figurative terminology `alter ego' and `disregard of the corporate entity'", he wrote, "is generally used to refer to the various situations that are an abuse of the corporate privilege * * * The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will * * *; when they hold themselves out as being personally liable for the debts of the corporation * * *; or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs". (56 Cal. 2d, p. 579; italics supplied.)

Examining the facts of the case in light of the legal principles just enumerated, he found that "[it was] undisputed that there was no attempt to provide adequate capitalization. [The corporation] never had any substantial assets. It leased the pool that it operated, and the lease was forfeited for failure to pay the rent. Its capital was `trifling compared with the business to be done and the risks of loss'". (56 Cal. 2d, p. 580.)

It seems obvious that one of "the risks of loss" referred to was the possibility of drownings due to the negligence of the corporation. And the defendant's failure to provide such assets or any fund for recovery resulted in his being held personally liable.

In Anderson v. Abbott (321 U. S. 349) the defendant shareholders had organized a holding company and transferred to that company shares which they held in various national banks in return for shares in the holding company. The holding company did not have sufficient assets to meet the double liability requirements of the governing Federal statutes which provided that the owners of shares in national [424] banks were personally liable for corporate obligations "to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares" (U. S. Code, tit. 12, former § 63).

The court had found that these transfers were made in good faith, that other defendant shareholders who had purchased shares in the holding company had done so in good faith and that the organization of such a holding company was entirely legal. Despite this finding, the Supreme Court, speaking through Mr. Justice DOUGLAS, pierced the corporate veil of the holding company and held all the shareholders, even those who had no part in the organization of the corporation, individually responsible for the corporate obligations as mandated by the statute.

"Limited liability", he wrote, "is the rule, not the exception; and on that assumption large undertakings are rested, vast enterprises are launched, and huge sums of capital attracted. But there are occasions when the limited liability sought to be obtained through the corporation will be qualified or denied. Mr. Justice CARDOZO stated that a surrender of that principle of limited liability would be made `when the sacrifice is essential to the end that some accepted public policy may be defended or upheld.' * * * The cases of fraud make up part of that exception * * * But they do not exhaust it. An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability * * * That rule has been invoked even in absence of a legislative policy which undercapitalization would defeat. It becomes more important in a case such as the present one where the statutory policy of double liability will be defeated if impecunious bank-stock holding companies are allowed to be interposed as non-conductors of liability. It has often been held that the interposition of a corporation will not be allowed to defeat a legislative policy, whether that was the aim or only the result of the arrangement * * * `the courts will not permit themselves to be blinded or deceived by mere forms of law' but will deal `with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require.'" (321 U. S., pp. 362-363; emphasis added.)

[425] The policy of this State has always been to provide and facilitate recovery for those injured through the negligence of others. The automobile, by its very nature, is capable of causing severe and costly injuries when not operated in a proper manner. The great increase in the number of automobile accidents combined with the frequent financial irresponsibility of the individual driving the car led to the adoption of section 388 of the Vehicle and Traffic Law which had the effect of imposing upon the owner of the vehicle the responsibility for its negligent operation. It is upon this very statute that the cause of action against both the corporation and the individual defendant is predicated.

In addition the Legislature, still concerned with the financial irresponsibility of those who owned and operated motor vehicles, enacted a statute requiring minimum liability coverage for all owners of automobiles. The important public policy represented by both these statutes is outlined in section 310 of the Vehicle and Traffic Law. That section provides that: "The legislature is concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted. The legislature determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them."

The defendant Carlton claims that, because the minimum amount of insurance required by the statute was obtained, the corporate veil cannot and should not be pierced despite the fact that the assets of the corporation which owned the cab were "trifling compared with the business to be done and the risks of loss" which were certain to be encountered. I do not agree.

The Legislature in requiring minimum liability insurance of $10,000, no doubt, intended to provide at least some small fund for recovery against those individuals and corporations who just did not have and were not able to raise or accumulate assets sufficient to satisfy the claims of those who were injured as a result of their negligence. It certainly could not have intended to shield those individuals who organized corporations, with the specific intent of avoiding responsibility to the public, where the operation of the corporate enterprise yielded profits sufficient to purchase additional insurance. Moreover, it is reasonable [426] to assume that the Legislature believed that those individuals and corporations having substantial assets would take out insurance far in excess of the minimum in order to protect those assets from depletion. Given the costs of hospital care and treatment and the nature of injuries sustained in auto collisions, it would be unreasonable to assume that the Legislature believed that the minimum provided in the statute would in and of itself be sufficient to recompense "innocent victims of motor vehicle accidents * * * for the injury and financial loss inflicted upon them".

The defendant, however, argues that the failure of the Legislature to increase the minimum insurance requirements indicates legislative acquiescence in this scheme to avoid liability and responsibility to the public. In the absence of a clear legislative statement, approval of a scheme having such serious consequences is not to be so lightly inferred.

The defendant contends that the court will be encroaching upon the legislative domain by ignoring the corporate veil and holding the individual shareholder. This argument was answered by Mr. Justice DOUGLAS in Anderson v. Abbot (supra, pp. 366-367) where he wrote that: "In the field in which we are presently concerned, judicial power hardly oversteps the bounds when it refuses to lend its aid to a promotional project which would circumvent or undermine a legislative policy. To deny it that function would be to make it impotent in situations where historically it has made some of its most notable contributions. If the judicial power is helpless to protect a legislative program from schemes for easy avoidance, then indeed it has become a handy implement of high finance. Judicial interference to cripple or defeat a legislative policy is one thing; judicial interference with the plans of those whose corporate or other devices would circumvent that policy is quite another. Once the purpose or effect of the scheme is clear, once the legislative policy is plain, we would indeed forsake a great tradition to say we were helpless to fashion the instruments for appropriate relief." (Emphasis added.)

The defendant contends that a decision holding him personally liable would discourage people from engaging in corporate enterprise.

[427] What I would merely hold is that a participating shareholder of a corporation vested with a public interest, organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation's business, may be held personally responsible for such liabilities. Where corporate income is not sufficient to cover the cost of insurance premiums above the statutory minimum or where initially adequate finances dwindle under the pressure of competition, bad times or extraordinary and unexpected liability, obviously the shareholder will not be held liable (Henn, Corporations, p. 208, n. 7).

The only types of corporate enterprises that will be discouraged as a result of a decision allowing the individual shareholder to be sued will be those such as the one in question, designed solely to abuse the corporate privilege at the expense of the public interest.

For these reasons I would vote to affirm the order of the Appellate Division.

Order reversed, etc.

---------

[1] The corporate owner of a garage is also included as a defendant.

[2] There is no merit to the contention that the ownership and operation of the taxi fleet "constituted a breach of hack owners regulations as promulgated by [the] Police Department of the City of New York". Those regulations are clearly applicable to individual owner-operators and fleet owners alike. They were not intended to prevent either incorporation of a single-vehicle taxi business or multiple incorporation of a taxi fleet.

[3] In his affidavit in opposition to the motion to dismiss, the plaintiff's counsel claimed that corporate assets had been "milked out" of, and "siphoned off" from the enterprise. Quite apart from the fact that these allegations are far too vague and conclusory, the charge is premature. If the plaintiff succeeds in his action and becomes a judgment creditor of the corporation, he may then sue and attempt to hold the individual defendants accountable for any dividends and property that were wrongfully distributed (Business Corporation Law, §§ 510, 719, 720).

[*] It appears that the medallions, which are of considerable value, are judgment proof. (Administrative Code of City of New York, § 436-2.0.)

[210] William David Levine, St. Clair and Levine, Huntington, West Virginia, for plaintiff-appellant.

D.C. Offutt, Jr., argued (John M. Poma, on brief), Jenkins, Fenstermaker, Krieger, Kayes & Farrell, Huntington, W.Va., for defendant-appellee.

Before HALL, Circuit Judge, CHAPMAN, Senior Circuit Judge, and WARD, Senior District Judge for the Middle District of North Carolina, sitting by designation.

OPINION

CHAPMAN, Senior Circuit Judge:

Plaintiff-appellant Kinney Shoe Corporation ("Kinney") brought this action in the United States District Court for the Southern District of West Virginia against Lincoln M. Polan ("Polan") seeking to recover money owed on a sublease between Kinney and Industrial Realty Company ("Industrial"). Polan is the sole shareholder of Industrial. The district court found that Polan was not personally liable on the lease between Kinney and Industrial. Kinney appeals asserting that the corporate veil should be pierced, and we agree.

I.

The district court based its order on facts which were stipulated by the parties. In 1984 Polan formed two corporations, Industrial and Polan Industries, Inc., for the purpose of re-establishing an industrial manufacturing business. The certificate of incorporation for Polan Industries, Inc. was issued by the West Virginia Secretary of State in November 1984. The following month the certificate of incorporation for Industrial was issued. Polan was the owner of both corporations. Although certificates of incorporation were issued, no organizational meetings were held, and no officers were elected.

In November 1984 Polan and Kinney began negotiating the sublease of a building in which Kinney held a leasehold interest. The building was owned by the Cabell County Commission and financed by industrial revenue bonds issued in 1968 to induce Kinney to locate a manufacturing plant in Huntington, West Virginia. Under the terms of the lease, Kinney was legally obligated to make payments on the bonds on a semi-annual basis through January 1, 1993, at which time it had the right to purchase the property. Kinney had ceased using the building as a manufacturing plant in June 1983.

The term of the sublease from Kinney to Industrial commenced in December 1984, even though the written lease was not signed by the parties until April 5, 1985. On April 15, 1985, Industrial subleased part of the building to Polan Industries for fifty percent of the rental amount due Kinney. Polan signed both subleases on behalf of the respective companies.

Other than the sublease with Kinney, Industrial had no assets, no income and no bank account. Industrial issued no stock certificates because nothing was ever paid in to this corporation. Industrial's only income was from its sublease to Polan Industries, Inc. The first rental payment to Kinney was made out of Polan's personal funds, and no further payments were made by Polan or by Polan Industries, Inc. to either Industrial or to Kinney.

Kinney filed suit against Industrial for unpaid rent and obtained a judgment in the amount of $166,400.00 on June 19, 1987. A writ of possession was issued, but because Polan Industries, Inc. had filed for bankruptcy, Kinney did not gain possession for six months. Kinney leased the building until it was sold on September 1, 1988. Kinney then filed this action against Polan individually to collect the amount owed by Industrial to Kinney. Since the amount to which Kinney is entitled is undisputed, the only issue is whether Kinney can pierce the [211] corporate veil and hold Polan personally liable.

The district court held that Kinney had assumed the risk of Industrial's undercapitalization and was not entitled to pierce the corporate veil. Kinney appeals, and we reverse.

II.

We have long recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation. See, e.g., DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir.1976). This concept, however, is a fiction of the law "`and it is now well settled, as a general principle, that the fiction should be disregarded when it is urged with an intent not within its reason and purpose, and in such a way that its retention would produce injustices or inequitable consequences.'" Laya v. Erin Homes, Inc., 352 S.E.2d 93, 97-98 (W.Va.1986) (quoting Sanders v. Roselawn Memorial Gardens, Inc., 152 W.Va. 91, 159 S.E.2d 784, 786 (1968).

Piercing the corporate veil is an equitable remedy, and the burden rests with the party asserting such claim. DeWitt Truck Brokers, 540 F.2d at 683. A totality of the circumstances test is used in determining whether to pierce the corporate veil, and each case must be decided on its own facts. The district court's findings of facts may be overturned only if clearly erroneous. Id.

Kinney seeks to pierce the corporate veil of Industrial so as to hold Polan personally liable on the sublease debt. The Supreme Court of Appeals of West Virginia has set forth a two prong test to be used in determining whether to pierce a corporate veil in a breach of contract case. This test raises two issues: first, is the unity of interest and ownership such that the separate personalities of the corporation and the individual shareholder no longer exist; and second, would an equitable result occur if the acts are treated as those of the corporation alone. Laya, 352 S.E.2d at 99. Numerous factors have been identified as relevant in making this determination.^[1]

[212] The district court found that the two prong test of Laya had been satisfied. The court concluded that Polan's failure to carry out the corporate formalities with respect to Industrial, coupled with Industrial's gross undercapitalization, resulted in damage to Kinney. We agree.

It is undisputed that Industrial was not adequately capitalized. Actually, it had no paid in capital. Polan had put nothing into this corporation, and it did not observe any corporate formalities. As the West Virginia court stated in Laya, "`[i]ndividuals who wish to enjoy limited personal liability for business activities under a corporate umbrella should be expected to adhere to the relatively simple formalities of creating and maintaining a corporate entity.'" Laya, 352 S.E.2d at 100 n. 6 (quoting Labadie Coal Co. v. Black, 672 F.2d 92, 96-97 (D.C.Cir.1982)). This, the court stated, is "`a relatively small price to pay for limited liability.'" Id. Another important factor is adequate capitalization. "[G]rossly inadequate capitalization combined with disregard of corporate formalities, causing basic unfairness, are sufficient to pierce the corporate veil in order to hold the shareholder(s) actively participating in the operation of the business personally liable for a breach of contract to the party who entered into the contract with the corporation." Laya, 352 S.E.2d at 101-02.

In this case, Polan bought no stock, made no capital contribution, kept no minutes, and elected no officers for Industrial. In addition, Polan attempted to protect his assets by placing them in Polan Industries, Inc. and interposing Industrial between Polan Industries, Inc. and Kinney so as to prevent Kinney from going against the corporation with assets. Polan gave no explanation or justification for the existence of Industrial as the intermediary between Polan Industries, Inc. and Kinney. Polan was obviously trying to limit his liability and the liability of Polan Industries, Inc. by setting up a paper curtain constructed of nothing more than Industrial's certificate of incorporation. These facts present the classic scenario for an action to pierce the corporate veil so as to reach the responsible party and produce an equitable result. Accordingly, we hold that the district court correctly found that the two prong test in Laya had been satisfied.

In Laya, the court also noted that when determining whether to pierce a corporate veil a third prong may apply in certain cases. The court stated:

When, under the circumstances, it would be reasonable for that particular type of a party [those contract creditors capable of protecting themselves] entering into a contract with the corporation, for example, a bank or other lending institution, to conduct an investigation of the credit of the corporation prior to entering into the contract, such party will be charged with the knowledge that a reasonable credit investigation would disclose. If such an investigation would disclose that the corporation is grossly undercapitalized, based upon the nature and the magnitude of the corporate undertaking, such party will be deemed to have assumed the risk of the gross undercapitalization and will not be permitted to pierce the corporate veil.

Laya, 352 S.E.2d at 100. The district court applied this third prong and concluded that Kinney "assumed the risk of Industrial's defaulting" and that "the application of the doctrine of `piercing the corporate veil' ought not and does not [apply]." While we agree that the two prong test of Laya was satisfied, we hold that the district court's conclusion that Kinney had assumed the risk is clearly erroneous.

Without deciding whether the third prong should be extended beyond the context of the financial institution lender mentioned [213] in Laya, we hold that, even if it applies to creditors such as Kinney, it does not prevent Kinney from piercing the corporate veil in this case. The third prong is permissive and not mandatory. This is not a factual situation that calls for the third prong, if we are to seek an equitable result. Polan set up Industrial to limit his liability and the liability of Polan Industries, Inc. in their dealings with Kinney. A stockholder's liability is limited to the amount he has invested in the corporation, but Polan invested nothing in Industrial. This corporation was no more than a shell — a transparent shell. When nothing is invested in the corporation, the corporation provides no protection to its owner; nothing in, nothing out, no protection. If Polan wishes the protection of a corporation to limit his liability, he must follow the simple formalities of maintaining the corporation. This he failed to do, and he may not relieve his circumstances by saying Kinney should have known better.

III.

For the foregoing reasons, we hold that Polan is personally liable for the debt of Industrial, and the decision of the district court is reversed and this case is remanded with instructions to enter judgment for the plaintiff.

REVERSED AND REMANDED WITH INSTRUCTIONS.

[1] The following factors were identified in Laya:

(1) commingling of funds and other assets of the corporation with those of the individual shareholders;

(2) diversion of the corporation's funds or assets to noncorporate uses (to the personal uses of the corporation's shareholders);

(3) failure to maintain the corporate formalities necessary for the issuance of or subscription to the corporation's stock, such as formal approval of the stock issue by the board of directors;

(4) an individual shareholder representing to persons outside the corporation that he or she is personally liable for the debts or other obligations of the corporation;

(5) failure to maintain corporate minutes or adequate corporate records;

(6) identical equitable ownership in two entities;

(7) identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties);

(8) failure to adequately capitalize a corporation for the reasonable risks of the corporate undertaking;

(9) absence of separately held corporate assets;

(10) use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation;

(11) sole ownership of all the stock by one individual or members of a single family;

(12) use of the same office or business location by the corporation and its individual shareholder(s);

(13) employment of the same employees or attorney by the corporation and its shareholder(s);

(14) concealment or misrepresentation of the identity of the ownership, management or financial interests in the corporation, and concealment of personal business activities of the shareholders (sole shareholders do not reveal the association with a corporation, which makes loans to them without adequate security);

(15) disregard of legal formalities and failure to maintain proper arm's length relationships among related entities;

(16) use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity;

(17) diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another;

(18) contracting by the corporation with another person with the intent to avoid risk of nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge for illegal transactions;

(19) the formation and use of the corporation to assume the existing liabilities of another person or entity.

Laya, 352 S.E.2d at 98-99 (footnote omitted).

[1452] [1453] [1454] Steven J. Phillips, Levy Phillips & Konigsberg, New York City (Alani Golanski, Levy Phillips & Konigsberg, New York City, on the brief), for Plaintiffs-Appellants.

Thomas E. Reidy, Nixon, Hargrave, Devans & Doyle, Rochester, New York (Henry J. DePippo, Flor M. Ferrer-Colón, Nixon, Hargrave, Devans & Doyle, Rochester, New York, on the brief), for Defendant-Appellee.

Before: KEARSE, CALABRESI, and CABRANES, Circuit Judges.

JOSÉ A. CABRANES, Circuit Judge:

This is a consolidated appeal from a final judgment of the United States District Court for the Southern District of New York (Morris E. Lasker, Judge), granting defendant-appellee Eastman Kodak Company's motion for summary judgment and dismissing all claims against it in two actions, Fletcher v. Atex, Inc., 92 Civ. 8758 and Hermanson v. 805 Middlesex Corp., Inc., 94 Civ. 1272. Fletcher v. Atex, Inc., 861 F.Supp. 242 (S.D.N.Y.1994). The plaintiffs-appellants filed suit against Atex, Inc. ("Atex") and its parent, Eastman Kodak Company ("Kodak"), to recover for repetitive stress injuries that they claim were caused by their use of computer keyboards manufactured by Atex.

[1455] Plaintiffs-appellants argue that the district court erred in granting summary judgment in favor of Kodak on the ground that Kodak could be held liable for the plaintiffs' alleged injuries. They contend that summary judgment was inappropriate because genuine issues of material fact existed regarding Kodak's liability as a defendant under each of the plaintiffs' four theories of liability, which we describe below.

I. BACKGROUND

The Fletcher and Hermanson plaintiffs filed their respective complaints on December 4, 1992, and February 25, 1994, seeking recovery from Atex and Kodak, among others, for repetitive stress injuries that they claim were caused by their use of Atex computer keyboards. From 1981 until December 1992, Atex was a wholly-owned subsidiary of Kodak. In 1987, Atex's name was changed to Electronic Pre-Press Systems, Inc., ("EPPS"), but its name was changed back to Atex in 1990. In December 1992, Atex sold substantially all of its assets to an independent third party and again changed its name to 805 Middlesex Corp., which holds the proceeds from the sale. Kodak continues to be the sole shareholder of 805 Middlesex Corp.

After extensive discovery, Kodak moved for summary judgment in Fletcher on April 21, 1994, and in Hermanson on April 28, 1994. The plaintiffs opposed Kodak's motion, arguing that genuine issues of material fact existed as to Kodak's liability under any number of theories, including (1) that Atex was merely Kodak's alter ego or instrumentality; (2) that Atex was Kodak's agent in the manufacture and marketing of the keyboards; (3) that Kodak was the "apparent manufacturer" of the Atex keyboards; and (4) that Kodak acted in tortious concert with Atex in manufacturing and marketing the allegedly defective keyboards.

In support of their first theory, the plaintiffs argued that Kodak "dominated and controlled" Atex by maintaining significant overlap between the boards of directors of the two companies, "siphoning" off funds from Atex through use of a cash management system, requiring Kodak's approval for major expenditures, stock sales, and real estate acquisitions, participating in negotiations involving the sale of Atex to a third party, and including references to Atex as a "division" of Kodak and to the "merger" between Atex and Kodak in Atex's promotional literature and Kodak's Annual Report. Second, the plaintiffs claimed that, at the very least, the references to Atex in the promotional literature raised a question of material fact regarding Kodak's intent to confer authority on Atex to act as its agent in the manufacturing and marketing of computer keyboards. In support of their third theory, the plaintiffs maintained that the use of Kodak's name in Atex's advertising, promotional, and packaging materials provided assurances to consumers that the Kodak name stood behind Atex's products, and Kodak could thus be held liable as the "apparent manufacturer" of the keyboards. Finally, they argued that the fact that Kodak was generally aware of the danger of repetitive stress injuries and the fact that Kodak had tested the ergonomics of three Atex keyboards in 1990 presented evidence of concerted tortious action between Atex and Kodak. The Fletcher and Hermanson actions were consolidated before the district court for the purposes of summary judgment proceedings.

On August 17, 1994, the district court rejected each of the plaintiffs' theories of Kodak's liability and granted Kodak's motion for summary judgment in both actions. In its opinion, the court referred to, but did not rely upon, an identical suit filed against Atex and Kodak in New York state court, King v. Eastman Kodak Co., No. 23439/92 (N.Y.Sup. Ct. June 9, 1994), in which Kodak's motion for summary judgment was granted on similar grounds. Fletcher, 861 F.Supp. at 243.

First, the district court found that Kodak and Atex observed all corporate formalities and maintained separate corporate existences. It held that Atex's participation in Kodak's cash management system and Kodak's control over Atex's major expenditures and asset sales were insufficient to raise an issue of material fact regarding Kodak's liability under an alter ego theory. Id. at 244-45. Second, it held that the representations in various advertisements, promotional literature, [1456] and annual reports were similarly insufficient as a matter of law to find Kodak liable under an agency theory. Id. at 247. Third, the court held that Kodak was entitled to summary judgment on the plaintiffs' apparent manufacturer theory because the company was not involved in the sale or distribution of the keyboards. Id. at 245-46. Finally, the court found that the plaintiffs' concerted action theory failed as a matter of law because they offered no evidence indicating that Kodak and Atex had agreed to commit a tortious act. Id. at 246. This appeal followed.

II. DISCUSSION

A. The Summary Judgment Standard

We review a district court's grant of summary judgment de novo to determine whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. Healy v. Rich Prods. Corp., 981 F.2d 68, 72 (2d Cir. 1992). Summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits ... show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c). "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986) (emphasis in original). While the court must view the inferences to be drawn from the facts in the light most favorable to the party opposing the motion, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986), a party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987). The non-moving party may defeat the summary judgment motion by producing sufficient specific facts to establish that there is a genuine issue of material fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Finally, "`mere conclusory allegations or denials'" in legal memoranda or oral argument are not evidence and cannot by themselves create a genuine issue of material fact where none would otherwise exist. Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir.1980) (quoting SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir.1978)).

B. Theories of Liability

Plaintiffs argue that the district court should have denied Kodak's motion for summary judgment on the ground that genuine issues of material fact existed regarding each of the plaintiffs' four theories of liability. We consider the plaintiffs' arguments on each of these theories in turn.

1. Alter Ego Liability

The plaintiffs claim that the district court erred in granting Kodak's motion for summary judgment on their alter ego theory of liability. The plaintiffs offer two arguments in this regard. First, they contend that the district court was estopped from granting Kodak's motion for summary judgment because the New York state court found in King v. Eastman that issues of material fact existed regarding Kodak's domination of Atex. Second, they argue that even if collateral estoppel does not apply in the instant case, genuine issues of material fact remain that preclude a grant of summary judgment in favor of Kodak.

The district court correctly noted that "[u]nder New York choice of law principles, `[t]he law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders.'" Fletcher, 861 F.Supp. at 244 (quoting Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir.1993)). Because Atex was a Delaware corporation, Delaware law determines whether the corporate veil can be pierced in this instance.

[1457] Delaware law permits a court to pierce the corporate veil of a company "where there is fraud or where [it] is in fact a mere instrumentality or alter ego of its owner." Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del.Ch.1992). Although the Delaware Supreme Court has never explicitly adopted an alter ego theory of parent liability for its subsidiaries, lower Delaware courts have applied the doctrine on several occasions, as has the United States District Court for the District of Delaware. See Geyer, 621 A.2d at 793; Mabon, Nugent & Co. v. Texas Am. Energy Corp., No. CIV.A. 8578, 1990 WL 44267, at *5, (Del.Ch. Apr. 12, 1990); Harper v. Delaware Valley Broadcasters, Inc., 743 F.Supp. 1076, 1085 (D.Del.1990), aff'd, 932 F.2d 959 (3d Cir.1991). Thus, under an alter ego theory, there is no requirement of a showing of fraud. Id. at 1085. To prevail on an alter ego claim under Delaware law, a plaintiff must show (1) that the parent and the subsidiary "operated as a single economic entity" and (2) that an "overall element of injustice or unfairness ... [is] present." Id. (internal quotation marks omitted); see also Mabon, 1990 WL 44267, at *5; Harco Nat'l Ins. Co. v. Green Farms, Inc., No. CIV.A. 1331, 1989 WL 110537, at *5, (Del Ch. Sept. 19, 1989).

In the New York state action of King v. Eastman, the court granted Kodak's motion for summary judgment, relying on an erroneous interpretation of Delaware's alter ego doctrine. The court noted that although the plaintiffs had raised "ample questions of fact regarding the first element of the piercing theory — domination," they made "no showing that Kodak used whatever dominance it had over Atex to perpetrate a fraud or other wrong that proximately cause[d] injury to them." This was an error; under Delaware law, the alter ego theory of liability does not require any showing of fraud.

a. Collateral Estoppel

Although the plaintiffs acknowledge that the New York state court erred in its interpretation of Delaware law, they argue that the court's treatment of the question of Kodak's domination over Atex should preclude all further litigation of that issue. We disagree and hold that the New York court's findings in King v. Eastman regarding Kodak's domination over Atex do not have collateral estoppel effect under New York law.

The doctrine of collateral estoppel "precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party ... whether or not the tribunals or causes of action are the same." Ryan v. New York Tel. Co., 62 N.Y.2d 494, 500, 478 N.Y.S.2d 823, 826, 467 N.E.2d 487, 490 (1984) (citing Ripley v. Storer, 309 N.Y. 506, 517, 132 N.E.2d 87 (1956)). Under New York law, two conditions must be met to preclude relitigation in the second action: (1) "the issue must have been material to the first action or proceeding and essential to the decision rendered therein" and (2) "the party against whom collateral estoppel is asserted [must have been] afforded a full and fair opportunity in the prior administrative proceeding to contest the decision now said to be controlling...." 62 N.Y.2d at 500-01, 478 N.Y.S.2d at 826, 467 N.E.2d at 490. Neither condition was met in this case.

First, the state court's finding of "ample questions of fact" regarding Kodak's domination of Atex was not essential to its judgment in King. The state court did not decide the summary judgment motion based on its finding of factual disputes between the parties. To the contrary, it granted summary judgment to Kodak on the plaintiffs' alter ego theory of liability based on its erroneous interpretation of Delaware law. Since the court's finding of domination was not essential to the judgment, its conclusions should not be accorded preclusive effect in the present action.

The plaintiffs counter that the state court's finding of a factual dispute on the issue of domination should be given preclusive effect, even though it was not essential to the judgment, because it was fully litigated by the parties and fully considered by the court. They rely on Malloy v. Trombley, 50 N.Y.2d 46, 427 N.Y.S.2d 969, 405 N.E.2d 213 (1980), which held that a court's alternative holding, while not essential to the judgment, could be given conclusive effect. However, the Malloy court carefully limited its holding: [1458] "[W]ithout intending to enunciate any broad rule, we hold in this instance that the rule of issue preclusion is applicable notwithstanding that in a precise sense the issue precluded was the subject of only an alternative determination by the trial court." 50 N.Y.2d at 52, 427 N.Y.S.2d at 973, 405 N.E.2d at 216. In Malloy, the trial court articulated a viable alternative ground to support its conclusion, a ground that the Court of Appeals noted had "validating authenticity" because it was likely expressed by the trial court to provide another basis for affirmance in case the other ground was rejected on appeal. 50 N.Y.2d at 52, 427 N.Y.S.2d at 972, 405 N.E.2d at 215. Here, the trial court's finding of a factual dispute on the issue of domination was not an alternative holding at all. It was at odds with the court's conclusion that summary judgment was appropriate and certainly did not provide "validating authenticity" for the court's holding.

Second, the court's finding of a factual dispute cannot have collateral estoppel effect because Kodak did not have a "full and fair opportunity" to litigate the question that the plaintiffs are asserting against it. Under New York law, a party has not had a full and fair opportunity to litigate an issue if it has had no opportunity to appeal the adverse finding. People v. Medina, 208 A.D.2d 771, 617 N.Y.S.2d 491, 493 (2d Dep't 1994); see also Pinkney v. Keane, 737 F.Supp. 187, 195 (E.D.N.Y.) ("Under New York law, a party who has obtained a final judgment in its favor is not normally precluded from relitigating a subsidiary issue that was decided against it."), aff'd, 920 F.2d 1090 (2d Cir. 1990), cert. denied, 501 U.S. 1217, 111 S.Ct. 2824, 115 L.Ed.2d 995 (1991). Kodak was in precisely this situation. It could not appeal the trial court's finding of a material factual dispute, because the final judgment — that is, the grant of summary judgment — was in Kodak's favor.

In sum, the collateral estoppel doctrine does not bar the relitigation of the question of Kodak's domination over its subsidiary, Atex, because the state court's finding was not essential to its judgment and because Kodak did not have a full and fair opportunity to litigate the issue.

b. Summary Judgment on the Alter Ego Theory

To prevail on an alter ego theory of liability, a plaintiff must show that the two corporations "`operated as a single economic entity such that it would be inequitable ... to uphold a legal distinction between them.'" Harper, 743 F.Supp. at 1085 (quoting Mabon, 1990 WL 44267, at *5). Among the factors to be considered in determining whether a subsidiary and parent operate as a "single economic entity" are:

"[W]hether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder."

Harco, 1989 WL 110537, at *4 (quoting United States v. Golden Acres, Inc., 702 F.Supp. 1097, 1104 (D.Del.1988)). As noted above, a showing of fraud or wrongdoing is not necessary under an alter ego theory, but the plaintiff must demonstrate an overall element of injustice or unfairness. Harco, 1989 WL 110537, at *5.

A plaintiff seeking to persuade a Delaware court to disregard the corporate structure faces "a difficult task." Harco, 1989 WL 110537, at *4. Courts have made it clear that "[t]he legal entity of a corporation will not be disturbed until sufficient reason appears." Id. Although the question of domination is generally one of fact, courts have granted motions to dismiss as well as motions for summary judgment in favor of defendant parent companies where there has been a lack of sufficient evidence to place the alter ego issue in dispute. See, e.g., Akzona, Inc. v. Du Pont, 607 F.Supp. 227, 237 (D.Del. 1984) (rejecting plaintiffs' alter ego theory of liability on a motion to dismiss); Nelson v. International Paint Co., 734 F.2d 1084, 1092 (5th Cir.1984) ("[I]n the lack of sufficient evidence to place the alter ego issue in dispute, a corporate defendant may be entitled [1459] to summary judgment."); see also Japan Petroleum Co. (Nigeria) v. Ashland Oil Inc., 456 F.Supp. 831, 838, 846 (D.Del.1978) (finding that subsidiary was not instrumentality of parent on a motion for summary judgment).

Kodak has shown that Atex followed corporate formalities, and the plaintiffs have offered no evidence to the contrary. Significantly, the plaintiffs have not challenged Kodak's assertions that Atex's board of directors held regular meetings, that minutes from those meetings were routinely prepared and maintained in corporate minute books, that appropriate financial records and other files were maintained by Atex, that Atex filed its own tax returns and paid its own taxes, and that Atex had its own employees and management executives who were responsible for the corporation's day-to-day business. The plaintiffs' primary arguments regarding domination concern (1) the defendant's use of a cash management system; (2) Kodak's exertion of control over Atex's major expenditures, stock sales, and the sale of Atex's assets to a third party; (3) Kodak's "dominating presence" on Atex's board of directors; (4) descriptions of the relationship between Atex and Kodak in the corporations' advertising, promotional literature, and annual reports; and (5) Atex's assignment of one of its former officer's mortgage to Kodak in order to close Atex's asset-purchase agreement with a third party. The plaintiffs argue that each of these raises a genuine issue of material fact about Kodak's domination of Atex, and that the district court therefore erred in granting summary judgment to Kodak on the plaintiffs' alter ego theory. We find that the district court correctly held that, in light of the undisputed factors of independence cited by Kodak, "the elements identified by the plaintiffs ... [were] insufficient as a matter of law to establish the degree of domination necessary to disregard Atex's corporate identity." Fletcher, 861 F.Supp. at 245.

First, the district court correctly held that "Atex's participation in Kodak's cash management system is consistent with sound business practice and does not show undue domination or control." Id. at 244. The parties do not dispute the mechanics of Kodak's cash management system. Essentially, all of Kodak's domestic subsidiaries participate in the system and maintain zero-balance bank accounts. All funds transferred from the subsidiary accounts are recorded as credits to the subsidiary, and when a subsidiary is in need of funds, a transfer is made. At all times, a strict accounting is kept of each subsidiary's funds.

Courts have generally declined to find alter ego liability based on a parent corporation's use of a cash management system. See, e.g., In re Acushnet River & New Bedford Harbor Proceedings, 675 F.Supp. 22, 34 (D.Mass.1987) (Without "considerably more," "a centralized cash management system ... where the accounting records always reflect the indebtedness of one entity to another, is not the equivalent of intermingling funds" and is insufficient to justify disregarding the corporate form.); United States v. Bliss, 108 F.R.D. 127, 132 (E.D.Mo.1985) (cash management system indicative of the "usual parent-subsidiary relationship"); Japan Petrol., 456 F.Supp. at 846 (finding segregation of subsidiary's accounts within parent's cash management system to be "a function of administrative convenience and economy, rather than a manifestation of control"). The plaintiffs offer no facts to support their speculation that Kodak's centralized cash management system was actually a "complete commingling" of funds or a means by which Kodak sought to "siphon[] all of Atex's revenues into its own account."

Second, the district court correctly concluded that it could find no domination based on the plaintiffs' evidence that Kodak's approval was required for Atex's real estate leases, major capital expenditures, negotiations for a sale of minority stock ownership to IBM, or the fact that Kodak played a significant role in the ultimate sale of Atex's assets to a third party. Again, the parties do not dispute that Kodak required Atex to seek its approval and/or participation for the above transactions. However, this evidence, viewed in the light most favorable to the plaintiffs, does not raise an issue of material fact about whether the two corporations constituted "a single economic entity." Indeed, [1460] this type of conduct is typical of a majority shareholder or parent corporation. See Phoenix Canada Oil Co. v. Texaco, 842 F.2d 1466, 1476 (3d Cir.1988) (declining to pierce the corporate veil where subsidiary required to secure approval from parent for "large investments and acquisitions or disposals of major assets"), cert. denied, 488 U.S. 908, 109 S.Ct. 259, 102 L.Ed.2d 247 (1988); Akzona, 607 F.Supp. at 237 (same, where parent approval required for expenditures exceeding $850,000); Japan Petrol., 456 F.Supp. at 843 (finding no parent liability where parent approval required for expenditures exceeding $250,000). In Akzona, the Delaware district court noted that a parent's "general executive responsibilities" for its subsidiary's operations included approval over major policy decisions and guaranteeing bank loans, and that that type of oversight was insufficient to demonstrate domination and control. Akzona, 607 F.Supp. at 238 (internal quotation marks omitted). Similarly, the district court in the instant case properly found that the presence of Kodak employees at periodic meetings with Atex's chief financial officer and comptroller to be "entirely appropriate." Fletcher, 861 F.Supp. at 245 (citing Akzona, 607 F.Supp. at 238); see Acushnet, 675 F.Supp. at 34 ("The quarterly and annual reports made [to the parent] do not represent an untoward intrusion by the owner into the corporate enterprise. The right of shareholders to remain informed is similarly recognized in many public and closely held corporations.").

The plaintiffs' third argument, that Kodak dominated the Atex board of directors, also fails. Although a number of Kodak employees have sat on the Atex board, it is undisputed that between 1981 and 1988, only one director of Atex was also a director of Kodak. Between 1989 and 1992, Atex and Kodak had no directors in common. Parents and subsidiaries frequently have overlapping boards of directors while maintaining separate business operations. In Japan Petroleum, the Delaware district court held that the fact that a parent and a subsidiary have common officers and directors does not necessarily demonstrate that the parent corporation dominates the activities of the subsidiary. 456 F.Supp. at 841; see Scott-Douglas Corp. v. Greyhound Corp., 304 A.2d 309, 314 (Del.Super.Ct.1973) (same). Since the overlap is negligible here, we find this evidence to be entirely insufficient to raise a question of fact on the issue of domination.

Fourth, the district court properly rejected the plaintiffs' argument that the descriptions of the relationship between Atex and Kodak and the presence of the Kodak logo in Atex's promotional literature justify piercing the corporate veil. Fletcher, 861 F.Supp. at 245. The plaintiffs point to several statements in both Kodak's and Atex's literature to evidence Kodak's domination of its subsidiary. For example, plaintiffs refer to (1) a promotional pamphlet produced by EPPS (a/k/a Atex) describing Atex as a business unit of EPPS and noting that EPPS was an "agent" of Kodak; (2) a document produced by Atex entitled "An Introduction to Atex Systems," which describes a "merger" between Kodak and Atex; (3) a statement in Kodak's 1985 and 1986 annual reports describing Atex as a "recent acquisition[]" and a "subsidiar[y] ... combined in a new division"; and (4) a statement in an Atex/EPPS document, "Setting Up TPE 6000 on the Sun 3 Workstation," describing Atex as "an unincorporated division of Electronic Pre-Press Systems, Inc., a Kodak company." They also refer generally to the fact that Atex's paperwork and packaging materials frequently displayed the Kodak logo.

It is clear from the record that Atex never merged with Kodak or operated as a Kodak division. The plaintiffs offer no evidence to the contrary, apart from these statements in Atex and Kodak documents that they claim are indicative of the true relationship between the two companies. Viewed in the light most favorable to the plaintiffs, these statements and the use of the Kodak logo are not evidence that the two companies operated as a "single economic entity." See Coleman v. Corning Glass Works, 619 F.Supp. 950, 956 (W.D.N.Y.1985) (upholding corporate form despite "loose language" in annual report about "merger" and parent's reference to subsidiary as a "division"), aff'd, 818 F.2d 874 (1987); Japan Petrol., 456 F.Supp. at 846 (noting that representations made by parent in its annual reports that subsidiary [1461] serves as an agent "may result from public relations motives or an attempt at simplification"); American Trading & Prod. Corp. v. Fischbach & Moore, Inc., 311 F.Supp. 412, 416 (N.D.Ill.1970) ("boastful" advertising and consideration of subsidiaries as "family" do not prove that corporate identities were ignored).

Fifth, the plaintiffs contend that Atex's assignment of its former CEO's mortgage to Kodak in order to close the sale of Atex's assets to a third party is evidence of Kodak's domination of Atex. We reject this argument as well. The evidence is undisputed that Kodak paid Atex the book value of the note and entered into a formal repayment agreement with the former CEO. Formal contracts were executed, and the two companies observed all corporate formalities.

Finally, even if the plaintiffs did raise a factual question about Kodak's domination of Atex, summary judgment would still be appropriate because the plaintiffs offer no evidence on the second prong of the alter ego analysis. The plaintiffs have failed to present evidence of an "overall element of injustice or unfairness" that would result from respecting the two companies' corporate separateness. See Harper, 743 F.Supp. at 1085 (holding that plaintiff cannot prevail on alter ego theory "because he has failed to allege any unfairness or injustice which would justify the court in disregarding the [companies'] separate legal existences"). In the instant case, the plaintiffs offer nothing more than the bare assertion that Kodak "exploited" Atex "to generate profits but not to safeguard safety." There is no indication that Kodak sought to defraud creditors and consumers or to siphon funds from its subsidiary. The plaintiffs' conclusory assertions, without more, are not evidence, see Quinn, 613 F.2d at 445, and are completely inadequate to support a finding that it would be unjust to respect Atex's corporate form.

For all of the foregoing reasons, the district court's order entering summary judgment on the plaintiffs' alter ego theory of liability is affirmed.

2. Agency Liability

The plaintiffs next contend that a genuine issue of fact was raised as to whether Kodak could be held liable on an agency theory — that is, whether Kodak, as principal, could be liable for the tortious acts of Atex, its agent. The plaintiffs rely on statements in Atex/ EPPS literature to support their theory: (1) the statement in the Atex document "Setting Up TPE 6000 on the Sun 3 Workstation" that "Atex is an unincorporated division of Electronic Pre-Press Systems, Inc., a Kodak company"; and (2) the statements in the EPPS promotional pamphlet that "EPPS serves as Kodak's primary agent to supply electronic pre-press products" and that "Atex is the largest of the EPPS business units." In granting Kodak's motion for summary judgment, the district court rejected the plaintiffs' agency theory of liability, finding that there was no evidence that Kodak authorized the statements. Fletcher, 861 F.Supp. at 247.

The plaintiffs contend that the fact that Kodak permitted the use of its logo on these documents raises a question of fact as to whether Kodak authorized or appeared to authorize the references to Atex/EPPS as its agent. First, the plaintiffs' argument fails under a theory of actual authority. The Restatement (Second) of Agency states: "Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal's manifestations of consent to him." RESTATEMENT (SECOND) OF AGENCY § 7 (1958). "Manifestation of consent" is "the expression of the will to another as distinguished from the undisclosed purpose or intention." Id. cmt. b; see also Greene v. Hellman, 51 N.Y.2d 197, 203-04, 433 N.Y.S.2d 75, 79, 412 N.E.2d 1301, 1305 (1980). A close reading of the record reveals no evidence that Kodak conferred actual authority upon Atex to act on its behalf. The plaintiffs have offered no evidence that either document was produced by Kodak; in fact, it appears that Atex and EPPS published and disseminated the documents at issue. The presence of a parent's logo on documents created and distributed by a subsidiary, standing alone, does not confer authority [1462] upon the subsidiary to act as an agent.

For similar reasons, plaintiffs' arguments fail under a theory of apparent authority. New York's Court of Appeals has made it clear that "apparent authority is dependent upon verbal or other acts by a principal which reasonably give an appearance of authority to conduct the transaction." Greene, 51 N.Y.2d at 204, 433 N.Y.S.2d at 80, 412 N.E.2d at 1306 (emphasis added) (citing RESTATEMENT (SECOND) OF AGENCY § 8 cmts. a, c). "Key to the creation of apparent authority," the court continued, "is that the third person, accepting the appearance of authority as true, has relied upon it." Id. The plaintiffs offer no evidence that Kodak authorized or gave the appearance of having authorized the statements in the Atex/EPPS documents. Atex's/EPPS's use of the Kodak logo is not a "verbal or other act[] by a principal," but rather, an act by the purported agent. Furthermore, the record contains no evidence that the plaintiffs relied on the documents at issue. If there were evidence that the plaintiffs relied on these documents and if there were evidence that Kodak uttered or authorized them, then there would be an issue of material fact as to the existence of apparent authority. However, there is neither. We affirm the district court's order granting summary judgment to the defendant on the plaintiffs' agency theory of liability.

3. Apparent Manufacturer

The plaintiffs' third theory of liability is that Kodak should be held liable as the "apparent manufacturer" of the Atex keyboards. RESTATEMENT (SECOND) OF TORTS § 400 (1965). The apparent manufacturer doctrine is set forth in the Restatement as follows: "One who puts out as his own product a chattel manufactured by another is subject to the same liability as though he were its manufacturer." Id. This theory of liability is well-established under New York law. See Commissioners of State Ins. Fund v. City Chem. Corp., 290 N.Y. 64, 69, 48 N.E.2d 262 (1943); Markel v. Spencer, 5 A.D.2d 400, 171 N.Y.S.2d 770, 780 (4th Dep't 1958), aff'd, 5 N.Y.2d 958, 184 N.Y.S.2d 835, 157 N.E.2d 713 (1959).

The district court held that Kodak could not be held liable under the apparent manufacturer doctrine because "[t]here is no indication in the Restatement [and in New York case law] that Section 400 was intended to apply to a party which is not a seller of chattel, or is [not] otherwise involved in the chain of distribution of a product." Fletcher, 861 F.Supp. at 245. In support of its holding, the district court cited the New York state court ruling in King v. Eastman, which held that Kodak was not liable under this section because, inter alia, it was not involved in the sale or distribution of the allegedly defective keyboards. Id. at 246. The King court relied on two federal court opinions, which similarly limited the application of § 400. See Torres v. Goodyear Tire and Rubber Co., 867 F.2d 1234, 1236 (9th Cir. 1989) (parent not liable under § 400 for subsidiary's product where it was not manufacturer or seller); Affiliated FM Ins. Co. v. Trane Co., 831 F.2d 153, 156 (7th Cir.1987) (parent not liable under § 400 in the absence of evidence that it was involved in manufacture, sale, or installation of product); see also Nelson, 734 F.2d at 1087-88 (section 400 does not apply to one who allows manufacturer to use its name but was not itself a manufacturer nor a distributor of the product).

Kodak argues that the district court's conclusion is supportable on three different theories. First, § 400 cannot apply because Kodak was neither the seller nor the distributor of the allegedly defective keyboards. Second, even if § 400 liability could reach a party who did not sell or distribute the products in question, it does not apply to Kodak in this instance because the Kodak logo was not affixed to the keyboards or their packages, only to promotional and advertising materials. Finally, even if § 400 can apply when a defendant's name appears only on promotional and packaging materials, the materials submitted here do not suggest that Kodak, rather than Atex, manufactured the keyboards. We agree.

First, New York courts have only applied the apparent manufacturer doctrine to sellers [1463] of a product or parties otherwise involved in the chain of distribution. The commentary to the Restatement states:

The words "one who puts out a chattel" include anyone who supplies it to others for their own use or for the use of third persons, either by sale or lease or by gift or loan.

RESTATEMENT (SECOND) OF TORTS § 400 cmt. a (emphasis added). Although no New York court, with the exception of the King court, has explicitly declined to apply § 400 where a parent arguably represents itself as the manufacturer of a product without participating in its sale or distribution, no New York court has ever extended liability under the doctrine to anyone other than sellers of products manufactured by third parties. See Willson v. Faxon, Williams & Faxon, 208 N.Y. 108, 113, 101 N.E. 799 (1913) (finding seller of laxatives could be held liable under apparent manufacturer doctrine where seller purchased tablets from manufacturer and affixed its own label to the product); State Ins. Fund, 290 N.Y. at 69, 48 N.E.2d 262 (finding chemical vendor could be held liable under earlier version of § 400 where vendor purchased chemicals from a distributor, removed distributor's label, and affixed its own); Markel, 171 N.Y.S.2d at 780 (finding defendant Ford Motor Company liable for malfunctioning brake pedal arm that it sold as a component part of a Ford automobile); Schwartz v. Macrose Lumber & Trim Co., 50 Misc.2d 547, 270 N.Y.S.2d 875, 889 (Sup.Ct. Queens County 1966) (finding vendor liable under apparent manufacturer doctrine for defective nail in box sold by vendor under vendor's name), rev'd on other grounds, 29 A.D.2d 781, 287 N.Y.S.2d 706 (2d Dep't 1968).

In support of their argument for § 400 liability, the plaintiffs draw our attention to several cases in other jurisdictions. All of these cases are distinguishable. Although they hold that participation in the chain of distribution is not essential to liability under the apparent manufacturer doctrine, each involved a licensing agreement in which the defendant allowed the use of its name in exchange for control over (or involvement in) the manufacture of the product. See Kasel v. Remington Arms Co., 24 Cal.App.3d 711, 718, 724, 101 Cal.Rptr. 314 (2d Dist.1972) (licensor who retains "right to inspect and control the quality" of product could be liable as an "integral component[] of the ... enterprise responsible for placing ... products on the market"); City of Hartford v. Assoc. Constr. Co., 34 Conn.Supp. 204, 384 A.2d 390, 393, 396 (1978) (licensor who "retained and exercised rights of control as to the quality and the methods and manner of application of the product" could be held liable under § 400); Connelly v. Uniroyal, Inc., 75 Ill.2d 393, 408, 411, 27 Ill.Dec. 343, 389 N.E.2d 155 (1979) (licensor who remained involved with "the goods and manufacturing operations" of product liable under § 400 as an "integral part of the marketing enterprise"), cert. denied, 444 U.S. 1060, 100 S.Ct. 992, 62 L.Ed.2d 738 (1980).

In the instant case, the plaintiffs have not produced any evidence that Kodak developed, designed, sold or distributed the allegedly defective keyboards. Contending otherwise, the plaintiffs point to the fact that Atex, in response to an interrogatory, listed Kodak among over thirty companies that were "involved in the design, manufacture, sale, marketing, leasing and/or installation of Atex keyboards." This interrogatory, however, was amended to delete Kodak from the list, and defendant's attorney submitted an affirmation attesting that the inclusion of Kodak was in error. Plaintiffs have submitted no other evidence of Kodak's actual participation in the manufacturing or distribution process; nor have they submitted any evidence of a licensing agreement between Kodak and Atex.

Second, even assuming that New York law permits a party that did not sell or distribute a product to be held liable under the apparent manufacturer doctrine, the plaintiffs offer no evidence that Kodak held itself out as the manufacturer of the Atex keyboard. See RESTATEMENT (SECOND) OF TORTS § 400. There is no question that the keyboards prominently display the name of Atex, the true manufacturer, and the plaintiffs do not dispute the defendant's assertion that the Kodak logo was not affixed to the Atex keyboards or their packages. Under these circumstances, it is difficult to understand how [1464] any defendant could be held liable on an apparent manufacturer theory. Indeed, the cases cited by the plaintiffs only extend § 400 liability to defendants who placed their names directly on the product or the product packaging at issue. See Willson, 208 N.Y. at 110, 113, 101 N.E. 799 (defendant could be held liable where vial containing tablets causing plaintiff's injuries labeled with defendant's name); State Ins. Fund, 290 N.Y. at 69, 48 N.E.2d 262 (defendant could be held liable where inscription on label of product bore defendant's name); Markel, 171 N.Y.S.2d at 780 (defendant liable for defective component part where vehicle marked with defendant's name); Schwartz, 270 N.Y.S.2d at 889 (defendant liable where plaintiff injured by nail packaged in box labeled with defendant's name); Forry v. Gulf Oil Corp., 428 Pa. 334, 344, 237 A.2d 593 (1968) (defendant could be held liable where tire embossed with its name); Carney v. Sears, Roebuck & Co., 309 F.2d 300, 304 (4th Cir.1962) (defendant could be held liable where its name appeared on defective product's label as well as in advertising).

Third, even if apparent manufacturer liability could extend to a defendant whose name appears only on promotional and advertising materials, rather than on the product itself, the materials offered by the plaintiffs do not suggest that Kodak manufactured the Atex keyboards. Many of the documents that the plaintiffs rely on make reference only to Atex computer software, such as the Atex "Color Imaging System" and the "PC Custom Display Software User Manual." Furthermore, Atex is repeatedly identified as the manufacturer of the Atex computer systems in all the documents identified by the plaintiffs. Under these circumstances, the plaintiffs' argument — that the presence of the Kodak logo on these documents is sufficient to raise an issue of material fact as to whether Kodak represented itself as the manufacturer of the keyboards — must fail.

For these reasons, we affirm the district court's order granting summary judgment for the defendant-appellee on the plaintiffs' apparent manufacturer theory of liability.

4. Concerted Tortious Action

The plaintiffs' final theory of liability is that Kodak acted in tortious concert with Atex in designing and marketing the allegedly defective keyboards. The plaintiffs present alternative arguments for Kodak's liability under the so-called concerted action doctrine. First, they argue that "the evidence of Kodak's direct participation in the marketing of the defective keyboard equipment" raises an issue of material fact regarding Kodak's acting in concert with Atex. In the alternative, they argue that Kodak could be liable under a separate theory of concerted action under which liability may be premised upon "concerted action by substantial assistance."

Section 876 of the Restatement (Second) of Torts provides that:

For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he

(a) does a tortious act in concert with the other or pursuant to a common design with him, or

(b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself....

It remains an open question under New York law whether concerted action liability can be premised on a showing of concerted action by "substantial assistance or encouragement." Although the New York Court of Appeals has referred to both the traditional "common design" approach as well as the "substantial assistance" theory of concerted action, see Bichler v. Eli Lilly & Co., 55 N.Y.2d 571, 580-81, 450 N.Y.S.2d 776, 780, 436 N.E.2d 182, 186 (1982), no cases have ever applied the "substantial assistance" approach. We find it unnecessary to decide this question of New York law at this time, because the plaintiffs' claim fails as a matter of law under either theory.

Under the first theory of concerted action, New York law "provides for joint and several liability on the part of all defendants having an understanding, express or tacit, to participate in a common plan or design to commit a tortious act." Rastelli v. Goodyear Tire & Rubber Co., 79 N.Y.2d 289, [1465] 295, 582 N.Y.S.2d 373, 375, 591 N.E.2d 222, 224 (1992) (internal quotation marks omitted). The Court of Appeals has held that "[i]t is essential that each defendant charged with acting in concert have acted tortiously and that one of the defendants committed an act in pursuance of the agreement which constitutes a tort." Id. The plaintiffs argue that various statements in the Atex/EPPS literature and the use of the Kodak logo on certain documents packaged with Atex products, as well as the fact that Atex's interrogatory answer initially listed Kodak among the companies "involved in the design, manufacture, sale, marketing, leasing and/or installation of Atex keyboards," demonstrate Kodak's "full collaboration" in the marketing of the keyboards. In addition, the plaintiffs present various reports and documents on ergonomics^[1] and repetitive stress injuries that Kodak created for the use of its own employees as evidence that "Kodak was fully aware of both the hazards associated with keyboard use and the means of reducing or eliminating those hazards." Finally, they rely on the Kodak Design Resource Center's evaluation of the ergonomics of three Atex keyboards in 1990 as evidence that "Kodak was a full participant with Atex in the deliberations about whether to warn users of the Kodak/Atex equipment, exactly what such warnings should state, and what would be the risks of not issuing such warnings."

As the district court correctly held, "none of this tends to show that Kodak and Atex had `an understanding ... to participate in a common plan or design to commit a tortious act.'" Fletcher, 861 F.Supp. at 246 (alteration in original) (quoting Rastelli, 79 N.Y.2d at 295, 582 N.Y.S.2d at 375, 591 N.E.2d at 224). As noted above, the defendant's attorney submitted an affirmation attesting that the answer to the interrogatory was an error, and the plaintiffs have offered no additional evidence that Kodak actually participated in the design or manufacture of the Atex keyboards. The documents offered by the plaintiffs do not suggest any "agreement" between Kodak and Atex to act "jointly and tortiously." They merely refer to general statements about the "merger" between Atex and Kodak and the "marriage" between the two companies.

Furthermore, none of the evidence demonstrates that Kodak's actions were tortious. The fact that Kodak prepared guidelines for its employees to use in relation to their own computer workstations does not constitute tortious conduct with regard to the keyboards developed and sold by Atex. There is no allegation that Kodak's internal guidelines were ever used in conjunction with the design or manufacture of the Atex keyboards. Likewise, while it is undisputed that Atex retained Kodak's Design Resource Center to evaluate the ergonomics of various Atex keyboards in 1990, nothing contradicts the evidence in the record that this evaluation occurred only after all of the keyboards at issue had been designed, developed, and manufactured. Furthermore, the plaintiffs have offered no shred of evidence to support their speculation that "Kodak was a full participant with Atex in the deliberations about whether to warn users of the Kodak/Atex equipment." Nothing contradicts the defendant's evidence that Atex retained Kodak as an "independent organization" solely to conduct a single evaluation of three Atex keyboards. Finally, there is no allegation that Kodak's laboratory performed the tests on the Atex equipment negligently or provided Atex with false information about its evaluation of Atex's keyboards.

In their second argument, the plaintiffs contend that even if there was no agreement between the parties to act tortiously, Kodak may be liable under the concerted action theory by providing "substantial assistance or encouragement" to Atex in furtherance of its tortious conduct. A "substantial assistance" claim based on § 876 of the Restatement (Second) of Torts requires evidence that (1) the defendant knows that the other's conduct constitutes a breach of [1466] duty and (2) the defendant gives substantial assistance or encouragement to the other's conduct. RESTATEMENT (SECOND) OF TORTS § 876(b).

We find that, viewed in the light most favorable to the plaintiffs, Kodak's general awareness of the hazards of repetitive stress injuries and the Kodak laboratory's evaluation of the Atex keyboards in 1990 are insufficient to raise a question of material fact regarding Kodak's knowledge of or substantial assistance in Atex's allegedly tortious conduct. Kodak's knowledge about repetitive stress injuries generally cannot be construed as knowledge of the alleged defective design of the Atex keyboard or Atex's alleged failure to warn keyboard users of the hazards of repetitive stress injuries. Furthermore, the plaintiffs have offered no evidence to contradict the defendant's assertions that Kodak's one-time evaluation of the keyboards in 1990 occurred years after the keyboards in question were designed and distributed. Finally, the plaintiffs present no evidence to suggest that Kodak was involved — either before or after the 1990 evaluation—in the decision to include warnings about repetitive stress disorders or user guidelines with Atex keyboards. Thus, we find that summary judgment on this claim was also appropriate.

III. CONCLUSION

To summarize:

We affirm the district court's order granting summary judgment for the defendant on each of the plaintiffs' four theories of liability.

1. We agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' alter ego theory of liability. The collateral estoppel doctrine does not preclude relitigation of the question of Kodak's domination over Atex because the state court's finding of material facts in dispute was not essential to its judgment and because the defendant did not have a full and fair opportunity to litigate the issue. The elements identified by the plaintiffs were insufficient to raise a material issue of fact regarding domination, and further, the plaintiffs failed to offer evidence of injustice that would justify disregarding Atex's corporate form.

2. We affirm the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' agency theory of liability because the plaintiffs offered no evidence that Kodak authorized or appeared to authorize Atex to act on its behalf in the manufacturing and marketing of keyboards or that the plaintiffs relied on the documents in question.

3. We agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' apparent manufacturer theory of liability on the ground that, under New York law, a parent cannot be liable as an apparent manufacturer where it was not the seller or the distributor of the product.

4. Finally, we agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' concerted tortious action theory. We also affirm the court's finding that the plaintiffs offered no evidence that Kodak and Atex had an agreement to commit a tortious act. Finally, we find that there was no evidence to support the plaintiffs' theory that Kodak provided "substantial assistance or encouragement" to Atex in furtherance of its allegedly tortious conduct.

[1] "Ergonomics is the study of the design of requirements of work in relation to the physical and psychological capabilities and limitations of people.... The aim of the discipline is to prevent the development of occupational disorders and to reduce the potential for fatigue, error, or unsafe acts through the evaluation and design of facilities, environments, jobs, tasks, tools, equipment, processes, and training methods to match the capabilities of specific workers." See 57 Fed.Reg. 34192, 34199 app. A (Aug. 3, 1992) (OSHA advance notice of proposed rulemaking on ergonomics safety).

[399] Richard F. Corroon, of Potter, Anderson & Corroon, Wilmington, and Milton Kunen of Kaye, Scholer, Fierman, Hays & Handler, New York City, for plaintiff.

Robert H. Richards, Jr., of Richards, Layton & Finger, Wilmington, and John R. Hupper, of Cravath, Swaine & Moore, New York City, for defendant Girard B. Henderson.

W. Laird Stabler, Jr., Wilmington, for defendant Alexander Dawson, Inc.

MARVEL, Vice Chancellor:

Plaintiff, which was formed in May of 1967 by the defendant Girard B. Henderson's former wife, Theodora G. Henderson, is the holder of record of 11,000 of the 40,500 issued and outstanding shares of common stock of the defendant Alexander Dawson, Inc. It sues derivatively as well as on its own behalf for an accounting by the individual defendants for the losses allegedly sustained by the corporate defendant and the concomitant improper gains allegedly received by the individual defendants as a result of certain transactions of which plaintiff complains. However, the basic relief sought by plaintiff after trial is the appointment of a liquidating receiver for the corporate defendant, such application being based on the alleged wrongs suffered by the corporate defendant at the hands of the individual defendants, which wrongs, according to plaintiff, if permitted to continue, threaten the very existence of such corporation.

As of September 30, 1968, Theodora G. Henderson, in addition to her interest in [400] the plaintiff corporation, was the holder of the following shares of preferred stock of the corporate defendant, namely, 3,000 of first preferred, 12,000 of second preferred, and 22,000 of third preferred. She continues to receive dividends on such shares. Prior to plaintiff's formation in 1967 Mrs. Henderson had received dividends on both common and preferred shares of the corporate defendant until she transferred her 11,000 shares of the common stock of said company to plaintiff during the year 1967. Corporate dividends paid to Mrs. Henderson in recent years and now to plaintiff and Mrs. Henderson have increased substantially in recent years. As of December 3, 1968, dividends paid to plaintiff and Mrs. Henderson in that year totalled $385,240. In 1966, Mrs. Henderson had received dividends in the amount of $292,840, and in 1967, a year in which Alexander Dawson, Inc., made a controversial charitable contribution having a value of $528,000, the combined dividends of plaintiff and Mrs. Henderson totalled $286,240.

In January of 1955, the defendant Girard B. Henderson and his then wife, Theodora G. Henderson, had entered into a separation agreement looking towards a divorce, at which time Mrs. Henderson's dividends from the corporate defendant totalled approximately $50,000 per annum. Under the terms of such agreement Mrs. Henderson acknowledged that she had received from her then husband the shares of common stock of Alexander Dawson, Inc., here in issue as well as a number of shares of preferred stock of such corporation. Upon plaintiff's organization, it became the owner of Mrs. Henderson's 11,000 shares of common stock^[1] on May 3, 1967. As of April 30, 1967, the shares of Alexander Dawson, Inc., to be turned over to the plaintiff corporation had a fair market value of $15,675,000 and an underlying net asset value of $28,996,000. Mrs. Henderson has since placed certain Dawson shares in trust for her own benefit and that of her two daughters and their issue.

The individual defendant Henderson by reason of the extent of his combined majority holdings of common and preferred stock of Alexander Dawson, Inc., each class of which has voting rights, exercises effective control over the affairs of such corporation, the net worth of the assets of which, at the time of the filing of this suit, was approximately $150,000,000.

It is claimed and the evidence supports such contention that on December 8, 1967, the defendant Girard B. Henderson, by virtue of his voting control over the affairs of Alexander Dawson, Inc., caused the board of directors of such corporation to be reduced in number from eight to three persons, namely himself, the defendant Bengt Ljunggren,^[2] an employee of the corporate defendant, and Mr. Henderson's daughter, Theodora H. Ives. It is alleged that thereafter the defendant Girard B. Henderson (over the objection of the director, Mrs. Ives) caused the board and the majority of the voting stock of Alexander [401] Dawson, Inc., improperly to contribute stock held by it in the approximate value of $550,000 to the Alexander Dawson Foundation, a charitable trust, the affairs of which were then controlled and continue to be controlled by Mr. Henderson. Another claim asserted by plaintiff is to the effect that in November or December of 1967, the defendant Henderson wrongfully transferred assets of Alexander Dawson, Inc., consisting of some $14,000,000 in cash, to accounts in Switzerland, where a portion of said moneys was converted or sought to be converted into silver bullion and Swiss francs at a cost to the corporate defendant of more than $2,500,000. It is also claimed that on November 10, 1958, the defendant improperly caused the board of the corporate defendant to acquire rights to a membership on the New York Stock Exchange for said Henderson's personal use, and that said membership having been thereafter sold on January 22, 1968, at a net profit of $330,000, such profit was thereupon appropriated by Mr. Henderson. Plaintiff argues that the transaction complained of occurred in 1968 when the Stock Exchange seat, allegedly the property of the corporation, was sold and the profit pocketed by Mr. Henderson. However, as noted earlier, I am of the opinion that a decision as to the precise time at which this transaction occurred is not required because Mrs. Henderson's direct interest in the defendant corporation as well as her indirect interest therein through the plaintiff corporation constitute compliance with the requirements of 8 Del.C. § 327, and Rule 23.1. It is further claimed that in March 1968 the defendant Henderson caused some $1,400,000 of the corporate defendant's assets to be invested in an airplane servicing and mechanics training project known as Kensair Corporation and that said entire investment has been irretrievably lost. It is next alleged that in December, 1967, an additional sum of approximately $737,000.00 of corporate funds was lost by reason of Mr. Henderson's application of the corporate defendant's funds to a research project known as Credo, Inc. It is finally claimed that other sums in lesser amounts have been dissipated on other unprofitable projects; that Mr. Henderson has improperly paid to himself non-interest bearing corporate loans, and that on the basis of the many instances of gross mismanagement of Alexander Dawson, Inc. charged in the complaint that a liquidating receiver should be appointed. However, after trial, plaintiff now limits its application for relief to recovery of the profit gained by Mr. Henderson as a result of the sale of a New York Stock Exchange seat together with the commissions earned through the use of such seat, to an accounting for the alleged improper corporate gift of $528,000 to the Alexander Dawson Foundation in 1967, and finally to the appointment of a liquidating receiver on the ground of gross mismanagement and distortion of corporate purpose on the part of Mr. Henderson.

Alexander Dawson, Inc. has functioned as a personal holding company since 1935 when Mr. Henderson's mother exchanged a substantial number of shares held by her in a company which later became Avon Products, Inc., for all of the shares of her own company known as Alexander Dawson, Inc. Mr. Henderson and a brother later succeeded to their mother's interest in Alexander Dawson, Inc., the brother thereafter permitting his shares to be redeemed by the corporation. As noted earlier, Mr. Henderson, by reason of his combined holdings of common and preferred stock of the corporate defendant, is in clear control of the affairs of such corporation, which, for the most part, has been operated informally by Mr. Henderson with scant regard for the views of other board members. Some seventy-five percent of its assets consist of shares of Avon Products, Inc. stock, there having been some diversification, particularly in 1967, largely through the urging of officers of the United States Trust Company of New York who have served as advisors. Through exercise of such control, Mr. Henderson has, since 1957, [402] caused the corporate defendant to donate varying amounts to a charitable trust organized in that year by Mr. Henderson, namely the Alexander Dawson Foundation. In 1957, $10,610 was donated to such trust. From 1960 to 1966 (except for the year 1965) gifts were in the range of approximately $63,000 to $70,000 or higher in each year other than 1963 when $27,923 was donated. In 1966, however, a gift in the form of a large tract of land in Colorado, having a value of some $467,750, was made.^[3] All of these gifts through 1966 were unanimously approved by all of the stockholders of Alexander Dawson, Inc., including Mrs. Theodora G. Henderson. The gift now under attack, namely one of the shares of stock of the corporate defendant having a value of some $528,000, was made to the Alexander Dawson Foundation in December of 1967. Such gift was first proposed by Mr. Henderson in April, 1967 before the board of the corporate defendant was reduced in number from eight to three. However, director reaction was thereafter confused, one of the directors, Mrs. Henderson's daughter, Theodora H. Ives, having expressed a desire that a corporate gift also be made to her own charitable corporation and that of her mother, Theodora G. Henderson. Accordingly, the matter was not pressed by Mr. Henderson until late December when the reduced board had taken over management of the corporate defendant. It is claimed and admitted that such gift had an effect on the equity and dividends of shareholders of the corporate defendant although the tax consequences of such gift clearly soften the apparent impact of such transaction. It is significant, however, as noted above, that the 1966 corporate gift, consisting of a ranch located in Colorado, had been approved by all of the directors and stockholders of the corporate defendant, and that the gift here under attack was apparently intended to be a step towards consummation of the purpose behind such grant of land, namely to provide a fund for the financing of a western camp for under privileged boys, particularly members of the George Junior Republic, a self-governing institution which has served the public interest for some seventy-five years at a school near Freeville, New York. Thus, in the summer of 1967, a small group of under privileged children had enjoyed the advantages of such camp in a test of the feasibility of such an institution. However, it is apparently Mr. Henderson's intention to continue and expand his interest in such camp where he maintains an underground home which he occupies at a $6,000 rental per annum, such house being occupied by him during some three months of the year. Plaintiff initially attacked such use. However, as in the case of charges made concerning the purchase of silver bullion and Swiss francs, as well as corporate investments in Credo, Inc., Kensair Corporation and other enterprises plaintiff seeks no accounting from the individual defendants concerning any of several specific transactions complained of other than those which charge Mr. Henderson with breaches of fiduciary duty in the purchase and sale of a seat on the New York Stock Exchange and the charitable gift of shares of stock of the corporate defendant having a value of $528,000 to the Alexander Dawson Foundation, although, to be sure, plaintiff asks that all actions undertaken by Mr. Henderson which demonstrate a course of irresponsible corporate conduct as well as misuse of corporate power and assets should be considered by the Court in reaching an ultimate decision on the question of whether or not a liquidating receiver for Alexander Dawson, Inc., should be appointed.

Turning to the controversy over the defendant Henderson's purchase of a seat on the New York Stock Exchange in November, 1958, a transaction which involved use of $120,000 of the corporate defendant's [403] funds, it is clear, first of all, that the seat in question was purchased in Mr. Henderson's name and that while corporate funds were used for the purchase Mr. Henderson entered the sums used in his cheque book as loaned or advanced. Plaintiff claims, however, that the seat in question was in fact purchased on behalf of Alexander Dawson, Inc., that Mr. Henderson was a mere nominee for the corporation, and that purported November 10, 1958 corporate minutes to such effect signed by Mr. Turnbull (Mr. Henderson's attorney) as secretary of the meeting, reflect what actually was contemplated, although the directors purportedly present at such meeting did not sign an attached waiver of notice.^[4] And while Mr. Henderson concedes that the original plan was to have the seat to be purchased held by him merely as nominee of the corporation, he testified that he had learned from his broker prior to his appearance before a subcommittee on admissions of the New York Stock Exchange on November 12, 1958, that the Board of Governors of the Exchange is not authorized to approve a corporation as an Exchange member unless, inter alia, the primary purpose of such corporation in becoming a member is the transaction of business as a broker or dealer in securities, Constitution and Rules, New York Stock Exchange, Article IX, § 1407. Accordingly, Mr. Henderson contends that he thereupon concluded that he must buy the seat with his own means and so testified before the sub-committee. However, he overlooks the fact that on November 7 when he drew a personal cheque to the order of the treasurer of the Exchange in the amount of $23,400 in part payment for the seat in question, he had simultaneously drawn a corporate cheque to his order in the amount of $25,000 contrary to the terms of 8 Del.C. § 143 which then forbade loans to corporate officers. On November 10, he borrowed $85,000 more from the corporate defendant, and passed on said money to the Stock Exchange, using his personal account and not that of the corporate defendant. Significantly, however, such Stock Exchange seat was carried on the balance sheets of Alexander Dawson, Inc. as an asset or the like and not as a loan receivable from as early as July 31, 1961 until Mr. Henderson had repaid the money he had borrowed from the corporate defendant for application to the controversial purchase.

I conclude that in a situation in which the defendant Henderson was faced with the dilemma of violating a basic rule^[5] of the New York Stock Exchange or a section of the Delaware Corporation Law, he chose to violate the statute by using improperly borrowed corporate funds for his own ultimate benefit (though, to be sure, he did not remit brokerage commissions to the corporation until the so-called loan had been paid off), and the question as to whether or not the November 10, 1958 board meeting actually took place thus becomes insignificant.

In short, I am of the opinion that in a situation in which Mr. Henderson as president and the majority stockholder of the corporate defendant had a duty not to place his own interest above that of the corporation and to refrain from enriching himself through the use of allegedly borrowed corporate funds, such defendant is not entitled to the protection of the business judgment rule. Gottlieb v. McKee, 34 Del.Ch. 537, 107 A.2d 240. Compare Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A. [404] 2d 503. Accordingly, such defendant must account to the corporate defendant for any profits made by him in the sale of the Stock Exchange seat here in issue as well as for the receipt of any brokerage commissions not already remitted by him to the corporation.

The next matter to be considered is the propriety of the December 1967 gift made by Alexander Dawson, Inc. to the Alexander Dawson Foundation of shares of stock of the corporate defendant having a value in excess of $525,000, an amount within the limits of the provisions of the federal tax law having to do with deductible corporate gifts, Internal Revenue Code of 1954 §§ 170(b) (2), 545(b) (2).

Title 8 Del.C. § 122 provides as follows:

"Every corporation created under this chapter shall have power to —

* * * * * *

(9) Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof."

There is no doubt but that the Alexander Dawson Foundation is recognized as a legitimate charitable trust by the Department of Internal Revenue. It is also clear that it is authorized to operate exclusively in the fields of "* * * religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals * * *". Furthermore, contemporary courts recognize that unless corporations carry an increasing share of the burden of supporting charitable and educational causes that the business advantages now reposed in corporations by law may well prove to be unacceptable to the representatives of an aroused public. The recognized obligation of corporations towards philanthropic, educational and artistic causes is reflected in the statutory law of all of the states, other than the states of Arizona and Idaho.

In A. P. Smith Mfg. Co. v. Barlow, 13 N.J. 145, 98 A.2d 681, 39 A.L.R.2d 1179, appeal dismissed, 346 U.S. 861, 74 S.Ct. 107, 98 L.Ed. 373, a case in which the corporate donor had been organized long before the adoption of a statute authorizing corporate gifts to charitable or educational institutions, the Supreme Court of New Jersey upheld a gift of $1500 by the plaintiff corporation to Princeton University, being of the opinion that the trend towards the transfer of wealth from private industrial entrepreneurs to corporate institutions, the increase of taxes on individual income, coupled with steadily increasing philanthropic needs, necessitate corporate giving for educational needs even were there no statute permitting such gifts, and this was held to be the case apart from the question of the reserved power of the state to amend corporate charters. The court also noted that the gift tended to bolster the free enterprise system and the general social climate in which plaintiff was nurtured. And while the court pointed out that there was no showing that the gift in question was made indiscriminately or to a pet charity in furtherance of personal rather than corporate ends, the actual holding of the opinion appears to be that a corporate charitable or educational gift to be valid must merely be within reasonable limits both as to amount and purpose. Compare Union Pacific R. R. v. Trustees, Inc., 8 Utah 2d 101, 329 P.2d 398.

The New Jersey statute in force and effect at the time of the Smith case gift provided that directors might cause their corporation to contribute for charitable and educational purposes and the like "* * such reasonable sum or sums as they may determine * * *" provided, however, that such contributions might not be made in situations where the proposed donee owned more than 10% of the voting stock of the donor and provided further that such gifts be limited to 5% of capital and surplus unless "* * * authorized by the stockholders."

[405] Whether or not these statutory limitations on corporate giving were the source of the limiting language of the New Jersey Supreme Court is not clear, the point being that the Delaware statute contains no such limiting language and therefor must, in my opinion, be construed to authorize any reasonable corporate gift of a charitable or educational nature. Significantly, Alexander Dawson, Inc. was incorporated in Delaware in 1958 after 8 Del.C. § 122(9) was cast in its present form, therefor no constitutional problem arising out of the effect on a stockholder's property rights of the State's reserved power to amend corporate charters is presented.

I conclude that the test to be applied in passing on the validity of a gift such as the one here in issue is that of reasonableness, a test in which the provisions of the Internal Revenue Code pertaining to charitable gifts by corporations furnish a helpful guide. The gift here under attack was made from gross income and had a value as of the time of giving of $528,000 in a year in which Alexander Dawson, Inc.'s total income was $19,144,229.06, or well within the federal tax deduction limitation of 5% of such income. The contribution under attack can be said to have "cost" all of the stockholders of Alexander Dawson, Inc. including plaintiff, less than $80,000, or some fifteen cents per dollar of contribution, taking into consideration the federal tax provisions applicable to holding companies as well as the provisions for compulsory distribution of dividends received by such a corporation. In addition, the gift, by reducing Alexander Dawson, Inc.'s reserve for unrealized capital gains taxes by some $130,000, increased the balance sheet net worth of stockholders of the corporate defendant by such amount. It is accordingly obvious, in my opinion, that the relatively small loss of immediate income otherwise payable to plaintiff and the corporate defendant's other stockholders, had it not been for the gift in question, is far out-weighed by the overall benefits flowing from the placing of such gift in channels where it serves to benefit those in need of philanthropic or educational support, thus providing justification for large private holdings, thereby benefiting plaintiff in the long run. Finally, the fact that the interests of the Alexander Dawson Foundation appear to be increasingly directed towards the rehabilitation and education of deprived but deserving young people is peculiarly appropriate in an age when a large segment of youth is alienated even from parents who are not entirely satisfied with our present social and economic system.

Plaintiff seeking to draw an analogy between the bizarre situation found to exist in the case of Tansey v. Oil Producing Royalties, Inc., 36 Del.Ch. 472, 133 A.2d 141, decided in 1957, to the facts at bar, prays finally that a liquidating receiver be appointed for the corporate defendant. In the cited case it appeared that the basic purpose of the company for which a receiver was sought was to purchase and hold oil royalties. The evidence before the Court was to the effect that while the corporation was in fact the holder of some $20,000 of oil royalties, it had, with one minor exception, purchased no royalty interests since 1930. In addition, the chief executive officer and majority stockholder of the defendant corporation testified that he had no intention of continuing the business of the company. Such individual defendant having been found by the Chancellor to be advanced in years and with "strange" ideas, the Court concluded that such officer's high handed practice of using the corporation as a vehicle for loans without regard to the views of other corporate officers and directors actually threatened the rights of the corporation's preferred stockholders. Accordingly, a liquidating receiver was appointed. In the case at bar, on the other hand the value of the assets of the corporate defendant has steadily increased largely through appreciation in value of its stock in Avon Products, Inc. between the [406] time Mr. Henderson became president and chairman of the board of Alexander Dawson, Inc. in the mid 1940's and December 31, 1967. As of the earlier date such stock had a value of $1,900,000, while the corporation's financial statements as of the latter date list the value^[6] of such stock based on market quotations to be $115,593,772.50. And while Mr. Henderson has accepted recommendations for some diversification of investment for the corporate defendant, particularly in 1967, it has been his confidence in Avon and its retention in the corporate defendant's portfolio which has led to the enormous growth in the value of Alexander Dawson, Inc.'s assets in the last twenty years. Compare Hall v. John S. Isaacs & Sons Farms, Inc., 39 Del. Ch. 244, 163 A.2d 288. As stated in Warshaw v. Calhoun (Del.Sup.Ct.), 221 A.2d 487:

"It is plain, we think, that for a court to order a dissolution or liquidation of a solvent corporation, the proponents must show a failure of corporate purpose, a fraudulent disregard of the minority's rights, or some other fact which indicates an imminent danger of great loss resulting from fraudulent or absolute mismanagement. Berwald v. Mission Development Co., 40 Del.Ch. 509, 185 A.2d 480, and Graham-Newman Corp. v. Franklin County Distilling Co., 26 Del. Ch. 233, 27 A.2d 142. As we pointed out in Hall v. John S. Isaacs & Sons Farms, Inc., 39 Del.Ch. 244, 163 A.2d 288, the remedy of a minority stockholder in a corporation who is dissatisfied with its management or method of operation is to withdraw from the corporate enterprise by the sale of his stock when the minority stockholder's complaint is not based on any illegality."

Finally, none of the separate transactions sought to be relied on by plaintiff to demonstrate gross mismanagement or a threat to the corporate defendant's existence as a viable business entity, considered separately or cumulatively, not only fail to demonstrate the type of corporate perversion or self-dealing which warrant interference by a court of equity but rather have been shown to be reasonable corporate acts within the business judgment rule. Plaintiff's application for the appointment of a liquidating receiver for Alexander Dawson, Inc. must be denied.

On notice, an order in conformity with the holdings of this opinion may be presented.

[1] Because it did not become a holder of Alexander Dawson, Inc., stock until May of 1967, the individual defendants contend that plaintiff cannot complain of corporate transactions which occurred prior to that date, Title 8 Del.C. § 327, and Rule 23.1, Del.C.Ann. This procedural rule, however, was designed to militate against the wrong of buying into a derivative law suit and should not be allowed to bar an action by a stockholder with a long standing equitable interest in a corporation, Rosenthal v. Burry Biscuit Co., 30 Del.Ch. 296, 60 A.2d 106, and Maclary v. Pleasant Hills, Inc., 35 Del. Ch. 39, 109 A.2d 830. Had the harsh rule of Myer v. Myer, 271 App.Div. 465, 66 N.Y.S.2d 83, been invoked, I would have entertained a motion for the joinder of Theodora G. Henderson as a party plaintiff in light of her continuing ownership of preferred stock of Alexander Dawson, Inc.

[2] Mr. Ljunggren, whose forte appears to be that of public relations, joined Alexander Dawson, Inc., in 1966 at a salary of $12,000 per annum. He has since been rewarded with substantial raises and bonuses which have more than doubled his starting salary.

[3] Mr. Henderson also made a personal donation of $122,602 to the Foundation in 1966.

[4] Mr. Henderson when asked whether or not such meeting was ever held, answered: "Not to the best of my knowledge sir." The other two directors allegedly present, namely Mrs. Theodora G. Henderson and Dariel A. Henderson, did not testify at trial or by deposition.

[5] Mr. Henderson did not demonstrate candor before the subcommittee in that he not only failed to disclose that he had purportedly borrowed $120,000 from the corporate defendant for the purchase in question but also neglected to report the terms of such loan. See Constitution and Rules, New York Stock Exchange, § 2301.30 et seq.

[6] The cost of said shares, presumably as of 1935, is given as $43,970.31.

Michael Hanrahan, Esquire, Paul A. Fioravanti, Jr., Esquire, Tanya E. Pino, Esquire, Kevin H. Davenport, Esquire, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Marc A. Topaz, Esquire, Lee D. Rudy, Esquire, Eric L. Zagar, Esquire, Michael C. Wagner, Esquire, James H. Miller, Esquire, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Robert D. Klausner, Esquire, Stuart A. Kaufman, Esquire, KLAUSNER, KAUFMAN, JENSEN & LEVINSON, Plantation, Florida, Attorneys for Plaintiffs Boilermakers Local 154 Retirement Fund, Key West Police & Fire Pension Fund, and IClub Investment Partnership.

William B. Chandler III, Esquire, Tamika R. Montgomery, Esquire, Ryan A. McLeod, Esquire, Ian R. Liston, Esquire, WILSON SONSINI GOODRICH & ROSATI, P.C., Georgetown, Delaware; David J. Berger, Esquire, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for Defendants Chevron Corporation, Samuel H. Armacost, Linnet F. Deily, Robert E. Denham, Robert J. Eaton, Chuck Hagel, Enrique Hernandez, Jr., Franklyn G. Jenifer, George L. Kirkland, Sam Nunn, Donald B. Rice, Kevin W. Sharer, Charles B. Shoemate, John G. Stumpf, Ronald D. Sugar, Carl Ware, and John S. Watson.

A. Gilchrist Sparks, III, Esquire, Kenneth J. Nachbar, Esquire, Bradley D. Sorrels, Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Defendants FedEx Corporation, James L. Barksdale, John A. Edwardson, J.R. Hyde, III, Shirley A. Jackson, Steven R. Loranger, Gary W. Loveman, Susan C. Schwab, Frederick W. Smith, Joshua I. Smith, David P. Steiner, and Paul S. Walsh.

OPINION

STRINE, Chancellor.

I. Introduction

The board of Chevron, the oil and gas major, has adopted a bylaw providing that litigation relating to Chevron's internal affairs should be conducted in Delaware, the state where Chevron is incorporated and whose substantive law Chevron's stockholders know governs the corporation's internal affairs. The board of the logistics company FedEx, which is also incorporated in Delaware and whose internal affairs are also therefore governed by Delaware law, has adopted a similar bylaw providing that the forum for litigation related to FedEx's internal affairs should be the Delaware Court of Chancery. The boards of both companies have been empowered in their certificates of incorporation to adopt bylaws under 8 Del. C. § 109(a).^[1]

The plaintiffs, stockholders in Chevron and FedEx, have sued the boards for adopting these "forum selection bylaws." The plaintiffs' complaints are nearly identical and were filed only a few days apart by clients of the same law firm. In Count I, the plaintiffs claim that the bylaws are statutorily invalid because they are beyond the board's authority under the Delaware General Corporation Law ("DGCL"). In Count IV, the plaintiffs allege that the bylaws are contractually invalid, and therefore cannot be enforced like other contractual forum selection clauses under the test adopted by the Supreme Court of the United States in The Bremen v. Zapata Offshore Co.,^[2] because they were unilaterally adopted by the Chevron and FedEx boards using their power to make bylaws. The plaintiffs have attempted to prove their point by presenting to this court a number of hypothetical situations in which, they claim, the bylaws might operate inconsistently with law or unreasonably. The plaintiffs have also claimed that the boards of Chevron and FedEx breached their fiduciary duties in adopting the bylaws.

In this opinion, the court resolves the defendants' motion for judgment on the pleadings on the counts relating to the statutory and contractual validity of the bylaws. Because the two bylaws are similar, present common legal issues, and are the target of near-identical complaints, the court decided to address them together. This is efficient, and is also in the interests of the parties, because a decision on the legal validity of the bylaws under the DGCL will moot the plaintiffs' other challenges if the bylaws are found to be invalid. And, it also aids the administration of justice, because a foreign court that respects the internal affairs doctrine, as it must,^[3] when faced with a motion to enforce the bylaws will consider, as a first order issue, whether the bylaws are valid under the "chartering jurisdiction's domestic law."^[4] Furthermore, the plaintiffs' facial statutory invalidity claim and their related contention that, as a matter of law, the bylaws are not contractually enforceable, have cast a cloud over the defendants' bylaws and those of other corporations. A decision as to the basic legal questions presented by the plaintiffs' complaints will provide efficiency benefits to not only the defendants and their stockholders, but to other corporations and their investors.

For these reasons, the court consolidated the Chevron and FedEx cases to address the purely facial legal challenges to the statutory and contractual validity of the bylaws raised by Counts I and IV of the plaintiffs' complaints. The defendants filed a motion for judgment on the pleadings, seeking a dismissal of Counts I and IV, and this is the motion before the court today.

After considering the parties' contending arguments on Count I of the complaints, the court finds that the bylaws are valid under our statutory law. 8 Del. C. § 109(b) provides that the bylaws of a corporation "may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." The forum selection bylaws, which govern disputes related to the "internal affairs" of the corporations, easily meet these requirements.^[5] The bylaws regulate the forum in which stockholders may bring suit, either directly or on behalf of the corporation in a derivative suit, to obtain redress for breaches of fiduciary duty by the board of directors and officers. The bylaws also regulate the forum in which stockholders may bring claims arising under the DGCL or other internal affairs claims. In other words, the bylaws only regulate suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine. Thus, the bylaws, by establishing these procedural rules for the operation of the corporation, plainly relate to the "business of the corporation[s]," the "conduct of [their] affairs," and regulate the "rights or powers of [their] stockholders." Because Delaware law, like federal law, respects and enforces forum selection clauses, the forum selection bylaws are also not inconsistent with the law.^[6] For these reasons, the forum selection bylaws are not facially invalid as a matter of statutory law.

As to Count IV of the complaints, the court finds that the bylaws are valid and enforceable contractual forum selection clauses. As our Supreme Court has made clear, the bylaws of a Delaware corporation constitute part of a binding broader contract among the directors, officers, and stockholders formed within the statutory framework of the DGCL.^[7] This contract is, by design, flexible and subject to change in the manner that the DGCL spells out and that investors know about when they purchase stock in a Delaware corporation. The DGCL allows the corporation, through the certificate of incorporation, to grant the directors the power to adopt and amend the bylaws unilaterally.^[8]

The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew (i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board's authority to adopt binding bylaws consistent with 8 Del. C. § 109. For that reason, our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader DGCL, form part of a flexible contract between corporations and stockholders, in the sense that the certificate of incorporation may authorize the board to amend the bylaws' terms and that stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.^[9]

The plaintiffs' argument to the contrary—that stockholders' rights may not be regulated by board-adopted bylaws—misunderstands the relationship between the corporation and stockholders established by the DGCL, and attempts to revive the outdated "vested rights" doctrine. As cases like Kidsco Inc. v. Dinsmore show, that doctrine is inconsistent with the fundamental structure of Delaware's corporate law.^[10] Thus, a forum selection clause adopted by a board with the authority to adopt bylaws is valid and enforceable under Delaware law to the same extent as other contractual forum selection clauses. Therefore, this court will enforce the forum selection bylaws in the same way it enforces any other forum selection clause, in accordance with the principles set down by the United States Supreme Court in Bremen^[11] and adopted explicitly by our Supreme Court in Ingres Corp. v. CA, Inc.^[12]

In an attempt to defeat the defendants' motion, the plaintiffs have conjured up an array of purely hypothetical situations in which they say that the bylaws of Chevron and FedEx might operate unreasonably. As the court explains, it would be imprudent and inappropriate to address these hypotheticals in the absence of a genuine controversy with concrete facts. Delaware courts "typically decline to decide issues that may not have to be decided or that create hypothetical harm."^[13] Under the settled authority of cases such as Frantz Manufacturing Co. v. EAC Industries^[14] and Stroud v. Grace,^[15] there is a presumption that bylaws are valid. By challenging the facial statutory and contractual validity of the forum selection bylaws, the plaintiffs took on the stringent task of showing that the bylaws cannot operate validly in any conceivable circumstance.^[16] The plaintiffs cannot evade this burden by conjuring up imagined future situations where the bylaws might operate unreasonably, especially when they acknowledge that in most internal affairs cases the bylaws will not operate in an unreasonable manner.^[17]

Nor does the adherence to the accepted standard of review in addressing facial invalidity claims work any unfairness. Under Bremen and its progeny, like our Supreme Court's recent Carlyle decision,^[18] as-applied challenges to the reasonableness of a forum selection clause should be made by a real plaintiff whose real case is affected by the operation of the forum selection clause. If a plaintiff faces a motion to dismiss because it filed outside the forum identified in the forum selection clause, the plaintiff can argue under Bremen that enforcing the clause in the circumstances of that case would be unreasonable. In addition, if a plaintiff-stockholder believes that a board is breaching its fiduciary duties by applying a forum selection clause to obtain dismissal of an actual case filed outside the forum designated by the bylaws, it may sue at that time. But the plaintiffs here, who have no separate claims pending that are affected by the bylaws, may not avoid their obligation to show that the bylaws are invalid in all circumstances by imagining circumstances in which the bylaws might not operate in a situationally reasonable manner. Such circumstantial challenges are required to be made based on real-world circumstances by real parties, and are not a proper basis for the survival of the plaintiffs' claims that the bylaws are facially invalid under the DGCL.

Therefore, the defendants' motion for judgment on the pleadings on Counts I and IV is granted.

II. Background And Procedural Posture

A. The Chevron And FedEx Forum Selection Bylaws

Critical to the resolution of this motion is an understanding of who has the power to adopt, amend, and repeal the bylaws, and what subjects the bylaws may address under the DGCL. 8 Del. C. § 109(a) identifies who has the power to adopt, amend, and repeal the bylaws:

[T]he power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote . . . . Notwithstanding the foregoing, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors . . . . The fact that such power has been so conferred upon the directors . . . shall not divest the stockholders . . . of the power, nor limit their power to adopt, amend or repeal bylaws.

8 Del. C. § 109(b) states the subject matter the bylaws may address:

The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

Both Chevron's and FedEx's certificates of incorporation conferred on the boards the power to adopt bylaws under 8 Del. C. § 109(a). Thus, all investors who bought stock in the corporations whose forum selection bylaws are at stake knew that (i) the DGCL allows for bylaws to address the subjects identified in 8 Del. C. § 109(b), (ii) the DGCL permits the certificate of incorporation to contain a provision allowing directors to adopt bylaws unilaterally, and (iii) the certificates of incorporation of Chevron and FedEx contained a provision conferring this power on the boards.

Acting consistent with the power conferred to the board in Chevron's certificate of incorporation, the board amended the bylaws and adopted a forum selection bylaw. Generally speaking, a forum selection bylaw is a provision in a corporation's bylaws that designates a forum as the exclusive venue for certain stockholder suits against the corporation, either as an actual or nominal defendant, and its directors and employees. On September 29, 2010, the board of Chevron, a Delaware corporation headquartered in California, adopted a forum selection bylaw that provided:

Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this [bylaw].^[19]

Several months later, on March 14, 2011, the board of FedEx, a Delaware corporation headquartered in Tennessee, adopted a forum selection bylaw identical to Chevron's.^[20] Like Chevron, FedEx's board had been authorized by the certificate of incorporation to adopt bylaws without a stockholder vote, and the FedEx board adopted the bylaw unilaterally.

Chevron's board amended its bylaw on March 28, 2012 to provide that suits could be filed in any state or federal court in Delaware with jurisdiction over the subject matter and the parties. The amended bylaw also provides that the bylaw would not apply unless the court in Delaware had personal jurisdiction over all the parties that were "indispensable" to the action.^[21] The amended bylaw, with the changes in italics, states:

Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court's having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this [bylaw].^[22]

In their briefing, the boards of Chevron and FedEx state that the forum selection bylaws are intended to cover four types of suit, all relating to internal corporate governance:

• Derivative suits. The issue of whether a derivative plaintiff is qualified to sue on behalf of the corporation and whether that derivative plaintiff has or is excused from making demand on the board is a matter of corporate governance, because it goes to the very nature of who may speak for the corporation.

• Fiduciary duty suits. The law of fiduciary duties regulates the relationships between directors, officers, the corporation, and its stockholders.

• D.G.C.L. suits. The Delaware General Corporation Law provides the underpinning framework for all Delaware corporations. That statute goes to the core of how such corporations are governed.

• Internal affairs suits. As the U.S. Supreme Court has explained, "internal affairs," in the context of corporate law, are those "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders."^[23]

That is, the description of the forum selection bylaws by the Chevron and FedEx boards is consistent with what the plain language of the bylaws suggests: that these bylaws are not intended to regulate what suits may be brought against the corporations, only where internal governance suits may be brought.^[24]

B. The Defendant Boards Have Identified Multiforum Litigation Over Single Corporate Transactions Or Decisions As The Reason Why They Adopted The Bylaws

The Chevron and FedEx boards say that they have adopted forum selection bylaws in response to corporations being subject to litigation over a single transaction or a board decision in more than one forum simultaneously, so-called "multiforum litigation."^[25] The defendants' opening brief argues that the boards adopted the forum selection bylaws to address what they perceive to be the inefficient costs of defending against the same claim in multiple courts at one time.^[26] The brief describes how, for jurisdictional purposes, a corporation is a citizen both of the state where it is incorporated and of the state where it has its principal place of business.^[27] Because a corporation need not be, and frequently is not, headquartered in the state where it is incorporated, a corporation may be subject to personal jurisdiction as a defendant in a suit involving corporate governance matters in two states.^[28] Therefore, any act that the corporation or its directors undertake is potentially subject to litigation in at least two states.^[29] Furthermore, both state and federal courts may have jurisdiction over the claims against the corporation. The result is that any act that the corporation or its directors undertake may be challenged in various forums within those states simultaneously.^[30] The boards of Chevron and FedEx argue that multiforum litigation, when it is brought by dispersed stockholders in different forums, directly or derivatively, to challenge a single corporate action, imposes high costs on the corporations and hurts investors by causing needless costs that are ultimately born by stockholders, and that these costs are not justified by rational benefits for stockholders from multiforum filings.^[31]

Thus, the boards of Chevron and FedEx claim to have tried to minimize or eliminate the risk of what they view as wasteful duplicative litigation by adopting the forum selection bylaws.^[32] Chevron and FedEx are not the only boards to have recently unilaterally adopted these clauses: in the last three years, over 250 publicly traded corporations have adopted such provisions.^[33]

As the court next explains, neither the wisdom of the Chevron and FedEx boards in adopting the forum selection bylaws to address the prevalence of multiforum litigation, or in proceeding by way of a bylaw, rather than proposing an amendment to the certificate of incorporation, are proper matters for this court to address. Those questions are not relevant on this motion.^[34]

C. The Plaintiffs Challenge The Forum Selection Bylaws

Within the course of three weeks in February 2012, a dozen complaints were filed in this court against Delaware corporations, including Chevron and FedEx, whose boards had adopted forum selection bylaws without stockholder votes.^[35] As a threshold issue, these complaints, which were all substantively identical and filed by clients of the same accomplished law firm, alleged that the boards of the defendant corporations had no authority to adopt the bylaws, and sought a declaration that the bylaws were invalid and a breach of fiduciary duty. The complaints also brought a salmagundi of other claims, alleging hypothetical ways in which the forum selection bylaws could potentially be enforced in an unreasonable and unfair manner, and accusing the directors of breaching their fiduciary duties by adopting them.

Ten of the twelve defendant corporations repealed their bylaws, and the complaints against them were dismissed. Chevron and FedEx did not repeal their bylaws and answered the plaintiffs' complaints. The defendants then asked the court to hear a consolidated action on the facial validity of the forum selection bylaws, not only because the plaintiffs' lawsuits were chilling the adoption of such bylaws under the DGCL, but, most importantly, because the "fundamental question[s]" of statutory validity and contractual enforceability were "ripe for adjudication now[.]"^[36] The plaintiffs wrote in response that they objected to the defendants' "attempt to truncate discovery and abruptly seek an advisory opinion on the theoretical permissibility of the director-adopted exclusive forum bylaws."^[37]

Shortly after the receipt of those letters, the court held an office conference on how the case should proceed. The defendant corporations argued that the statutory validity and contractual enforceability of their forum selection bylaws—as challenged by Counts I and IV—were important legal questions that could be addressed by dealing with these counts on motion practice now. The defendants believed that an adjudication of those purely legal issues would benefit the stockholders of Delaware corporations, because the statutory validity and contractual enforceability of the companies' bylaws in actual, real-world situations involving their effect on substantive internal affairs litigation had been clouded by the present case. On the other hand, the plaintiffs' other counts, which involve their fiduciary duty claims and arguments about the ways in which the forum selection clauses could be inequitably adopted or applied in particular situations, could be determined after the core questions of facial statutory validity and contractual enforceability had been resolved. The defendants pointed out that, if they lose, the legal issues are settled against them, and if the bylaws are invalid, then the plaintiffs' other as-applied claims are moot. But, if the bylaws are statutorily and contractually valid and enforceable as a facial matter, then there would be a more concrete legal context for consideration of whether the plaintiffs' fiduciary duty and as-applied claims are meritorious or even, on account of the purely hypothetical nature of the latter arguments, justiciable.

The plaintiffs resisted this approach, arguing that their facial challenges in Counts I and IV should not be resolved until discovery was completed on all their other claims. But, because Chevron and FedEx had made persuasive arguments that addressing the facial challenges to the bylaws would avoid unnecessary costs or delay, especially given the doubt the plaintiffs themselves created about a corporation's statutory power to adopt forum selection bylaws at all,^[38] the court consolidated their cases to resolve those common and narrow questions of law: (i) whether the forum selection bylaws are facially invalid under the DGCL (Count I); and (ii) whether the board-adopted forum selection bylaws are facially invalid as a matter of contract law (Count IV). For those reasons, a scheduling order was entered that specifically contemplated motion practice on the statutory and contractual validity issues common to both cases in Counts I and IV.^[39]

But the plaintiffs have taken the position that the court cannot consolidate the cases to address purely legal issues, because, as they say, it is improper for this court to make "a determination of the validity of the [b]ylaw[s] in the abstract."^[40] The court's power to consolidate cases to address purely legal issues is codified in Delaware Court of Chancery Rule 42(a), which provides that:

When actions involving a common question of law or fact are pending before the Court, it may order a joint hearing or trial of any or all the matters in issue in the actions; it may order all the actions consolidated; and it may make such orders concerning proceedings therein as may tend to avoid unnecessary costs or delay.

Under that rule, the court may consolidate any cases involving a "common question of law" to decide "any or all the matters." And, here, the order to consolidate these actions to address the ripe legal issues—the facial statutory and contractual validity and enforceability of the forum selection bylaws adopted by Chevron's and FedEx's board of directors under the DGCL—rests on that clear authority.^[41]

Even more surprising still was that the plaintiffs also argued in their brief that the pleadings had not been closed yet, and for that reason alone, the court must stay its hand, and not rule on the purely legal issues presented by their own Counts I and IV.^[42] The basis for the plaintiffs' claim was that they had filed a supplemental pleading (which this court had authorized it to do) in response to Chevron's amended bylaw.^[43]

But the schedule that the court entered on this consolidated action specifically contemplated that the court would address the counts contesting the facial statutory validity and contractual enforceability of the forum selection bylaws in a consolidated action, and as part and parcel of that decision, permitted the plaintiffs to file supplemental pleadings in the Chevron case that Chevron did not have to answer until this consolidated action was resolved, because the supplement would only raise certain additional counts not related to facial statutory or contractual invalidity.^[44] That order was consistent with the court's finding that it would be efficient to resolve the legal questions first, given that it could moot other claims in both cases and even the new ones raised by the supplemental pleadings in the Chevron case. By order, a briefing schedule was put in place for the resolution of this motion, which addresses only Counts I and IV of the plaintiffs' complaints, for which the pleadings are closed.^[45] These counts allege that the bylaws are statutorily invalid because they are beyond the board's authority under the DGCL, and that board-adopted forum selection bylaws are contractually invalid and therefore not enforceable.^[46] The plaintiffs' claims that the boards breached their fiduciary duties in adopting the bylaws have been stayed.^[47] The plaintiffs understood this, and their argument in their brief, that this motion addressing their counts relating to purely legal, facial challenges to the forum selection bylaws cannot be considered until their fact-intensive counts are addressed, contradicts the clear order of this court and has no support in the law. If this novel contention were adopted, plaintiffs could cast corporate action in doubt and impair the functioning of a corporation, while not allowing a corporation to clear up the doubt by means of traditional motion practice often used to resolve purely legal questions in a timely manner. Rather, the corporation would not be able to get a ruling on the purely legal challenge of facial validity until the court addressed all the more fact-laden counts in the complaint. Our law does not require that approach. Rather, "[f]acial challenges to the legality of provisions in corporate instruments are regularly resolved by this Court."^[48]

III. The Standard Of Review

The standard of review on this motion is important in framing this consolidated motion. The two sides approach this issue differently. The plaintiffs, for their part, simply recite the basic procedural standard, by noting that this court may only grant judgment on the pleadings if there are no material facts in dispute, and one party is entitled to judgment as a matter of law.^[49] Thus, the plaintiffs say, "[t]he Court can grant Defendants' [motion] only if unambiguous and unmistakably clear language of the Bylaws renders Defendants' constructions the only reasonable interpretation."^[50] The plaintiffs then devote much of their complaints and briefing to arguing that the bylaws are ambiguous, because, they say, the forum selection bylaws could be applied in different ways in different factual situations.^[51]

But, the plaintiffs ignore the nature of this motion, and the counts of their own complaints to which the defendants' motion is directed. This motion concerns Count I, in which the plaintiffs alleged that "the bylaw[s are] invalid because [they are] beyond the authority granted in 8 Del. C. § 109(b)," and Count IV, in which the plaintiffs claim that "the bylaw[s are] not [] valid and enforceable forum selection provision[s]."^[52] Thus, this motion is only concerned with the facial statutory and contractual validity of the bylaws, and the motion is expressly not concerned with how the bylaws might be applied in any future, real-world situation. The plaintiffs' proposed standard, by contrast, is based on a case in which this court resolved an actual, live controversy over whether a bylaw could be applied to the real human events underlying that case.^[53]

The defendants correctly point out this error in the plaintiffs' approach. As our Supreme Court held in the Frantz Manufacturing case, "[t]he bylaws of a corporation are presumed to be valid, and the courts will construe the bylaws in a manner consistent with the law rather than strike down the bylaws."^[54] Thus, the plaintiffs' burden on this motion challenging the facial statutory and contractual validity of the bylaws is a difficult one: they must show that the bylaws cannot operate lawfully or equitably under any circumstances.^[55] So, the plaintiffs must show that the bylaws do not address proper subject matters of bylaws as defined by the DGCL in 8 Del. C. § 109(b), and can never operate consistently with law.^[56] The plaintiffs voluntarily assumed this burden by making a facial validity challenge,^[57] and cannot satisfy it by pointing to some future hypothetical application of the bylaws that might be impermissible.^[58]

The answer to the possibility that a statutorily and contractually valid bylaw may operate inequitably in a particular scenario is for the party facing a concrete situation to challenge the case-specific application of the bylaw, as in the landmark case of Schnell v. Chris-Craft Industries.^[59] The settled approach of our law regarding bylaws is that courts should endeavor to enforce them to the extent that it is possible to do so without violating anyone's legal or equitable rights.^[60] This is also consistent with the doctrine laid down by the U.S. Supreme Court decision in Bremen and its progeny, which requires courts to give as much effect as is possible to forum selection clauses and only deny enforcement of them to the limited extent necessary to avoid some fundamentally inequitable result or a result contrary to positive law.^[61] Thus, a plaintiff can challenge the real-world enforcement of a forum selection bylaw. But that review happens when there is a genuine, extant controversy in which the forum selection bylaw is being applied. Under our Supreme Court's precedent in Stroud and Frantz, which this court must follow, the appropriate question now is simply whether the bylaws are valid under the DGCL, and whether they form facially valid contracts between the stockholders, the directors and officers, and the corporation.^[62]

The court turns to these questions now.

IV. Legal Analysis

A. The Board-Adopted Forum Selection Bylaws Are Statutorily Valid

Given this procedural context, the court structures its analysis to mirror the two facial claims of invalidity as they have been presented in the complaints. First, the court looks at Count I's challenge that the "bylaw[s are] invalid because [they are] beyond the authority granted in 8 Del. C. § 109(b)."^[63] As to that claim, the court must determine whether the adoption of the forum selection bylaws was beyond the board's authority in the sense that they do not address a proper subject matter under 8 Del. C. § 109(b), which provides that:

The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

Thus, the court must decide if the bylaws are facially invalid under the DGCL because they do not relate to the business of the corporations, the conduct of their affairs, or the rights of the stockholders.

After first making that determination, the court then addresses Count IV's challenge that "the bylaw[s are] not a valid and enforceable forum selection provision."^[64] That is, even if forum selection bylaws regulate proper subject matter under 8 Del. C. § 109(b), the plaintiffs allege that forum selection bylaws are contractually invalid because they have been unilaterally adopted by the board.^[65]

1. The Forum Selection Bylaws Regulate A Proper Subject Matter Under 8 Del. C. § 109(b)

Having challenged whether the bylaws are authorized by 8 Del. C. § 109(b), the plaintiffs have to confront the broad subjects that § 109(b) permits bylaws to address. The DGCL provides that bylaws may address any subject, "not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees."^[66] The most important consideration for a court in interpreting a statute is the words the General Assembly used in writing it.^[67] As a matter of easy linguistics, the forum selection bylaws address the "rights" of the stockholders, because they regulate where stockholders can exercise their right to bring certain internal affairs claims against the corporation and its directors and officers.^[68] They also plainly relate to the conduct of the corporation by channeling internal affairs cases into the courts of the state of incorporation, providing for the opportunity to have internal affairs cases resolved authoritatively by our Supreme Court if any party wishes to take an appeal.^[69] That is, because the forum selection bylaws address internal affairs claims, the subject matter of the actions the bylaws govern relates quintessentially to "the corporation's business, the conduct of its affairs, and the rights of its stockholders [qua stockholders]."

Perhaps recognizing the weakness of any argument that the forum selection bylaws fall outside the plain language of 8 Del. C. § 109(b), the plaintiffs try to argue that judicial gloss put on the language of the statute renders the bylaws facially invalid.^[70] The plaintiffs contend that the bylaws do not regulate permissible subject matters under 8 Del. C. § 109(b), because they attempt to regulate an "external" matter, as opposed to, an "internal" matter of corporate governance.^[71] The plaintiffs attempt to support this argument with a claim that traditionally there have only been three appropriate subject matters of bylaws: stockholder meetings, the board of directors and its committees, and officerships.^[72]

But even if one assumes that judicial statements could limit the plain statutory words in the way the plaintiffs claim (which is dubious), the judicial decisions do not aid the plaintiffs. The plaintiffs take a cramped view of the proper subject matter of bylaws.^[73] The bylaws of Delaware corporations have a "procedural, process-oriented nature."^[74] It is doubtless true that our courts have said that bylaws typically do not contain substantive mandates, but direct how the corporation, the board, and its stockholders may take certain actions.^[75] 8 Del. C. § 109(b) has long been understood to allow the corporation to set "self-imposed rules and regulations [that are] deemed expedient for its convenient functioning."^[76] The forum selection bylaws here fit this description. They are process-oriented, because they regulate where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain on behalf of herself or the corporation. The bylaws also clearly address cases of the kind that address "the business of the corporation, the conduct of its affairs, and . . . the rights or powers of its stockholders, directors, officers or employees," because they govern where internal affairs cases governed by state corporate law may be heard.^[77] These are the kind of claims most central to the relationship between those who manage the corporation and the corporation's stockholders.

By contrast, the bylaws would be regulating external matters if the board adopted a bylaw that purported to bind a plaintiff, even a stockholder plaintiff, who sought to bring a tort claim against the company based on a personal injury she suffered that occurred on the company's premises or a contract claim based on a commercial contract with the corporation. The reason why those kinds of bylaws would be beyond the statutory language of 8 Del. C. §109(b) is obvious: the bylaws would not deal with the rights and powers of the plaintiff-stockholder as a stockholder.^[78] As noted earlier, the defendants themselves read the forum selection bylaws in a natural way to cover only internal affairs claims brought by stockholders qua stockholders.

Nor is it novel for bylaws to regulate how stockholders may exercise their rights as stockholders. For example, an advance notice bylaw "requires stockholders wishing to make nominations or proposals at a corporation's annual meeting to give notice of their intention in advance of so doing."^[79] Like such bylaws, which help organize what could otherwise be a chaotic stockholder meeting, the forum selection bylaws are designed to bring order to what the boards of Chevron and FedEx say they perceive to be a chaotic filing of duplicative and inefficient derivative and corporate suits against the directors and the corporations. The similar purpose of the advance notice bylaws and the forum selection bylaws reinforce that forum selection bylaws have a proper relationship to the business of the corporation and the conduct of its affairs under 8 Del. C. § 109(b).^[80]

The plaintiffs' argument, then, reduces to the claim that the bylaws do not speak to a "traditional" subject matter, and should be ruled invalid for that reason alone. For starters, the factual premise of this argument is not convincing. The bylaws cannot fairly be argued to regulate a novel subject matter: the plaintiffs ignore that, in the analogous contexts of LLC agreements and stockholder agreements, the Supreme Court and this court have held that forum selection clauses are valid.^[81] But in any case, the Supreme Court long ago rejected the position that board action should be invalidated or enjoined simply because it involves a novel use of statutory authority. In Moran v. Household International in 1985, the plaintiff argued that a corporation could not use its powers to issue rights to purchase shares of preferred stock in the form of a shareholder rights plan—a.k.a. poison pill—the sole purpose of which was to allow the board to defend against tender offers addressed solely to stockholders.^[82] The Supreme Court rejected the appellants' argument that 8 Del. C. § 157 had never been used to authorize the issuance of rights for the purpose of defeating a hostile takeover.^[83] Rather, echoing its recent iconic decision in Unocal, the court reiterated that "our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs. Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited."^[84]

Just as the board of Household was permitted to adopt the pill to address a future tender offer that might threaten the corporation's best interests, so too do the boards of Chevron and FedEx have the statutory authority to adopt a bylaw to protect against what they claim is a threat to their corporations and stockholders, the potential for duplicative law suits in multiple jurisdictions over single events. As Moran makes clear, that a board's action might involve a new use of plain statutory authority does not make it invalid under our law, and the boards of Delaware corporations have the flexibility to respond to changing dynamics in ways that are authorized by our statutory law. Nor, in addressing this facial challenge, is it possible to conceive that choosing the most obviously reasonable forum—the state of incorporation, Delaware—so that internal affairs cases will be decided in the courts whose Supreme Court has the authoritative final say as to what the governing law means, somehow takes the forum selection bylaws outside of 8 Del C. § 109(b)'s broad authorizing language.^[85]

Furthermore, the bylaws here are subject to the same, plus even more, controls on their misuse than the pill found valid in Moran. Like a board that has adopted a poison pill in case of some future threat and can redeem it when a tender offer poses no threat, the boards of the companies in this case have reserved the right in the bylaw itself—as is traditional for any party affected by a contractual forum provision—to waive the corporation's rights under the bylaw in a particular circumstance in order to meet their obligation to use their power only for proper corporate purposes.^[86] And as with all exercises of fiduciary authority, the real-world application of a forum selection bylaw can be challenged as an inequitable breach of fiduciary duty.^[87] But, as a distinguished scholar has noted, "[t]he presumption is not that the [bylaw] is invalid upon adoption because it might, under some undefined and hypothetical set of later-evolving circumstances, be improperly applied."^[88]

And forum selection clauses have additional safeguards that poison pills do not have. For starters, unlike typical poison pills, board-adopted forum selection bylaws are subject, as will be discussed more later, to the most direct form of attack by stockholders who do not favor them: stockholders can simply repeal them by a majority vote.^[89] In addition, because the corporation must raise the forum selection clause as a jurisdictional defense if it wishes to obtain dismissal of a case filed in a different forum outside of the state selected in the bylaws, the enforceability of the forum selection bylaws will be analyzed under the Bremen test in any case where an affected stockholder plaintiff resists compliance, as the court will explain in more depth later.^[90] That is, the board must voluntarily submit the forum selection clause to the scrutiny of the courts if a plaintiff does not comply with it.

Therefore, the court concludes that forum selection bylaws are statutorily valid under Delaware law, and Count I of the plaintiffs' complaints is dismissed. The court now considers whether a forum selection bylaw is contractually invalid when adopted by the board unilaterally.

2. The Board-Adopted Bylaws Are Not Contractually Invalid As Forum Selection Clauses Because They Were Adopted Unilaterally By The Board

Despite the contractual nature of the stockholders' relationship with the corporation under our law, the plaintiffs argue, in Count IV of their complaints, that the forum selection bylaws by their nature are different and cannot be adopted by the board unilaterally. The plaintiffs' argument is grounded in the contention that a board-adopted forum selection bylaw cannot be a contractual forum selection clause because the stockholders do not vote in advance of its adoption to approve it.^[91] The plaintiffs acknowledge that contractual forum selection clauses are "prima facie valid" under The Bremen v. Zapata Off-Shore Co. and Ingres Corp. v. CA, Inc., and that they are presumptively enforceable.^[92] But, the plaintiffs say, the forum selection bylaws are contractually invalid in this case, because they were adopted by a board, rather than by Chevron's and FedEx's dispersed stockholders. The plaintiffs argue that this method of adopting a forum selection clause is invalid as a matter of contract law, because it does not require the assent of the stockholders who will be affected by it. Thus, in the plaintiffs' view, there are two types of bylaws: (i) contractually binding bylaws that are adopted by stockholders; (ii) non-contractually binding bylaws that are adopted by boards using their statutory authority conferred by the certificate of incorporation.^[93]

By this artificial bifurcation, the plaintiffs misapprehend fundamental principles of Delaware corporate law. Our corporate law has long rejected the so-called "vested rights" doctrine.^[94] That vested rights view, which the plaintiffs have adopted as their own, "asserts that boards cannot modify bylaws in a manner that arguably diminishes or divests pre-existing shareholder rights absent stockholder consent."^[95] As then-Vice Chancellor, now Justice, Jacobs explained in the Kidsco case, under Delaware law, where a corporation's articles or bylaws "put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment."^[96]

In an unbroken line of decisions dating back several generations, our Supreme Court has made clear that the bylaws constitute a binding part of the contract between a Delaware corporation and its stockholders.^[97] Stockholders are on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects.^[98] Such a change by the board is not extra-contractual simply because the board acts unilaterally; rather it is the kind of change that the overarching statutory and contractual regime the stockholders buy into explicitly allows the board to make on its own.^[99] In other words, the Chevron and FedEx stockholders have assented to a contractual framework established by the DGCL and the certificates of incorporation that explicitly recognizes that stockholders will be bound by bylaws adopted unilaterally by their boards.^[100] Under that clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws.^[101] The plaintiffs' argument that stockholders must approve a forum selection bylaw for it to be contractually binding is an interpretation that contradicts the plain terms of the contractual framework chosen by stockholders who buy stock in Chevron and FedEx. Therefore, when stockholders have authorized a board to unilaterally adopt bylaws, it follows that the bylaws are not contractually invalid simply because the board-adopted bylaw lacks the contemporaneous assent of the stockholders.^[102] Accordingly, the conclusion reached by the United States District Court for the Northern District of California in Galaviz v. Berg, a case on which the plaintiffs rely heavily—that board-adopted bylaws are not like other contracts because they lack the stockholders' assent— rests on a failure to appreciate the contractual framework established by the DGCL for Delaware corporations and their stockholders.^[103]

Even so, the statutory regime provides protections for the stockholders, through the indefeasible right of the stockholders to adopt and amend bylaws themselves. "[B]y its terms Section 109(a) vests in the shareholders a power to adopt, amend or repeal bylaws that is legally sacrosanct, i.e., the power cannot be non-consensually eliminated or limited by anyone other than the legislature itself."^[104] Thus, even though a board may, as is the case here, be granted authority to adopt bylaws, stockholders can check that authority by repealing board-adopted bylaws. And, of course, because the DGCL gives stockholders an annual opportunity to elect directors,^[105] stockholders have a potent tool to discipline boards who refuse to accede to a stockholder vote repealing a forum selection clause.^[106] Thus, a corporation's bylaws are part of an inherently flexible contract between the stockholders and the corporation under which the stockholders have powerful rights they can use to protect themselves if they do not want board-adopted forum selection bylaws to be part of the contract between themselves and the corporation.

And, as noted, precisely because forum selection bylaws are part of a larger contract between the corporation and its stockholders,^[107] and because bylaws are interpreted using contractual principles,^[108] the bylaws will also be subject to scrutiny under the principles for evaluating contractual forum selection clauses established by the Supreme Court of the United States in The Bremen v. Zapata Off-Shore Co., and adopted by our Supreme Court.^[109] In Bremen, the Court held that forum selection clauses are valid provided that they are "unaffected by fraud, undue influence, or overweening bargaining power," and that the provisions "should be enforced unless enforcement is shown by the resisting party to be `unreasonable.'"^[110] In Ingres, our Supreme Court explicitly adopted this ruling, and held not only that forum selection clauses are presumptively enforceable, but also that such clauses are subject to as-applied review under Bremen in real-world situations to ensure that they are not used "unreasonabl[y] and unjust[ly]."^[111] The forum selection bylaws will therefore be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable.^[112]

In fact, U.S. Supreme Court precedent reinforces the conclusion that forum selection bylaws are, as a facial matter of law, contractually binding. In Carnival Cruise Line v. Shute, the respondent, a cruise ship passenger from Washington State, was injured during the ship's travel between Los Angeles and Mexico.^[113] Mrs. Shute tried suing the company in Washington.^[114] But the fine print on the ticket contained a forum selection clause designating the courts of Florida as an exclusive forum for disputes.^[115] The Supreme Court held that the forum selection provision, although it was not subject to negotiation and was printed on the ticket she received after she purchased the passage, was reasonable, and thus enforceable.^[116]

Unlike cruise ship passengers, who have no mechanism by which to change their tickets' terms and conditions, stockholders retain the right to modify the corporation's bylaws.^[117] That plaintiffs did not vote on the bylaws at the time of their adoption is not relevant to the question of whether the bylaws are valid or contractually binding under Delaware law. Like any other bylaw, which may be unilaterally adopted by the board and subsequently modified by stockholders, these bylaws are enforced according to their terms. Thus, they will be enforced just like any other forum selection clause.^[118]

In sum, stockholders contractually assent to be bound by bylaws that are valid under the DGCL—that is an essential part of the contract agreed to when an investor buys stock in a Delaware corporation. Where, as here, the certificate of incorporation has conferred on the board the power to adopt bylaws, and the board has adopted a bylaw consistent with 8 Del. C. § 109(b), the stockholders have assented to that new bylaw being contractually binding. Thus, Count IV of the complaints cannot survive and the bylaws are contractually valid as a facial matter.

B. The Plaintiffs' Parade Of Horribles Are Not Facial Challenges To The Bylaws And Do Not Make The Bylaws Inconsistent With Law

The plaintiffs try to show that the forum selection bylaws are inconsistent with law and thus facially invalid by expending much effort on conjuring up hypothetical as-applied challenges in which a literal application of the bylaws might be unreasonable. For reasons the court has explained, these hypotheticals are not appropriately posed. Rather, if a plaintiff believes that a forum selection clause cannot be equitably enforced in a particular situation, the plaintiff may sue in her preferred forum and respond to the defendant's motion to dismiss for improper venue by arguing that, under Bremen, the forum selection clause should not be respected because its application would be unreasonable.^[119] The plaintiff may also argue that, under Schnell, the forum selection clause should not be enforced because the bylaw was being used for improper purposes inconsistent with the directors' fiduciary duties. The plaintiffs argue that following regular order in this manner puts a potential plaintiff in the predicament of potentially breaching the bylaws and suffering if the court upholds the forum selection clause and dismisses her case, rendering the plaintiff liable for damages. But that predicament is the same as is faced by any party that seeks to bring a case outside the forum designated in an applicable forum selection clause. And if a potential plaintiff does not have confidence in the strength of her argument under Bremen that the forum selection clause does not reasonably apply to the case she seeks to bring, she can always choose to file the case in the forum designated in the bylaws.

Review under Bremen and its progeny is genuine, not toothless.^[120] Indeed, the Bremen doctrine exists precisely to ensure that facially valid forum selection clauses are not used in an unreasonable manner in particular circumstances.^[121] Our Supreme Court and this court have in the past applied an analysis similar to Bremen to hold that forum selection clauses are situationally unenforceable. For example, in the TransAmerican Natural Gas case, Justice Berger, then-Vice Chancellor, declined to issue an injunction to enforce a forum selection clause designating this court as the exclusive forum for a contract dispute, because this court did not, as a matter of positive Delaware law, have subject matter jurisdiction over the controversy.^[122] The Supreme Court affirmed, holding that the litigation could proceed in the forum that the plaintiff in the non-Delaware action had chosen, which was a court of general jurisdiction.^[123]

But, the plaintiffs seek to undermine Bremen by using a facial challenge as a way to get this court to address conjured-up scenarios. Under our law, our courts do not render advisory opinions about hypothetical situations that may not occur.^[124] Rather, as in other contexts, the time for a plaintiff to make an as-applied challenge to the forum selection clauses is when the plaintiff wishes to, and does, file a lawsuit outside the chosen forum. At that time, a court will have a concrete factual situation against which to apply the Bremen test, or analyze, à la Schnell,^[125] whether the directors' use of the bylaws is a breach of fiduciary duty.

The absence of any principled basis to complete the law school hypotheticals posed by the plaintiffs is also made clear by the reality that the plaintiffs concede, as they must, that in the main, the forum selection bylaws will work without any problem.^[126] As noted earlier, in their opening brief, the defendants outlined the types of claims that the forum selection bylaws cover.^[127] Consistent with the plain language of the bylaws and the plaintiffs' own description of the covered claims in their complaints,^[128] the defendants' brief makes clear that the forum selection bylaws are addressed solely to internal affairs claims governed by state corporate law. In other words, the forum selection bylaws only regulate where a certain set of claims, relating to the internal affairs of the corporation and governed by the law of the state of incorporation, may be brought, not what claims.^[129]

In other words, the plaintiffs cannot even reasonably contend that the bylaws are intended to do more than address where claims clearly involving the internal affairs of the corporation and thus governed by the law of the state of incorporation must be brought. And the plaintiffs fail to make any reasoned argument that the forum selection bylaws cannot operate sensibly as to the bulk of typical internal affairs cases, where the traditional defendants are the directors and top officers of the corporations, subject to jurisdiction under 10 Del. C. § 3114.^[130]

Perhaps recognizing this weakness in their position, the plaintiffs conjure up situations where there might be a stray defendant or two who is not subject to personal jurisdiction in the state of incorporation, but may be susceptible to service elsewhere.^[131] In that situation, they say, the bylaws might not operate reasonably. But, of course, the plaintiffs ignore the reality that the bylaws might operate reasonably even then. For example, there may be no forum anywhere in which all possible defendants would be subject to personal jurisdiction. Nor is it apparent that it would be unreasonable to require a plaintiff to bring an internal affairs claim in the courts of the state of incorporation against the numerous corporate defendants who will be indisputably subject to the state's personal jurisdiction, simply because a few other defendants have to be sued elsewhere. And in the case of the most common type of litigation where filing of internal affairs claims in corporate litigation occurs—those involving challenges to proposed mergers—the plaintiffs ignore the multiple tools that exist to allow the courts of the state of incorporation to hold parties accountable to stockholders claiming that their rights were violated. This includes the broad reach of 10 Del. C. § 3114, which now covers not only all directors, but, as mentioned, also key officers,^[132] and other jurisdictional doctrines that usually make it possible for a plaintiff to hale all the key defendants before this state's courts.^[133] Not only that, the plaintiffs ignore that corporations such as Chevron and FedEx that have adopted forum selection bylaws will have an incentive to encourage officers, employees and affiliates not covered by § 3114 to consent to jurisdiction in the forum identified by the bylaws, and can accomplish that easily by conditioning the provision of advancement and indemnification on assent to jurisdiction in Delaware over the types of claims covered by the bylaws, or by including consent-to-jurisdiction provisions in employment agreements.

Similarly, the plaintiffs' attempts to show that there might be situations when the forum selection bylaws would not operate reasonably because they could somehow preclude a plaintiff from bringing a claim that must be brought exclusively in a federal court also is inappropriate and unconvincing as a way to show that the forum selection bylaws are facially invalid. For one thing, these arguments do not even pertain to the Chevron bylaw, which was amended to allow a filing in the federal courts of the state of incorporation. For another thing, it bears repeating that in the main, and as the plaintiffs themselves concede,^[134] the kind of cases in which claims covered by the forum selection clause predominate are already overwhelmingly likely to be resolved by a state, not federal, court. And as with the issue of personal jurisdiction, the plaintiffs ignore a number of factors that suggest that their hypothetical concern that the forum selection clause will operate unreasonably is overstated. For example, it is common for derivative actions to be filed in state court on behalf of corporations coincident to the filing of federal securities claims exclusively within the jurisdiction of the federal courts.^[135] And with good reason. The corporation is usually a defendant in the federal action. Any stockholder seeking to bring a derivative suit on behalf of the corporation has to act in the best interest of the corporation and cannot therefore sue it for damages simultaneously.^[136] In these situations, the derivative suits typically seek recompense from the directors on behalf of the corporation for any harm the corporation may suffer if it has to pay damages or incur other loss because the directors caused the corporation to breach the securities laws.^[137] It is not at all evident that in these situations, the application of the bylaws would operate unreasonably. Indeed, the strength of Bremen and situational fiduciary duty review is that any such argument is presented in an actual case with concrete facts.

On their face, neither of the forum selection bylaws purports in any way to foreclose a plaintiff from exercising any statutory right of action created by the federal government. Rather, the forum selection bylaws plainly focus on claims governed by the internal affairs doctrine and thus the law of the state of incorporation. In the event that a plaintiff seeking to bring a claim within the exclusive jurisdiction of the federal courts is met with a motion to dismiss because of the forum selection clause, the plaintiff will have the most hospitable forum possible to address the motion by pressing an argument that the bylaw cannot operate to foreclose her suit—a federal court. For example, if a claim under SEC Rule 14a-9 was brought against FedEx and its board of directors in federal court and the defendants moved to dismiss because of the forum selection clause, they would have trouble for two reasons.^[138] First, a claim by a stockholder under federal law for falsely soliciting proxies does not fit within any category of claim enumerated in FedEx's forum selection bylaw. Thus, FedEx's bylaw is consistent with what has been written about similar forum selection clauses addressing internal affairs cases: "[Forum selection] provisions do not purport to regulate a stockholder's ability to bring a securities fraud claim or any other claim that is not an intra-corporate matter."^[139] Second, the plaintiff could argue that if the board took the position that the bylaw waived the stockholder's rights under the Securities Exchange Act, such a waiver would be inconsistent with the antiwaiver provisions of that Act, codified at 15 U.S.C. § 78cc.^[140] But, the court declines to wade deeper into imagined situations involving multiple "ifs" because rulings on these situationally specific kind of issues should occur if and when the need for rulings is actually necessary.^[141]

As a distinguished scholar has pointed out, there likely are pragmatic solutions to the imagined scenarios that the plaintiffs cite, which would both respect the forum selection bylaws' requirement that state law internal affairs claims be adjudicated in the courts of the state of incorporation, while preserving any substantive claims that must be brought in federal court.^[142] But, for present purposes, the key is that forum selection bylaws, like other forum selection clauses, are not facially invalid because they might operate in a problematic way in some future situation. The situational review Bremen requires, and the analogous protections of fiduciary duty review under cases like Schnell, exist to deal with real-world concerns when they arise in real-world and extant disputes, rather than hypothetical and imagined future ones.

The wisdom of declining to opine on hypothetical situations that might or might not come to pass is evident. The waiver provision in the bylaws also counsels against the need to do that, as by that tool, the board, as the statutory instrumentality charged with advancing the corporation's best interests, is empowered to permit a plaintiff with a claim within the exclusive jurisdiction of a federal court, but which arguably falls within the reach of the bylaw's language, to proceed. And, the prospective plaintiff may also ask the board to waive the bylaw in a particular circumstance, and if the prospective plaintiff believes that the board's refusal to waive amounts to a breach of fiduciary duty, the plaintiff may sue for an injunction seeking the board to be required to waive the bylaw's application. But, under Delaware law, the presumption is not that the Chevron and FedEx directors will not use their waiver authority in good faith and for the best interests of the corporations and their stockholders; it is that they will.^[143] In view of that reality, and the fact that Chevron's and FedEx's stated reasons for the bylaws have nothing to do with foreclosing anyone from exercising any substantive federal rights, but only with channeling internal affairs cases governed by state law to the state of incorporation's courts, there is no basis on a facial challenge to assume that the bylaws can never operate reasonably.^[144]

But the main point remains the mundane but important one. As with other forum selection clauses, Bremen provides protection in the event that a plaintiff believes that the clause is operating in a situationally unreasonable or unlawful manner.^[145] And as with the case of bylaws generally, the board's use of its powers under the bylaw is subject to challenge as inconsistent with its fiduciary duties in the event of an actual dispute.^[146]

V. Conclusion

For these reasons, the court finds that the challenged bylaws are statutorily valid under 8 Del. C. § 109(b), and are contractually valid and enforceable as forum selection clauses. Judgment is entered for the defendants dismissing Counts I and IV of the plaintiffs' complaints against Chevron and FedEx, with prejudice. IT IS SO ORDERED.

[1] 8 Del. C. § 109(a) ("[A]ny corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors . . . .").

[2] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972).

[3] See CTS Corp. v. Dynamics Corp., 481 U.S. 69, 90 (1987) ("[A] corporation—except in the rarest situations—is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation."); Edgar v. MITE Corp., 457 U.S. 624, 645 (1982) ("The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands." (citation omitted)); see also Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 92 (1991) (holding that in a derivative suit "the scope of the demand requirement embodies the incorporating State's allocation of governing powers within the corporation"); Burks v. Lasker, 441 U.S. 471, 478 (1979) ("[T]he first place one must look to determine the powers of corporate directors is in the relevant State's corporation law." (citations omitted)).

[4] Joseph A. Grundfest & Kristen A. Savelle, The Brouhaha over Intra-Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis, 68 Bus. Law. 325, 330 (2013) [hereinafter Grundfest & Savelle, Forum Selection Provisions].

[5] See Edgar, 457 U.S. at 645; VantagePoint Venture P'rs 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005).

[6] See 8 Del. C. § 109(b) ("The bylaws may contain any provision, not inconsistent with law. . . ."); Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010) (holding that forum selection clauses are presumptively valid and enforceable under Delaware law).

[7] For two cases making this clear, eighty years apart, see Airgas, Inc. v. Air Products & Chemicals, Inc., 8 A.3d 1182, 1188 (Del. 2010), and Lawson v. Household Finance Corp., 152 A. 723, 726 (Del. 1930).

[8] 8 Del. C. § 109(a).

[9] See, e.g., Centaur P'rs, IV v. Nat'l Intergp., Inc., 582 A.2d 923, 928 (Del. 1990).

[10] 674 A.2d 483 (Del. Ch. 1995).

[11] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972).

[12] 8 A.3d 1143 (Del. 2010).

[13] 3 Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Officers 3498 (6th ed. 2009) (discussing suits over bylaws).

[14] 501 A.2d 401, 407 (Del. 1985).

[15] 606 A.2d 75, 96 (Del. 1992) (citing STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1137 n.2 (Del. 1991); Ala. By-Prods. Corp. v. Neal, 588 A.2d 255, 258 n.1 (Del. 1991)).

[16] E.g., Frantz, 501 A.2d at 407.

[17] Tr. of Oral Arg. 64:13-65:6.

[18] Nat'l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., ___ A.3d ___, 2013 WL 2325602 (Del. May 29, 2013).

[19] Chevron Compl. ¶ 21.

[20] FedEx Compl. ¶ 20.

[21] Pls.' Revised Supplement to Compl. ¶¶ 1-2 [hereinafter "Chevron Supp."] (quoting Chevron Corp., Current Report (Form 8-K) (Mar. 28, 2012)).

[22] Id.

[23] Defs.' Opening Br. 30-31 (quoting Edgar v. MITE Corp., 457 U.S. 624, 645 (1982)) (other citations omitted).

[24] See also Grundfest & Savelle, Forum Selection Provisions, at 370-73.

[25] Defs.' Opening Br. at 6-9.

[26] Id. at 9-22.

[27] Id.; see also 28 U.S.C. § 1332(c)(1) (defining corporate citizenship for the purposes of federal diversity jurisdiction).

[28] Defs.' Opening Br. 6-9.

[29] Id.

[30] Id.

[31] Id. at 9-22 (citing Frederick H. Alexander & Daniel D. Matthews, The Multi-Jurisdictional Stockholder Litigation Problem and the Forum Selection Solution, 26 Corporate Counsel Weekly 19 (May 11, 2011)); Grundfest & Savelle, Forum Selection Provisions; Edward B. Micheletti & Jenness E. Parker, Multi-Jurisdictional Litigation: Who Caused This Problem, and Can It Be Fixed?, 37 Del. J. Corp. L. 1 (2012); Mark Lebovitch et al., Chaos: A Proposal To Improve Organization and Coordination in Multi-Jurisdictional Merger-Related Litigation (Dec. 1, 2011), http://www.blbglaw.com/misc_files/MakingOrderoutofChaos).

[32] Defs.' Opening Br. 9 ("The detriments of multi-jurisdictional duplicative litigation are significant.").

[33] Id. at 21 (citing Grundfest & Savelle, Forum Selection Provisions, at 326).

[34] Cf. CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 240 (Del. 2008) ("[W]e express no view on whether the [b]ylaw as currently drafted, would create a better governance scheme from a policy standpoint.").

[35] Boilermakers Local 154 Ret. Fund v. Priceline.com, Inc., C.A. No. 7216-CS (Del. Ch. Feb. 6, 2012); Boilermakers Local 154 Ret. Fund v. Danaher Corp., C.A. No. 7218-CS (Del. Ch. Feb. 6, 2012); Boilermakers Local 154 Ret. Fund v. CurtissWright Corp., C.A. No. 7219-CS (Del. Ch. Feb. 6, 2012); Boilermakers Local 154 Ret. Fund v. Chevron Corp., C.A. No. 7220-CS (Del. Ch. Feb. 6, 2012); Sutton v. AutoNation, Inc., C.A. No. 7221-CS (Del. Ch. Feb. 6, 2012); Singh v. Navistar Int'l Corp., C.A. No. 7222-CS (Del. Ch. Feb. 6, 2012); Stead v. Franklin Res., Inc., C.A. No. 7223-CS (Del. Ch. Feb. 7, 2012); City of Sunrise Gen. Emps.' Pension Plan v. Super. Energy Servs., Inc., C.A. No. 7224-CS (Del. Ch. Feb. 7, 2012); Laborers' Local No. 1174 Pension Fund v. SPX Corp., C.A. No. 7225-CS (Del. Ch. Feb. 7, 2012); IClub Inv. P'ship v. FedEx Corp., C.A. No. 7238-CS (Del. Ch. Feb. 13, 2012); Neighbors v. Air Prods. & Chems., Inc., C.A. No. 7240-CS (Del. Ch. Feb. 13, 2012); Schellman v. Jack in the Box, Inc.,C.A. No. 7274-CS (Del. Ch. Feb. 23, 2012).

A separate derivative complaint against the board of directors of Chevron, relating to the board's enactment of the forum selection bylaw, was filed in the United States District Court for the Northern District of California on March 30, 2012. That action was stayed in favor of this Delaware litigation. Bushansky v. Armacost, 2012 WL 3276937 (N.D. Cal. Aug. 9, 2012).

[36] Letter to the Ct. from Counsel for Defs. (Oct. 9, 2012).

[37] Letter to the Ct. from Counsel for Pls. (Oct. 11, 2012).

[38] Compare Galaviz v. Berg, 763 F. Supp. 2d 1170, 1174-75 (N.D. Cal. 2011) (ruling that a board-adopted forum selection clause was unenforceable), with In re Revlon, Inc. S'holders Litig., 990 A.2d 940, 960 & n.8 (Del. Ch. 2010) (suggesting that corporations could adopt "charter provisions selecting an exclusive forum for intra-entity disputes," but properly noting that "[t]he issues implicated by an exclusive forum selection provision must await resolution in an appropriate case").

[39] See Order Regarding Limited Coordination & Scheduling (Nov. 19, 2012).

[40] Pls.' Br. in Opp'n 30 (citation omitted).

[41] The plaintiffs have also ignored the appropriate procedural mechanism, Court of Chancery Rule 59(f), to reargue the court's October ruling in which it consolidated the cases to address the facial validity claims. Having failed to avail themselves of the appropriate procedural mechanism, the plaintiffs have waived this procedural argument. See McDaniel v. DaimlerChrysler Corp., 860 A.2d 321, 323 (Del. 2004). For that reason alone, the plaintiffs' argument that the court cannot address the consolidated legal issues must fail.

[42] Pls.' Br. in Opp'n 29-30.

[43] See Order Regarding Limited Coordination & Scheduling (Nov. 19, 2012) ("Plaintiffs shall file their revised Supplement to the Complaint . . . . The Chevron Defendants will agree that the Revised Supplement shall become part of the Complaint[.]").

[44] Id. (providing a schedule for a motion for judgment on the pleadings and permitting the plaintiffs to file supplemental pleadings); see also Tr. of Office Conf. (Oct. 31, 2012) (granting the defendants' request to consolidate the cases to address the facial validity of the forum selection bylaws before proceeding with the other claims).

[45] Order Regarding Limited Coordination & Scheduling (Nov. 19, 2012).

[46] Chevron Compl. ¶¶ 48-56, FedEx Compl. ¶¶ 49-57 (Count I); Chevron Compl. ¶¶ 73-81, FedEx Compl. ¶¶ 72-80 (Count IV).

[47] See Tr. of Office Conf. 24-26, 44-45 (Oct. 31, 2012).

[48] Lions Gate Entm't Corp. v. Image Entm't Inc., 2006 WL 1668051, at *6-7 (Del. Ch. June 5, 2006).

[49] Pls.' Br. in Opp'n 29.

[50] Id. (citing JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 338 (Del. Ch. 2008); United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007)).

[51] E.g., Pls.' Br. in Opp'n 5-24, 32-36; Chevron Compl. ¶¶ 59-67, FedEx Compl. ¶¶ 58-66 (Count II) (the bylaws conflict with Delaware statutes); Chevron Compl. ¶¶ 68-72, FedEx Compl. ¶¶ 67-71 (Count III) (the bylaws improperly grant jurisdiction over all stockholders); Chevron Compl. ¶¶ 82-87, FedEx Compl. ¶¶ 81-86 (Count V) (the bylaws require claims to be brought where the court does not have jurisdiction over all defendants); Chevron Compl. ¶¶ 88-99, FedEx Compl. ¶¶ 87-98 (Count VI) (the bylaws impinge on jurisdiction of federal courts); Chevron Supp. ¶¶ 51-52 (Count IX) (the amended Chevron bylaw impinges on federal jurisdiction).

[52] Chevron Compl. ¶¶ 48-56, FedEx Compl. ¶¶ 49-57 (Count I); Chevron Compl. ¶¶ 73-81, FedEx Compl. ¶¶ 72-80 (Count IV) (capitalization omitted).

[53] See JANA, 954 A.2d at 344.

[54] Frantz, 501 A.2d at 407 (citation omitted); see also Hollinger Int'l, Inc. v. Black, 844 A.2d 1022, 1080-83 (Del. Ch. 2004) (distinguishing between the board's legal authority to adopt a bylaw and the board's equitable use of that authority), aff'd, 872 A.2d 559 (Del. 2005); R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations & Business Organizations § 1.10 [hereinafter Balotti & Finkelstein, Corporations] (explaining that courts attempt to interpret "by-laws in harmony" with the corporation's certificate of incorporation and positive law, and thus hold a bylaw to be invalid when a "conflict is unavoidable").

[55] Frantz, 501 A.2d at 407; Edward P. Welch et al., Folk on the Delaware General Corporation Law § 109.4 (2009) [hereinafter Welch et al., Folk on the DGCL] ("Bylaws are presumed to be valid. Courts will interpret a bylaw in a manner consistent with the law rather than striking it down. The rules of construction used to interpret statutes, contracts, and other written instruments apply to bylaws." (citations omitted)). Of course, often, claims about the facial invalidity of a provision come to the courts when a party challenges the legislature's power to enact a statute. Those principles are equally applicable here. See, e.g., Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 342-43 (Del. 1983) (noting that "the rules which are used to interpret statutes, contracts, and other written instruments are applicable when construing corporate charters and bylaws" (emphasis added)); Downs v. Jacobs, 272 A.2d 706, 707 (Del. 1970) ("Courts presume every legislative act constitutional and indulge every intendment in favor of validity."); State v. Hobson, 83 A.2d 846, 851 (Del. 1951) ("Even if the Delaware statute, read literally, were susceptible of the construction which defendant urges, it would be our duty to reject that construction, since we are required, as between two possible constructions, to adopt the one which will uphold its validity."); see also, e.g., R.M. v. V.H., 2006 WL 1389864, at *8 (Del. Fam. Ct. Jan. 19, 2006) ("A party may challenge a statute as unconstitutional on its face or as applied to a particular set of facts. A facial challenge is the most difficult to bring successfully because the challenger must establish that there is no set of circumstances under which the statute would be valid."); accord United States v. Salerno, 481 U.S. 739, 745 (1987) (describing a facial challenge as the "most difficult" challenge to succeed on because the statute must not operate lawfully in any circumstances).

[56] Stroud v. Grace, 606 A.2d 75, 79 (Del. 1992); Frantz, 501 A.2d at 407.

[57] Welch et al., Folk on the DGCL § 109.3.1 ("The party asserting that bylaws were not properly adopted bears the burden to prove it.").

[58] E.g., Stroud, 606 A.2d at 79 ("The validity of corporate action under [a bylaw] must await its actual use.").

[59] Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del. 1971); see also Moran v. Household Int'l, Inc., 500 A.2d 1346, 1357 (Del. 1985) (concluding that although the board had the power to adopt a poison pill, the "ultimate response" of the board to a takeover must be judged by the "[d]irectors' actions at that time"); accord Stroud, 606 A.2d at 96 ("It is not an overstatement to suggest that every valid by-law is always susceptible to potential misuse. Without a showing of abuse . . . we must . . . uphold the validity of [a bylaw].").

[60] Welch et al., Folk on the DGCL § 109.4; Balotti & Finkelstein, Corporations § 1.10.

[61] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972).

[62] The Frantz and Stroud approach is the traditional one. Although it differs from the approach taken by the Supreme Court in the 2008 CA case, the Supreme Court in that case cited Frantz and Stroud approvingly and as good law, stating that the novel posture of the case dictated the different standard of review. CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 238 (Del. 2008) ("Were this issue being presented in the course of litigation involving the application of the Bylaw to a specific set of facts, we would start with the presumption that the Bylaw is valid and, if possible, construe it in a manner consistent with the law. The factual context in which the Bylaw was challenged would inform our analysis, and we would `exercise caution [before] invalidating corporate acts based upon hypothetical injuries . . . .' (citing Frantz, 501 A.2d at 407, and quoting Stroud, 606 A.2d at 79)). The reason for this different approach may be intuited. In CA, the Supreme Court was operating under a novel constitutional amendment that gave it the authority to answer questions posed to it by the Securities and Exchange Commission on a limited paper record, without the full benefit of context that comes from traditional adversarial litigation. See 76 Del. Laws ch. 37, § 1 (2007) (amending Del. Const. art. IV, § 11(8)). The Supreme Court may have feared that by giving a federal regulatory body a flat indication that a bylaw was "valid" or not based on a record consisting of a long letter, it would create the false impression that bylaws of the kind at issue were immune from challenge in all circumstances. Thus, rather than risk such an overbroad implication, the court took a different approach, finding that in that unusual context the variance from the settled standard was the more modest approach. In the more traditional context here of a facial challenge to the validity of a bylaw, the more modest, restrained, and prudent approach is the traditional one under Frantz and Stroud. That approach involves judicial reticence to chill corporate freedom by condemning as invalid a bylaw that is consistent with the board's statutory and contractual authority, simply because it might be possible to imagine situations when the bylaw might operate unreasonably. By long-standing, settled law, such as-applied challenges are to be raised later, when real-world circumstances give rise to a genuine, concrete dispute requiring judicial resolution.

[63] Chevron Compl. ¶¶ 50-58, FedEx Compl. ¶¶ 49-57.

[64] Chevron Compl. ¶¶ 73-81, FedEx Compl. ¶¶ 72-80.

[65] Chevron Compl. ¶ 74; FedEx Compl. ¶ 73.

[66] 8 Del. C. § 109(b).

[67] E.g., New Cingular Wireless PCS v. Sussex Cty. Bd. of Adjustment, 65 A.3d 607, 611 (Del. 2013) ("It is axiomatic that a statute . . . is to be interpreted according to its plain and ordinary meaning." (citation omitted)); Scattered Corp. v. Chi. Stock Exch., Inc., 671 A.2d 874, 877 (Del. Ch. 1994) ("A determination of the General Assembly's intent must, where possible, be based on the language of the statute itself. In divining the legislative intent, statutory language, where possible, should be accorded its plain meaning." (citations omitted)).

[68] CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 236-37 (Del. 2008).

[69] See Grundfest & Savelle, Forum Selection Provisions, at 374.

[70] E.g., CA, Inc., 953 A.2d at 235 & n.15; Hollinger Int'l, Inc. v. Black, 844 A.2d 1022, 1078-79 & n.128 (Del. Ch. 2004), aff'd, 872 A.2d 559 (Del. 2005); Gow v. Consol. Coppermines Corp., 165 A. 136, 140 (Del. Ch. 1933).

[71] Pls.' Br. in Opp'n 39-40.

[72] Id. at 44.

[73] See, e.g., Hollinger, 844 A.2d at 1078 ("The DGCL is intentionally designed to provide directors and stockholders with flexible authority [to adopt bylaws], permitting great discretion for private ordering and adaptation. That capacious grant of power is policed in large part by the common law of equity, in the form of fiduciary duty principles."); Balotti & Finkelstein, Corporations § 1.10 ("By-laws that reasonably regulate broader [stockholder] rights may be valid, especially if courts follow the general rule of construction and attempt to harmonize the by-law regulation and the broader right." (citation omitted)).

[74] CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 236-37 (Del. 2008).

[75] Id.

[76] Gow v. Consol. Coppermines Corp., 165 A. 136, 140 (Del. Ch. 1933).

[77] 8 Del. C. § 109(b).

[78] See also Grundfest & Savelle, Forum Selection Provisions, at 369-70 ("[A]s much as contract rights can legitimately be regulated through forum selection provisions, it follows that stockholders' rights to pursue intra-corporate claims can also be regulated by [forum selection] provisions. To be sure, this conclusion would arguably not follow (or not hold as strongly) if the forum selection provision sought to regulate the right to pursue causes of action that were not intra-corporate in nature because then the provision would not be seeking to regulate the stockholder's rights as a stockholder and would be extended beyond the contract that defines and governs the stockholders' rights." (emphasis added)).

[79] JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 344 (Del. Ch. 2008) (citation omitted), aff'd, 947 A.2d 1120 (Del. 2008) (Table).

[80] The plaintiffs seek to bolster their argument that the forum selection bylaws go beyond the board's statutory authority under 8 Del. C. § 109(b) by claiming that the bylaws regulate not only the "rights and powers of [the] stockholders," as is permitted under the statutory text, but also the rights and powers of former stockholders. Chevron Compl. ¶ 51; FedEx Compl. ¶ 50. The plaintiffs cite the example of stockholders who are cashed out in a short-form merger, and, having been cashed out, sue the board for a breach of fiduciary duty. As with many of the plaintiffs' challenges to the bylaws, this is properly seen as an as-applied challenge, which should be addressed when the issue is actually ripe. But in any case, the plaintiffs do not cite any rule of statutory construction that justifies reading 8 Del. C. § 109(b) in the contorted fashion they propose. The only reason that so-called "former stockholders" can sue under 8 Del. C. § 253 is because they were stockholders at the time of the merger. In other words, it is not the case that a bylaw in effect at the time that a stockholder's internal affairs claim arose cannot bind that stockholder simply because the transaction she is challenging resulted in her no longer being a stockholder. That bylaw continues to bind her because her right to sue continues to be based on her status as a stockholder.

[81] Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286 (Del. 1999); Baker v. Impact Hldg., Inc., 2010 WL 1931032 (Del. Ch. May 13, 2010).

[82] Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del. 1985).

[83] Id. at 1351.

[84] Id. (quoting Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 957 (Del. 1985)).

[85] See Edgar v. MITE Corp., 457 U.S. 624, 645 (1982) ("The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders . . . .").

[86] Both bylaws begin: "Unless the Corporation consents in writing to the selection of an alternative forum . . . ." Chevron Supp. ¶ 1; FedEx Compl. ¶ 20.

[87] Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971).

[88] Grundfest & Savelle, Forum Selection Provisions, at 331.

[89] See 8 Del. C. § 109(a).

[90] See The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972); Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010); see also Grundfest & Savelle, Forum Selection Provisions, at 378 ("[F]orum selection bylaws are perhaps unique among all bylaws in that they can never be enforced by the corporation unless the corporation triggers prior judicial scrutiny designed to assure that the provision does not violate any legitimate stockholder right. This fact stands in sharp contrast to all other bylaw provisions that allow boards to act without first petitioning for judicial relief.").

[91] Pls.' Br. in Opp'n 49-50.

[92] Bremen, 407 U.S. at 10; Ingres, 8 A.3d 1143.

[93] Although the plaintiffs' argument suggests that a forum selection provision accomplished by a certificate amendment would be more legitimate in some normative sense because stockholders approved the amendment, the plaintiffs ignore that a certificate provision is harder for stockholders to reverse. See 8 Del. C. § 242(b)(1) (requiring a board resolution and stockholder vote for a proper amendment to the corporation's certificate of incorporation). By contrast, in the case of a board-adopted forum selection bylaw, the stockholders can act unilaterally to amend or repeal the provision. Id. § 109(a) ("After a corporation other than a nonstock corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote."). For present purposes, however, the issue is not whether someone might deem it more legitimate in some sense to proceed by an amendment to the certificate of incorporation rather than by a bylaw. That decision was for the Chevron and FedEx boards in the first instance, and the stockholders have multiple tools to hold the boards accountable if the stockholders disagree with it.

[94] See, e.g., Fed. United Corp. v. Havender, 11 A.2d 331, 335 (Del. 1940) (holding that preferred stockholders did not have a "vested" right to accrued dividends).

[95] Grundfest & Savelle, Forum Selection Provisions, at 376.

[96] Kidsco Inc. v. Dinsmore, 674 A.2d 483, 492 (Del. Ch. 1995) (emphasis added) (citing Roven v. Cotter, 547 A.2d 603, 608 (Del. Ch. 1988)); see also Willam Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 4176 (updated 2012) ("It is presumed that a person who becomes a shareholder in, or a member of, a corporation does so with knowledge and implied assent that its bylaws may be amended." (citations omitted)).

[97] Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010); Centaur P'rs, IV v. Nat'l Intergp., Inc., 582 A.2d 923, 928 (Del. 1990); Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 342-43 (Del. 1983); Lawson v. Household Fin. Corp., 152 A. 723, 726 (Del. 1930).

[98] Kidsco, 674 A.2d at 492-93.

[99] Stockholders likewise agree that a requisite majority of other stockholders may adopt bylaws with which they do not agree. A dissenting stockholder can no more object to the authority of a board to adopt a bylaw than it could object to the requisite majority of stockholders adopting a bylaw.

[100] Kidsco, 674 A.2d at 492-93 ("[T]his Court has held that where a corporation's by-laws put all on notice that the by-laws may be amended at any time, no vested rights can arise that would contractually prohibit an amendment."); see also Roven, 547 A.2d at 608; accord Centaur P'rs, 582 A.2d at 928 ("Corporate charters and by-laws are contracts among the shareholders of a corporation . . . .").

[101] CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 231 (Del. 2008) (discussing the power of a board to adopt bylaws without stockholder assent under the contractual framework of the DGCL).

[102] Kidsco, 674 A.2d at 492-93; see also 8 Del. C. § 109(b).

[103] 763 F. Supp. 2d 1170, 1174 (N.D. Cal. 2011); see Grundfest & Savelle, Forum Selection Provisions, at 407 ("[I]f the Galaviz analysis stands then much of standard corporate law practice regarding the amendment of bylaws must fall, and much larger bodies of corporate law must be rewritten.").

[104] CA, Inc., 953 A.2d at 232.

[105] See 8 Del. C. § 211.

[106] E.g., MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1127 (Del. 2003) ("This Court has repeatedly stated that, if the stockholders are not satisfied with the management or actions of their elected representatives on the board of directors, the power of corporate democracy is available to the stockholders to replace the incumbent directors when they stand for re-election." (citations omitted)).

[107] E.g., Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010).

[108] E.g., Centaur P'rs, IV v. Nat'l Intergp., Inc., 582 A.2d 923, 928 (Del. 1990).

[109] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972); Nat'l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., ___ A.3d ___, 2013 WL 2325602, at *6 (Del. May 29, 2013) (applying the Bremen test); Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1146 (Del. 2010) (same).

[110] Bremen, 407 U.S. at 10 (citations omitted).

[111] Ingres, 8 A.3d at 1146 (internal quotation marks and citations omitted).

[112] Bremen, 407 U.S. at 15.

[113] Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 588 (1991).

[114] Id.

[115] Id. at 587-88.

[116] Id. at 594-95.

[117] Grundfest & Savelle, Forum Selection Provisions, at 407.

[118] See Nat'l Indus. Gp. (Hldg.) v. Carlyle Inv. Mgmt. L.L.C., ___ A.3d ___, 2013 WL 2325602, at *6 (Del. May 29, 2013).

[119] See The Bremen v. Zapata Offshore Co., 407 U.S. 1, 15 (1972).

[120] See, e.g., Doe 1 v. AOL, LLC, 552 F.3d 1077 (9th Cir. 2009) (holding that a forum selection clause was unenforceable, because it barred plaintiffs from bringing a consumer class action under California law); Cent. Nat'l-Gottesman, Inc. v. M.V. "Gertrude Oldendorff," 204 F. Supp. 2d 675 (S.D.N.Y. 2002) (holding that a forum selection clause requiring the plaintiff to litigate abroad was unenforceable because the plaintiff would be deprived of statutory remedies). See generally 14D Charles Alan Wright et al., Federal Practice & Procedure § 3803.1 n.5 (3d ed. updated 2013) (collecting federal cases where forum selection clauses were not enforced).

[121] Bremen, 407 U.S. at 17-18.

[122] El Paso Natural Gas Co. v. TransAm. Natural Gas Corp., 1994 WL 248195 (Del. Ch. May 31, 1994).

[123] El Paso Natural Gas Co. v. TransAm. Natural Gas Corp., 669 A.2d 36 (Del. 1995). For other cases in which the courts of this state have declined to enforce forum selection clauses, see Aveta, Inc. v. Colon, 942 A.2d 603, 607 n.7 (Del. Ch. 2008), in which the Court of Chancery held that a forum selection clause was unenforceable, applying a standard "probably tantamount to the federal [Bremen] standard"; and Brandywine Balloons, Inc. v. Custom Computer Service, Inc., 1989 WL 63968, at *4 (Del. Super. Ct. June 13, 1989), in which the Superior Court denied a motion to dismiss a suit under a forum selection clause, on the ground that enforcing the clause "would seriously impair the plaintiff's ability to pursue his cause of action" (citation and internal quotation marks omitted).

[124] See, e.g., Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 51 (Del. 1993) ("It is the nature of the judicial process that we decide only the case before us . . . ."); Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479 (Del. 1989) ("[T]his Court's jurisdiction . . . does not require us to entertain suits seeking an advisory opinion or an adjudication of hypothetical questions . . . ." (citation and internal quotation marks omitted)); see also Opinion of the Justices, 314 A.2d 419 (Del. 1973) (declining to issue an advisory opinion on the ground that such an opinion was not authorized under 10 Del. C. § 141).

[125] Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437 (Del. 1971).

[126] Tr. of Oral Arg. 64:13-65:6.

[127] Defs.' Opening Br. 30-31.

[128] Chevron Supp. ¶¶ 1, 28-31; FedEx Compl. ¶¶ 20-22; see also Pls.' Br. in Opp'n 4-5.

[129] See Grundfest & Savelle, Forum Selection Provisions, at 370 ("[Forum selection] provisions do not purport to regulate a stockholder's ability to bring a securities fraud claim or any other claim that is not an intra-corporate matter, and the dominant forms of [forum selection] provisions are drafted expressly to preclude such applications."); id. at 373 ("Because the substantive resolution of these intra-corporate disputes are, pursuant to the internal affairs doctrine, governed by the laws of the chartering state, [forum selection] provisions cannot at all influence the substantive law governing the resolution of the underlying disputes.").

[130] 10 Del. C. § 3114 (a)-(b) (providing that nonresident directors and top officers of Delaware corporations consent to the appointment of the corporation's agent or the Secretary of State to receive service of process).

[131] Chevron Compl. ¶¶ 82-87, FedEx Compl. ¶¶ 81-86 (Count V).

[132] See 74 Del. Laws ch. 83, § 3 (2003) (codified at 10 Del. C. § 3114(b)).

[133] These doctrines include the aiding and abetting and conspiracy theories used in conjunction with the long-arm statute, 10 Del. C. § 3104. See, e.g., Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027-28 (Del. 2012) (applying the conspiracy theory of jurisdiction in conjunction with 10 Del. C. § 3104); Hercules Inc. v. Leu Trust & Banking (Bahs.) Ltd., 611 A.2d 476, 481-82 (Del. 1992) (same); In re Am. Int'l Gp., Inc., 965 A.2d 763, 814 (Del. Ch. 2009) ("The conspiracy theory of jurisdiction has often been used by plaintiffs in concert with . . . 10 Del. C. § 3104."); see also HMG/Courtland Props., Inc. v. Gray, 729 A.2d 300, 308 (Del. Ch. 1999) (noting that the agency, alter ego, and conspiracy theories can be used in conjunction with 10 Del. C. § 3104 "to advance Delaware's interest in holding aiders and abettors accountable"). Many other potential defendants, such as merger partners, investment banks, and law firms, are often either domiciled in Delaware or have sufficient contacts with the state to be susceptible to personal jurisdiction. See, e.g., Sample v. Morgan, 935 A.2d 1046, 1063-65 (Del. Ch. 2007) (finding that Delaware had jurisdiction over a law firm that prepared an amendment to a Delaware corporation's certificate that was the subject of the lawsuit); Derdiger v. Tallman, 773 A.2d 1005 (Del. Ch. 2000) (suit against target board for breach of fiduciary duty, and acquiring corporation for aiding and abetting breach of fiduciary duty); Final Order & J., In re El Paso Corp. S'holders Litig., C.A. No. 6949-CS (Del. Ch. Dec. 3, 2012) (settlement of law suit against target company board for breach of fiduciary duty, and financial advisor for aiding and abetting breach of duty, in which the financial advisor contributed to the settlement payment); Final Order & J., In re Del Monte Foods Co. S'holders Litig., C.A. No. 6027-VCL (Del. Ch. Dec. 1, 2011) (same).

[134] Tr. of Oral Arg. 64:8-65:6.

[135] See, e.g., In re Groupon Deriv. Litig., 882 F. Supp. 2d 1043 (N.D. Ill. 2012) (staying a derivative suit pending the resolution of a motion to dismiss a related securities suit); Bach v. Amedisys, Inc., 2010 WL 4318755 (M.D. La. Oct. 22, 2010) (describing four securities class actions and four derivative suits that arose out of the same facts); Cucci v. Edwards, 2007 WL 3396234 (C.D. Cal. Oct. 31, 2007) (staying derivative action during prosecution of securities class action); Brenner v. Albrecht, 2012 WL 252286 (Del. Ch. Jan. 27, 2012) (same); Brudno v. Wise, 2003 WL 1874750 (Del. Ch. Apr. 1, 2003) (same).

[136] See, e.g., Ruggiero v. Am. Bioculture, Inc., 56 F.R.D. 93, 95 (S.D.N.Y.1972) ("[I]t is difficult to see how the . . . plaintiffs can reconcile their existing duties to [the company] and its present shareholders as derivative plaintiffs with the duties which they seek to assume on behalf of a class which attacks [the company]."); see also Fed. R. Civ. Pro. 23.1(a) ("The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.").

[137] E.g., Brenner, 2012 WL 252286; Brudno, 2003 WL 1874750.

[138] 17 C.F.R. § 240.14a-9.

[139] Grundfest & Savelle, Forum Selection Provisions, at 370.

[140] See 15 U.S.C. §78cc(a) (corresponding to Securities Exchange Act of 1934, ch. 404, § 29(a), 48 Stat. 881, 903) ("Any condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void."); see also 15 U.S.C. § 77n (codifying Securities Act of 1933, ch. 38, § 14, 48 Stat. 74, 84) (antiwaiver provision of the Securities Act of 1933); 15 U.S.C. § 80a-46(a) (codifying Investment Company Act of 1940, ch. 686, § 47, 54 Stat. 789, 845) (antiwaiver provision of the Investment Company Act of 1940).

[141] See Moran v. Household Int'l, Inc., 500 A.2d 1346, 1357 (Del. 1985) (stating that corporate action "must be evaluated when and if the issue arises").

[142] John Coffee, Forum Selection Clauses and the Market for Settlements, N.Y. L.J., May 17, 2012, at 4.

[143] See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (citations omitted).

[144] See Grundfest & Savelle, Forum Selection Provisions, at 363-67 (discussing facial challenges to forum selection provisions).

[145] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15-17 (1972).

[146] Stroud v. Grace, 606 A.2d 75, 79, 96 (Del. 1992).

[174] Milton I. Shadur and Neil H. Adelman, of Chicago (Robert Plotkin, Ronald S. Miller, David J. Krupp, and Abner J. Mikva, of counsel), for appellant.

Sidley, Austin, Burgess & Smith, and Arthur Morse, of Chicago (James E.S. Baker, Edward Slovick, and Alexander C. Allison, of counsel), and Samuel W. Block and Kenneth S. Brown, of Chicago (Raymond, Mayer, Jenner & Block, of counsel), for appellees.

MR. JUSTICE SULLIVAN delivered the opinion of the court.

This is an appeal from a dismissal of plaintiff's amended complaint on motion of the defendants. The action was a stockholders' derivative suit against the directors for negligence and mismanagement. The corporation was also made a defendant. Plaintiff sought damages [175] and an order that defendants cause the installation of lights in Wrigley Field and the scheduling of night baseball games.

Plaintiff is a minority stockholder of defendant corporation, Chicago National League Ball Club (Inc.), a Delaware corporation with its principal place of business in Chicago, Illinois. Defendant corporation owns and operates the major league professional baseball team known as the Chicago Cubs. The corporation also engages in the operation of Wrigley Field, the Cubs' home park, the concessionaire sales during Cubs' home games, television and radio broadcasts of Cubs' home games, the leasing of the field for football games and other events and receives its share, as visiting team, of admission moneys from games played in other National League stadia. The individual defendants are directors of the Cubs and have served for varying periods of years. Defendant Philip K. Wrigley is also president of the corporation and owner of approximately 80% of the stock therein.

Plaintiff alleges that since night baseball was first played in 1935 nineteen of the twenty major league teams have scheduled night games. In 1966, out of a total of 1,620 games in the major leagues, 932 were played at night. Plaintiff alleges that every member of the major leagues, other than the Cubs, scheduled substantially all of its home games in 1966 at night, exclusive of opening days, Saturdays, Sundays, holidays and days prohibited by league rules. Allegedly this has been done for the specific purpose of maximizing attendance and thereby maximizing revenue and income.

The Cubs, in the years 1961-65, sustained operating losses from its direct baseball operations. Plaintiff attributes those losses to inadequate attendance at Cubs' home games. He concludes that if the directors continue to refuse to install lights at Wrigley Field and schedule [176] night baseball games, the Cubs will continue to sustain comparable losses and its financial condition will continue to deteriorate.

Plaintiff alleges that, except for the year 1963, attendance at Cubs' home games has been substantially below that at their road games, many of which were played at night.

Plaintiff compares attendance at Clubs' games with that of the Chicago White Sox, an American League club, whose weekday games were generally played at night. The weekend attendance figures for the two teams were similar; however, the White Sox week-night games drew many more patrons than did the Cubs' weekday games.

Plaintiff alleges that the funds for the installation of lights can be readily obtained through financing and the cost of installation would be far more than offset and recaptured by increased revenues and incomes resulting from the increased attendance.

Plaintiff further alleges that defendant Wrigley has refused to install lights, not because of interest in the welfare of the corporation but because of his personal opinions "that baseball is a `daytime sport' and that the installation of lights and night baseball games will have a deteriorating effect upon the surrounding neighborhood." It is alleged that he has admitted that he is not interested in whether the Cubs would benefit financially from such action because of his concern for the neighborhood, and that he would be willing for the team to play night games if a new stadium were built in Chicago.

Plaintiff alleges that the other defendant directors, with full knowledge of the foregoing matters, have acquiesced in the policy laid down by Wrigley and have permitted him to dominate the board of directors in matters involving the installation of lights and scheduling of night games, even though they knew he was not motivated [177] by a good faith concern as to the best interests of defendant corporation, but solely by his personal views set forth above. It is charged that the directors are acting for a reason or reasons contrary and wholly unrelated to the business interests of the corporation; that such arbitrary and capricious acts constitute mismanagement and waste of corporate assets, and that the directors have been negligent in failing to exercise reasonable care and prudence in the management of the corporate affairs.

The question on appeal is whether plaintiff's amended complaint states a cause of action. It is plaintiff's position that fraud, illegality and conflict of interest are not the only bases for a stockholder's derivative action against the directors. Contrariwise, defendants argue that the courts will not step in and interfere with honest business judgment of the directors unless there is a showing of fraud, illegality or conflict of interest.

The cases in this area are numerous and each differs from the others on a factual basis. However, the courts have pronounced certain ground rules which appear in all cases and which are then applied to the given factual situation. The court in Wheeler v. The Pullman Iron & Steel Co., 143 Ill. 197, 207, 32 NE 420 said:

"It is, however, fundamental in the law of corporations, that the majority of its stockholders shall control the policy of the corporation, and regulate and govern the lawful exercise of its franchise and business.... Every one purchasing or subscribing for stock in a corporation impliedly agrees that he will be bound by the acts and proceedings done or sanctioned by a majority of the shareholders, or by the agents of the corporation duly chosen by such majority, within the scope of the powers conferred by the charter, and courts of equity will not undertake to control the policy or business methods of a corporation, [178] although it may be seen that a wiser policy might be adopted and the business more successful if other methods were pursued. The majority of shares of its stock, or the agents by the holders thereof lawfully chosen, must be permitted to control the business of the corporation in their discretion, when not in violation of its charter or some public law, or corruptly and fraudulently subversive of the rights and interests of the corporation or of a shareholder."

The standards set in Delaware are also clearly stated in the cases. In Davis v. Louisville Gas & Electric Co., 6 NJ Misc 706, 142 A 654, a minority shareholder sought to have the directors enjoined from amending the certificate of incorporation. The court said on page 659:

"We have then a conflict in view between the responsible managers of a corporation and an overwhelming majority of its stockholders on the one hand and a dissenting minority on the other — a conflict touching matters of business policy, such as has occasioned innumerable applications to courts to intervene and determine which of the two conflicting views should prevail. The response which courts make to such applications is that it is not their function to resolve for corporations questions of policy and business management. The directors are chosen to pass upon such questions and their judgment unless shown to be tainted with fraud is accepted as final. The judgment of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve." (Emphasis supplied.)

Similarly, the court in Toebelman v. Missouri-Kansas Pipe Line Co., 41 F Supp 334, said at page 339:

[179] "The general legal principle involved is familiar. Citation of authorities is of limited value because the facts of each case differ so widely. Reference may be made to the statement of the rule in Helfman v. American Light & Traction Company, 121 NJ Eq 1, 187 A 540, 550, in which the Court stated the law as follows: `In a purely business corporation ... the authority of the directors in the conduct of the business of the corporation must be regarded as absolute when they act within the law, and the court is without authority to substitute its judgment for that of the directors.'"

Plaintiff argues that the allegations of his amended complaint are sufficient to set forth a cause of action under the principles set out in Dodge v. Ford Motor Co., 204 Mich 459, 170 NW 668. In that case plaintiff, owner of about 10% of the outstanding stock, brought suit against the directors seeking payment of additional dividends and the enjoining of further business expansion. In ruling on the request for dividends the court indicated that the motives of Ford in keeping so much money in the corporation for expansion and security were to benefit the public generally and spread the profits out by means of more jobs, etc. The court felt that these were not only far from related to the good of the stockholders, but amounted to a change in the ends of the corporation and that this was not a purpose contemplated or allowed by the corporate charter. The court relied on language found in Hunter v. Roberts, Throp & Co., 83 Mich 63, 47 NW 131, 134, wherein it was said:

"Courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, [180] divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud or breach of that good faith which they are bound to exercise toward the stockholders."

From the authority relied upon in that case it is clear that the court felt that there must be fraud or a breach of that good faith which directors are bound to exercise toward the stockholders in order to justify the courts entering into the internal affairs of corporations. This is made clear when the court refused to interfere with the directors' decision to expand the business. The following appears on page 684:

"We are not, however, persuaded that we should interfere with the proposed expansion of the business of the Ford Motor Company. In view of the fact that the selling price of products may be increased at any time, the ultimate results of the larger business cannot be certainly estimated. The judges are not business experts. It is recognized that plans must often be made for a long future, for expected competition, for a continuing as well as an immediately profitable venture.... We are not satisfied that the alleged motives of the directors, in so far as they are reflected in the conduct of the business, menace the interests of the shareholders." (Emphasis supplied.)

Plaintiff in the instant case argues that the directors are acting for reasons unrelated to the financial interest and welfare of the Cubs. However, we are not satisfied that the motives assigned to Philip K. Wrigley, and through him to the other directors, are contrary to the best interests of the corporation and the stockholders. For example, it appears to us that the effect on the surrounding neighborhood might well be considered by a [181] director who was considering the patrons who would or would not attend the games if the park were in a poor neighborhood. Furthermore, the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating. By these thoughts we do not mean to say that we have decided that the decision of the directors was a correct one. That is beyond our jurisdiction and ability. We are merely saying that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision.

[1, 2] While all the courts do not insist that one or more of the three elements must be present for a stockholder's derivative action to lie, nevertheless we feel that unless the conduct of the defendants at least borders on one of the elements, the courts should not interfere. The trial court in the instant case acted properly in dismissing plaintiff's amended complaint.

[3, 4] We feel that plaintiff's amended complaint was also defective in failing to allege damage to the corporation. The well pleaded facts must be taken as true for the purpose of judging the sufficiency of the amended complaint. (Highway Ins. Co. v. Korman, 40 Ill. App.2d 439, 442, 190 NE2d 124.) However, one need not accept conclusions drawn by the pleader. (Nagel v. Northern Illinois Gas Co., 12 Ill. App.2d 413, 420, 139 NE2d 810.) Furthermore, pleadings will be construed most strongly against the pleader prior to a verdict or judgment on the merits. New Amsterdam Cas. Co. v. Gerin, 9 Ill. App.2d 545, 133 NE2d 723.

There is no allegation that the night games played by the other nineteen teams enhanced their financial position or that the profits, if any, of those teams were directly related to the number of night games scheduled. There is an allegation that the installation of lights and [182] scheduling of night games in Wrigley Field would have resulted in large amounts of additional revenues and incomes from increased attendance and related sources of income. Further, the cost of installation of lights, funds for which are allegedly readily available by financing, would be more than offset and recaptured by increased revenues. However, no allegation is made that there will be a net benefit to the corporation from such action, considering all increased costs.

Plaintiff claims that the losses of defendant corporation are due to poor attendance at home games. However, it appears from the amended complaint, taken as a whole, that factors other than attendance affect the net earnings or losses. For example, in 1962, attendance at home and road games decreased appreciably as compared with 1961, and yet the loss from direct baseball operation and of the whole corporation was considerably less.

The record shows that plaintiff did not feel he could allege that the increased revenues would be sufficient to cure the corporate deficit. The only cost plaintiff was at all concerned with was that of installation of lights. No mention was made of operation and maintenance of the lights or other possible increases in operating costs of night games and we cannot speculate as to what other factors might influence the increase or decrease of profits if the Cubs were to play night home games.

[5] Nagel v. Northern Illinois Gas Co., supra, was a stockholder's derivative action for the rescission of a contract of the corporation. The court said on page 421:

"They allege that by these transactions `Edison gave to Northern assets, rights and benefits of a value in excess of $5,000,000' and received in return, under the Final Separation Contract, assets, rights and benefits of a net value of less than $50,000. These allegations are mere conclusions of the pleader and not an averment of the fact of gross inadequacy of [183] consideration, unless warranted by the provisions of the contract and the well pleaded facts in the amended complaint consistent with the contract."

Similarly, in the instant case, plaintiff's allegation that the minority stockholders and the corporation have been seriously and irreparably damaged by the wrongful conduct of the defendant directors is a mere conclusion and not based on well pleaded facts in the amended complaint.

[6, 7] Finally, we do not agree with plaintiff's contention that failure to follow the example of the other major league clubs in scheduling night games constituted negligence. Plaintiff made no allegation that these teams' night schedules were profitable or that the purpose for which night baseball had been undertaken was fulfilled. Furthermore, it cannot be said that directors, even those of corporations that are losing money, must follow the lead of the other corporations in the field. Directors are elected for their business capabilities and judgment and the courts cannot require them to forego their judgment because of the decisions of directors of other companies. Courts may not decide these questions in the absence of a clear showing of dereliction of duty on the part of the specific directors and mere failure to "follow the crowd" is not such a dereliction.

For the foregoing reasons the order of dismissal entered by the trial court is affirmed.

Affirmed.

DEMPSEY, P.J. and SCHWARTZ, J., concur.

William T. Quillen (argued), Robert K. Payson, Peter M. Sieglaff, Potter, Anderson & Corroon, Wilmington; and Allan M. Pepper, Michael D. Braff, Kaye, Scholer, Fierman, Hays & Handler, New York City, for appellants.

Joseph A. Rosenthal (argued), Morris & Rosenthal, P.A., Wilmington; and Irving Bizar, Pincus, Ohrenstein, Bizar, D'Alessandro & Solomon, New York City, for appellee.

Before McNEILLY, MOORE and CHRISTIE, JJ.

[807] MOORE, Justice:

In the wake of Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981), this Court left a crucial issue unanswered: when is a stockholder's demand upon a board of directors, to redress an alleged wrong to the corporation, excused as futile prior to the filing of a derivative suit? We granted this interlocutory appeal to the defendants, Meyers Parking System, Inc. (Meyers), a Delaware corporation, and its directors, to review the Court of Chancery's denial of their motion to dismiss this action, pursuant to Chancery Rule 23.1, for the [808] plaintiff's failure to make such a demand or otherwise demonstrate its futility.^[1] The Vice Chancellor ruled that plaintiff's allegations raised a "reasonable inference" that the directors' action was unprotected by the business judgment rule. Thus, the board could not have impartially considered and acted upon the demand. See Lewis v. Aronson, Del.Ch., 466 A.2d 375, 381 (1983).

We cannot agree with this formulation of the concept of demand futility. In our view demand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule. Because the plaintiff failed to make a demand, and to allege facts with particularity indicating that such demand would be futile, we reverse the Court of Chancery and remand with instructions that plaintiff be granted leave to amend the complaint.

I.

The issues of demand futility rest upon the allegations of the complaint. The plaintiff, Harry Lewis, is a stockholder of Meyers. The defendants are Meyers and its ten directors, some of whom are also company officers.

In 1979, Prudential Building Maintenance Corp. (Prudential) spun off its shares of Meyers to Prudential's stockholders. Prior thereto Meyers was a wholly owned subsidiary of Prudential. Meyers provides parking lot facilities and related services throughout the country. Its stock is actively traded over-the-counter.

This suit challenges certain transactions between Meyers and one of its directors, Leo Fink, who owns 47% of its outstanding stock. Plaintiff claims that these transactions were approved only because Fink personally selected each director and officer of Meyers.^[2]

Prior to January 1, 1981, Fink had an employment agreement with Prudential which provided that upon retirement he was to become a consultant to that company for ten years. This provision became operable when Fink retired in April 1980.^[3] Thereafter, Meyers agreed with Prudential to share Fink's consulting services and reimburse Prudential for 25% of the fees paid Fink. Under this arrangement Meyers paid Prudential $48,332 in 1980 and $45,832 in 1981.

On January 1, 1981, the defendants approved an employment agreement between Meyers and Fink for a five year term with provision for automatic renewal each year thereafter, indefinitely. Meyers agreed to pay Fink $150,000 per year, plus a bonus of 5% of its pre-tax profits over $2,400,000. Fink could terminate the contract at any time, but Meyers could do so only upon six months' notice. At termination, Fink was to become a consultant to Meyers and be paid $150,000 per year for the first three years, $125,000 for the next three years, and $100,000 thereafter for life. Death benefits were also included. Fink agreed to devote his best efforts and substantially his entire business time to advancing Meyers' interests. The agreement also provided [809] that Fink's compensation was not to be affected by any inability to perform services on Meyers' behalf. Fink was 75 years old when his employment agreement with Meyers was approved by the directors. There is no claim that he was, or is, in poor health.

Additionally, the Meyers board approved and made interest-free loans to Fink totalling $225,000. These loans were unpaid and outstanding as of August 1982 when the complaint was filed. At oral argument defendants' counsel represented that these loans had been repaid in full.

The complaint charges that these transactions had "no valid business purpose", and were a "waste of corporate assets" because the amounts to be paid are "grossly excessive", that Fink performs "no or little services", and because of his "advanced age" cannot be "expected to perform any such services". The plaintiff also charges that the existence of the Prudential consulting agreement with Fink prevents him from providing his "best efforts" on Meyers' behalf. Finally, it is alleged that the loans to Fink were in reality "additional compensation" without any "consideration" or "benefit" to Meyers.

The complaint alleged that no demand had been made on the Meyers board because:

13. ... such attempt would be futile for the following reasons:

(a) All of the directors in office are named as defendants herein and they have participated in, expressly approved and/or acquiesced in, and are personally liable for, the wrongs complained of herein.

(b) Defendant Fink, having selected each director, controls and dominates every member of the Board and every officer of Meyers.

(c) Institution of this action by present directors would require the defendant-directors to sue themselves, thereby placing the conduct of this action in hostile hands and preventing its effective prosecution.

Complaint, at ¶ 13.

The relief sought included the cancellation of the Meyers-Fink employment contract and an accounting by the directors, including Fink, for all damage sustained by Meyers and for all profits derived by the directors and Fink.

II.

Defendants moved to dismiss for plaintiff's failure to make demand on the Meyers board prior to suit, or to allege with factual particularity why demand is excused. See Del.Ch.Ct.R. 23.1, supra.

After recounting the allegations, the trial judge noted that the demand requirement of Rule 23.1 is a rule of substantive right designed to give a corporation the opportunity to rectify an alleged wrong without litigation, and to control any litigation which does arise. Lewis, 466 A.2d at 380. According to the Vice Chancellor, the test of futility is "whether the Board, at the time of the filing of the suit, could have impartially considered and acted upon the demand". Id. at 381.

As part of this formulation, the trial judge stated that interestedness is one factor affecting impartiality, and indicated that the business judgment rule is a potential defense to allegations of director interest, and hence, demand futility. Id. However, the court observed that to establish demand futility, a plaintiff need not allege that the challenged transaction could never be deemed a product of business judgment. Id. Rather, the Vice Chancellor maintained that a plaintiff "must only allege facts which, if true, show that there is a reasonable inference that the business judgment rule is not applicable for purposes of considering a pre-suit demand pursuant to Rule 23.1". Id. The court concluded that this transaction permitted such an inference. Id. at 384-86.

Upon these formulations, the Court of Chancery addressed the plaintiff's arguments [810] as to the futility of demand. Id. at 381-84. The trial judge correctly noted that futility is gauged by the circumstances existing at the commencement of a derivative suit. This disposed of plaintiff's argument that defendants' motion to dismiss established board hostility and the futility of demand. Id. at 381.

The Vice Chancellor then dealt with plaintiff's contention that Fink, as a 47% shareholder of Meyers, dominated and controlled each director, thereby making demand futile. Id. at 381-83. Plaintiff also argued that Fink's interest, when combined with the shareholdings of four other defendants, amounted to 57.5% of Meyers' outstanding shares. Id. at 381. After noting the presumptions under the business judgment rule that a board's actions are taken in good faith and in the best interests of the corporation, the Court of Chancery ruled that mere board approval of a transaction benefiting a substantial, but non-majority, shareholder will not overcome the presumption of propriety. Id. at 382. Specifically, the court observed that:

A plaintiff, to properly allege domination of the Board, particularly domination based on ownership of less than a majority of the corporation's stock, in order to excuse a pre-suit demand, must allege ownership plus other facts evidencing control to demonstrate that the Board could not have exercised its independent business judgment.

Id.

As to the combined 57.5% control claim, the court stated that there were no factual allegations regarding the alignment of the four directors with Fink, such as a claim that they were beneficiaries of the Meyers-Fink agreement. Id. at 382, 383. Because it was not alleged in the complaint, the court rejected plaintiff's argument that, as evidence of alignment with Fink, two of the directors have "similar" compensation agreements with Meyers. Id. at 383.

Turning to plaintiff's allegations of board approval, participation in, and/or acquiescence in the wrong, the trial court focused on the underlying transaction to determine whether the board's action was wrongful and not protected by the business judgment rule. Id. [citing Dann v. Chrysler, Del.Ch., 174 A.2d 696 (1961)]. The Vice Chancellor indicated that if the underlying transaction supported a reasonable inference that the business judgment rule did not apply, then the directors who approved the transaction were potentially liable for a breach of their fiduciary duty, and thus, could not impartially consider a stockholder's demand. Id.

The trial court then stated that board approval of the Meyers-Fink agreement, allowing Fink's consultant compensation to remain unaffected by his ability to perform any services, may have been a transaction wasteful on its face. Id. [citing Fidanque v. American Maracaibo Co., Del.Ch., 92 A.2d 311 (1952)]. Consequently, demand was excused as futile, because the Meyers' directors faced potential liability for waste and could not have impartially considered the demand. Id. at 384.

III.

The defendants make two arguments, one policy-oriented and the other, factual. First, they assert that the demand requirement embraces the policy that directors, rather than stockholders, manage the affairs of the corporation. They contend that this fundamental principle requires the strict construction and enforcement of Chancery Rule 23.1. Second, the defendants point to four of plaintiff's basic allegations and argue that they lack the factual particularity necessary to excuse demand. Concerning the allegation that Fink dominated and controlled the Meyers board, the defendants point to the absence of any facts explaining how he "selected each director". With respect to Fink's 47% stock interest, the defendants say that absent other facts this is insufficient to indicate domination and control. Regarding the claim of hostility to the plaintiff's suit, because defendants would have to sue themselves, the latter assert that this bootstrap argument ignores the possibility that the directors have other [811] alternatives, such as cancelling the challenged agreement. As for the allegation that directorial approval of the agreement excused demand, the defendants reply that such a claim is insufficient, because it would obviate the demand requirement in almost every case. The effect would be to subvert the managerial power of a board of directors. Finally, as to the provision guaranteeing Fink's compensation, even if he is unable to perform any services, the defendants contend that the trial court read this out of context. Based upon the foregoing, the defendants conclude that the plaintiff's allegations fall far short of the factual particularity required by Rule 23.1.

IV.

A.

A cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation. 8 Del.C. § 141(a). Section 141(a) states in pertinent part:

"The business and affairs of a corporation organized under this chapter shall be managed by or under the direction of a board of directors except as may be otherwise provided in this chapter or in its certificate of incorporation."

8 Del.C. § 141(a) (Emphasis added). The existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders.^[4]Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939). Moreover, a stockholder is not powerless to challenge director action which results in harm to the corporation. The machinery of corporate democracy and the derivative suit are potent tools to redress the conduct of a torpid or unfaithful management. The derivative action developed in equity to enable shareholders to sue in the corporation's name where those in control of the company refused to assert a claim belonging to it. The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.

By its very nature the derivative action impinges on the managerial freedom of directors.^[5] Hence, the demand requirement of Chancery Rule 23.1 exists at the threshold, first to insure that a stockholder exhausts his intracorporate remedies, and [812] then to provide a safeguard against strike suits. Thus, by promoting this form of alternate dispute resolution, rather than immediate recourse to litigation, the demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations.

In our view the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability. The business judgment rule is an acknowledgment of the managerial prerogatives of Delaware directors under Section 141(a). See Zapata Corp. v. Maldonado, 430 A.2d at 782. It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119, 124 (1971); Robinson v. Pittsburgh Oil Refinery Corp., Del.Ch., 126 A. 46 (1924). Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption. See Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971).

The function of the business judgment rule is of paramount significance in the context of a derivative action. It comes into play in several ways — in addressing a demand, in the determination of demand futility, in efforts by independent disinterested directors to dismiss the action as inimical to the corporation's best interests, and generally, as a defense to the merits of the suit. However, in each of these circumstances there are certain common principles governing the application and operation of the rule.

First, its protections can only be claimed by disinterested directors whose conduct otherwise meets the tests of business judgment. From the standpoint of interest, this means that directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally. Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971); Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964); David J. Greene & Co. v. Dunhill International, Inc., Del.Ch., 249 A.2d 427, 430 (1968). See also 8 Del.C. § 144. Thus, if such director interest is present, and the transaction is not approved by a majority consisting of the disinterested directors, then the business judgment rule has no application whatever in determining demand futility. See 8 Del.C. § 144(a)(1).

Second, to invoke the rule's protection directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties. While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence.^[6] See Veasey & Manning, Codified Standard [813] — Safe Harbor or Uncharted Reef? 35 Bus.Law. 919, 928 (1980).

However, it should be noted that the business judgment rule operates only in the context of director action. Technically speaking, it has no role where directors have either abdicated their functions, or absent a conscious decision, failed to act.^[7] But it also follows that under applicable principles, a conscious decision to refrain from acting may nonetheless be a valid exercise of business judgment and enjoy the protections of the rule.

The gap in our law, which we address today, arises from this Court's decision in Zapata Corp. v. Maldonado. There, the Court defined the limits of a board's managerial power granted by Section 141(a) and restricted application of the business judgment rule in a factual context similar to this action. Zapata Corp. v. Maldonado, 430 A.2d at 782-86, rev'g, Maldonado v. Flynn, Del.Ch., 413 A.2d 1251 (1980).

By way of background, this Court's review in Zapata was limited to whether an independent investigation committee of disinterested directors had the power to cause the derivative action to be dismissed. Preliminarily, it was noted in Zapata that "[d]irectors of Delaware corporations derive their managerial decision making power, which encompasses decisions whether to initiate, or refrain from entering, litigation, from 8 Del.C. § 141(a)". Zapata, 430 A.2d at 782 (footnotes omitted). In that context, this Court observed that the business judgment rule has no relevance to corporate decision making until after a decision has been made. Id. In Zapata, we stated that a shareholder does not possess an independent individual right to continue a derivative action. Moreover, where demand on a board has been made and refused, we apply the business judgment rule in reviewing the board's refusal to act pursuant to a stockholder's demand. Id. at 784 & n. 10. Unless the business judgment rule does not protect the refusal to sue, the shareholder lacks the legal managerial power to continue the derivative action, since that power is terminated by the refusal. Id. at 784. We also concluded that where demand is excused a shareholder possesses the ability to initiate a derivative action, but the right to prosecute it may be terminated upon the exercise of applicable standards of business judgment. Id. The thrust of Zapata is that in either the demand-refused or the demand-excused case, the board still retains its Section 141(a) managerial authority to make decisions regarding corporate litigation. Moreover, the board may delegate its managerial authority to a committee of independent disinterested directors. Id. at 786. See 8 Del.C. § 141(c). Thus, even in a demand-excused case, a board has the power to appoint a committee of one or more independent disinterested directors to determine whether the derivative action should be pursued or dismissal sought. Zapata, 430 A.2d at 786. Under Zapata, the Court of Chancery, in passing on a committee's motion to dismiss a derivative action in a demand excused case, must apply a two-step test. First, the court must inquire into the independence and good faith of the committee and review the reasonableness and good faith of the committee's investigation. Id. at 788. Second, the court must apply its own independent business judgment to decide whether the motion to dismiss should be granted. Id. at 789.

After Zapata numerous derivative suits were filed without prior demand upon boards of directors. The complaints in such actions all alleged that demand was excused because of board interest, approval or acquiescence in the wrongdoing. In any event, the Zapata demand-excused/demand-refused [814] bifurcation, has left a crucial issue unanswered: when is demand futile and, therefore, excused?

Delaware courts have addressed the issue of demand futility on several earlier occasions. See Sohland v. Baker, Del. Supr., 141 A. 277, 281-82 (1927); McKee v. Rogers, Del.Ch., 156 A. 191, 193 (1931); Miller v. Loft, Del.Ch., 153 A. 861, 862 (1931); Fleer v. Frank H. Fleer Corp., Del.Ch., 125 A. 411, 414 (1924); Harden v. Eastern States Public Service Co., Del.Ch., 122 A. 705, 707 (1923); Ellis v. Penn Beef Co., Del.Ch., 80 A. 666, 668 (1911). Cf. Mayer v. Adams, Del.Supr., 141 A.2d 458, 461 (1958) (minority demand on majority shareholders). The rule emerging from these decisions is that where officers and directors are under an influence which sterilizes their discretion, they cannot be considered proper persons to conduct litigation on behalf of the corporation. Thus, demand would be futile. See, e.g., McKee v. Rogers, Del.Ch., 156 A. 191, 192 (1931) (holding that where a defendant controlled the board of directors, "[i]t is manifest then that there can be no expectation that the corporation would sue him, and if it did, it can hardly be said that the prosecution of the suit would be entrusted to proper hands"). But see, e.g., Fleer v. Frank H. Fleer Corp., Del.Ch., 125 A. 411, 415 (1924) ("[w]here the demand if made would be directed to the particular individuals who themselves are the alleged wrongdoers and who therefore would be invited to sue themselves, the rule is settled that a demand and refusal is not requisite"); Miller v. Loft, Inc., Del.Ch., 153 A. 861, 862 (1931) ("if by reason of hostile interest or guilty participation in the wrongs complained of, the directors cannot be expected to institute suit, ... no demand upon them to institute suit is requisite").

However, those cases cannot be taken to mean that any board approval of a challenged transaction automatically connotes "hostile interest" and "guilty participation" by directors, or some other form of sterilizing influence upon them. Were that so, the demand requirements of our law would be meaningless, leaving the clear mandate of Chancery Rule 23.1 devoid of its purpose and substance.

The trial court correctly recognized that demand futility is inextricably bound to issues of business judgment, but stated the test to be based on allegations of fact, which, if true, "show that there is a reasonable inference" the business judgment rule is not applicable for purposes of a pre-suit demand. Lewis, 466 A.2d at 381.

The problem with this formulation is the concept of reasonable inferences to be drawn against a board of directors based on allegations in a complaint. As is clear from this case, and the conclusory allegations upon which the Vice Chancellor relied, demand futility becomes virtually automatic under such a test. Bearing in mind the presumptions with which director action is cloaked, we believe that the matter must be approached in a more balanced way.

Our view is that in determining demand futility the Court of Chancery in the proper exercise of its discretion must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Hence, the Court of Chancery must make two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of the challenged transaction and the board's approval thereof. As to the latter inquiry the court does not assume that the transaction is a wrong to the corporation requiring corrective steps by the board. Rather, the alleged wrong is substantively reviewed against the factual background alleged in the complaint. As to the former inquiry, directorial independence and disinterestedness, the court reviews the factual allegations to decide whether they raise a reasonable doubt, as a threshold matter, that the protections of the business judgment rule are available to the board. [815] Certainly, if this is an "interested" director transaction, such that the business judgment rule is inapplicable to the board majority approving the transaction, then the inquiry ceases. In that event futility of demand has been established by any objective or subjective standard.^[8]See, e.g., Bergstein v. Texas Internat'l Co., Del.Ch., 453 A.2d 467, 471 (1982) (because five of nine directors approved stock appreciation rights plan likely to benefit them, board was interested for demand purposes and demand held futile). This includes situations involving self-dealing directors. See Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971); Sterling v. Mayflower, Del.Supr., 93 A.2d 107 (1952); Trans World Airlines, Inc. v. Summa Corp., Del.Ch., 374 A.2d 5 (1977); David J. Greene & Co. v. Dunhill International, Inc., Del.Ch., 249 A.2d 427 (1968).

However, the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists. See Gimbel v. Signal Cos., Inc., Del.Ch., 316 A.2d 599, aff'd, Del.Supr., 316 A.2d 619 (1974); Cottrell v. Pawcatuck Co., Del.Supr., 128 A.2d 225 (1956). In sum the entire review is factual in nature. The Court of Chancery in the exercise of its sound discretion must be satisfied that a plaintiff has alleged facts with particularity which, taken as true, support a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. Only in that context is demand excused.

B.

Having outlined the legal framework within which these issues are to be determined, we consider plaintiff's claims of futility here: Fink's domination and control of the directors, board approval of the Fink-Meyers employment agreement, and board hostility to the plaintiff's derivative action due to the directors' status as defendants.

Plaintiff's claim that Fink dominates and controls the Meyers' board is based on: (1) Fink's 47% ownership of Meyers' outstanding stock, and (2) that he "personally selected" each Meyers director. Plaintiff also alleges that mere approval of the employment agreement illustrates Fink's domination and control of the board. In addition, plaintiff argued on appeal that 47% stock ownership, though less than a majority, constituted control given the large number of shares outstanding, 1,245,745.

Such contentions do not support any claim under Delaware law that these directors lack independence. In Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119 (1971), the Court of Chancery stated that "[s]tock ownership alone, at least when it amounts to less than a majority, is not sufficient proof of domination or control". Id. at 123. Moreover, in the demand context even proof of majority ownership of a company does not strip the directors of the presumptions of independence, and that their acts have been taken in good faith and in the best interests of the corporation. There must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person. See Mayer v. Adams, Del.Ch., 167 A.2d 729, 732, aff'd, Del.Supr., 174 A.2d 313 (1961). To date the principal decisions dealing [816] with the issue of control or domination arose only after a full trial on the merits. Thus, they are distinguishable in the demand context unless similar particularized facts are alleged to meet the test of Chancery Rule 23.1. See e.g., Kaplan, 284 A.2d at 123; Chasin v. Gluck, Del.Ch., 282 A.2d 188 (1971); Greene v. Allen, Del.Ch., 114 A.2d 916 (1955); Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225, 237 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939).

The requirement of director independence inhers in the conception and rationale of the business judgment rule. The presumption of propriety that flows from an exercise of business judgment is based in part on this unyielding precept. Independence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences. While directors may confer, debate, and resolve their differences through compromise, or by reasonable reliance upon the expertise of their colleagues and other qualified persons, the end result, nonetheless, must be that each director has brought his or her own informed business judgment to bear with specificity upon the corporate merits of the issues without regard for or succumbing to influences which convert an otherwise valid business decision into a faithless act.

Thus, it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election. That is the usual way a person becomes a corporate director. It is the care, attention and sense of individual responsibility to the performance of one's duties, not the method of election, that generally touches on independence.

We conclude that in the demand-futile context a plaintiff charging domination and control of one or more directors must allege particularized facts manifesting "a direction of corporate conduct in such a way as to comport with the wishes or interests of the corporation (or persons) doing the controlling". Kaplan, 284 A.2d at 123. The shorthand shibboleth of "dominated and controlled directors" is insufficient. In recognizing that Kaplan was decided after trial and full discovery, we stress that the plaintiff need only allege specific facts; he need not plead evidence. Otherwise, he would be forced to make allegations which may not comport with his duties under Chancery Rule 11.^[9]

Here, plaintiff has not alleged any facts sufficient to support a claim of control. The personal-selection-of-directors allegation stands alone, unsupported. At best it is a conclusion devoid of factual support. The causal link between Fink's control and approval of the employment agreement is alluded to, but nowhere specified. The director's approval, alone, does not establish control, even in the face of Fink's 47% stock ownership. See Kaplan v. Centex Corp., 284 A.2d at 122, 123. The claim that Fink is unlikely to perform any services under the agreement, because of his age, and his conflicting consultant work with Prudential, adds nothing to the control claim.^[10] Therefore, we cannot conclude that the [817] complaint factually particularizes any circumstances of control and domination to overcome the presumption of board independence, and thus render the demand futile.

C.

Turning to the board's approval of the Meyers-Fink employment agreement, plaintiff's argument is simple: all of the Meyers directors are named defendants, because they approved the wasteful agreement; if plaintiff prevails on the merits all the directors will be jointly and severally liable; therefore, the directors' interest in avoiding personal liability automatically and absolutely disqualifies them from passing on a shareholder's demand.

Such allegations are conclusory at best. In Delaware mere directorial approval of a transaction, absent particularized facts supporting a breach of fiduciary duty claim, or otherwise establishing the lack of independence or disinterestedness of a majority of the directors, is insufficient to excuse demand.^[11] Here, plaintiff's suit is premised on the notion that the Meyers-Fink employment agreement was a waste of corporate assets. So, the argument goes, by approving such waste the directors now face potential personal liability, thereby rendering futile any demand on them to bring suit. Unfortunately, plaintiff's claim falls in its initial premise. The complaint does not allege particularized facts indicating that the agreement is a waste of corporate assets. Indeed, the complaint as now drafted may not even state a cause of action, given the directors' broad corporate power to fix the compensation of officers.^[12]

In essence, the plaintiff alleged a lack of consideration flowing from Fink to Meyers, since the employment agreement provided that compensation was not contingent on Fink's ability to perform any services. The bare assertion that Fink performed "little or no services" was plaintiff's conclusion based solely on Fink's age and the existence of the Fink-Prudential employment agreement. As for Meyers' loans to Fink, beyond the bare allegation that they were made, the complaint does not allege facts indicating the wastefulness of such arrangements. Again, the mere existence of such loans, given the broad corporate powers conferred by Delaware law, does not even state a claim.^[13]

In sustaining plaintiff's claim of demand futility the trial court relied on Fidanque v. American Maracaibo Co., Del. Ch., 92 A.2d 311, 321 (1952), which held that a contract providing for payment of consulting fees to a retired president/director was a waste of corporate assets. Id. In Fidanque, the court found after trial that the contract and payments were in reality compensation for past services. Id. at 320. This was based upon facts not present here: the former president/director was a 70 year old stroke victim, neither the agreement nor the record spelled out his consulting duties at all, the consulting salary equalled the individual's salary when he was president and general manager of the corporation, and the contract was silent as to continued employment in the event that the retired president/director again became incapacitated and unable to perform his duties. Id. at 320-21. Contrasting the facts of Fidanque with the complaint here, it is apparent that plaintiff has not alleged [818] facts sufficient to render demand futile on a charge of corporate waste, and thus create a reasonable doubt that the board's action is protected by the business judgment rule. Cf. Beard v. Elster, Del.Supr., 160 A.2d 731 (1960); Lieberman v. Koppers Company Line, Inc., Del.Ch., 149 A.2d 756, aff'd, Lieberman v. Becker, Del.Supr., 155 A.2d 596 (1959).

D.

Plaintiff's final argument is the incantation that demand is excused because the directors otherwise would have to sue themselves, thereby placing the conduct of the litigation in hostile hands and preventing its effective prosecution. This bootstrap argument has been made to and dismissed by other courts. See, e.g., Lewis v. Graves, 701 F.2d 245, 248-49 (2d Cir.1983); Heit v. Baird, 567 F.2d 1157, 1162 (1st Cir. 1977); Lewis v. Anselmi, 564 F.Supp., 768, 772 (S.D.N.Y.1983). Its acceptance would effectively abrogate Rule 23.1 and weaken the managerial power of directors. Unless facts are alleged with particularity to overcome the presumptions of independence and a proper exercise of business judgment, in which case the directors could not be expected to sue themselves, a bare claim of this sort raises no legally cognizable issue under Delaware corporate law.

V.

In sum, we conclude that the plaintiff has failed to allege facts with particularity indicating that the Meyers directors were tainted by interest, lacked independence, or took action contrary to Meyers' best interests in order to create a reasonable doubt as to the applicability of the business judgment rule. Only in the presence of such a reasonable doubt may a demand be deemed futile. Hence, we reverse the Court of Chancery's denial of the motion to dismiss, and remand with instructions that plaintiff be granted leave to amend his complaint to bring it into compliance with Rule 23.1 based on the principles we have announced today.

* * *

REVERSED AND REMANDED.

[1] Chancery Rule 23.1, similar to Fed.R.Civ.P. 23.1, provides in pertinent part:

In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share of membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort. Del.Ch.Ct.R. 23.1 (Emphasis added).

[2] The Court of Chancery stated that Fink had been chief executive officer of Prudential prior to the spin-off and thereafter became chairman of Meyers' board. This was not alleged in the complaint. Lewis, 466 A.2d at 379.

[3] The trial court stated that Fink "changed his status with Prudential building from employee to consultant". Lewis, 466 A.2d at 379.

[4] The broad question of structuring the modern corporation in order to satisfy the twin objectives of managerial freedom of action and responsibility to shareholders has been extensively debated by commentators. See, e.g., Fischel, The Corporate Governance Movement, 35 Vand.L.Rev. 1259 (1982); Dickstein, Corporate Governance and the Shareholders' Derivative Action: Rules and Remedies for Implementing the Monitoring Model, 3 Cardozo L.Rev. 627 (1982); Haft, Business Decisions by the New Board: Behavioral Science and Corporate Law, 80 Mich.L.Rev. 1 (1981); Dent, The Revolution in Corporate Governance, The Monitoring Board, and The Director's Duty of Care, 61 B.U.L.Rev. 623 (1981); Moore, Corporate Officer & Director Liability: Is Corporate Behavior Beyond the Control of Our Legal System? 16 Capital U.L.Rev. 69 (1980); Jones, Corporate Governance: Who Controls the Large Corporation? 30 Hastings L.J. 1261 (1979); Small, The Evolving Role of the Director in Corporate Governance, 30 Hastings L.J. 1353 (1979).

[5] Like the broader question of corporate governance, the derivative suit, its value, and the methods employed by corporate boards to deal with it have received much attention by commentators. See, e.g., Brown, Shareholder Derivative Litigation and the Special Litigation Committee, 43 U.Pitt.L.Rev. 601 (1982); Coffee and Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform, 81 Colum.L.Rev. 261 (1981); Shnell, A Procedural Treatment of Derivative Suit Dismissals by Minority Directors, 609 Calif.L.Rev. 885 (1981); Dent, The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit? 75 N.W.U.L. Rev. 96 (1980); Jones, An Empirical Examination of the Incidence of Shareholder Derivative and Class Action Lawsuits, 1971-1978, 60 B.U. L.Rev. 306 (1980); Comment, The Demand and Standing Requirements in Stockholder Derivative Actions, 44 U.Chi.L.Rev. 168 (1976); Dykstra, The Revival of the Derivative Suit, 116 U.Pa.L.Rev. 74 (1967); Note, Demand on Directors and Shareholders as a Prerequisite to a Derivative Suit, 73 Harv.L.Rev. 729 (1960).

[6] While the Delaware cases have not been precise in articulating the standard by which the exercise of business judgment is governed, a long line of Delaware cases holds that director liability is predicated on a standard which is less exacting than simple negligence. Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 722 (1971), rev'g, Del.Ch., 261 A.2d 911 (1969) ("fraud or gross overreaching"); Getty Oil Co. v. Skelly Oil Co., Del.Supr., 267 A.2d 883, 887 (1970), rev'g, Del.Ch., 255 A.2d 717 (1969) ("gross and palpable overreaching"); Warshaw v. Calhoun, Del.Supr., 221 A.2d 487, 492-93 (1966) ("bad faith ... or a gross abuse of discretion"); Moskowitz v. Bantrell, Del.Supr., 190 A.2d 749, 750 (1963) ("fraud or gross abuse of discretion"); Penn Mart Realty Co. v. Becker, Del.Ch., 298 A.2d 349, 351 (1972) ("directors may breach their fiduciary duty ... by being grossly negligent"); Kors v. Carey, Del.Ch., 158 A.2d 136, 140 (1960) ("fraud, misconduct or abuse of discretion"); Allaun v. Consolidated Oil Co., Del.Ch., 147 A. 257, 261 (1929) ("reckless indifference to or a deliberate disregard of the stockholders").

[7] Although questions of director liability in such cases have been adjudicated upon concepts of business judgment, they do not in actuality present issues of business judgment. See Graham v. Allis-Chalmers Manufacturing Co., Del.Supr., 188 A.2d 125 (1963); Kelly v. Bell, Del.Ch., 254 A.2d 62 (1969), aff'd, Del. Supr., 266 A.2d 878 (1970); Lutz v. Boas, Del. Ch., 171 A.2d 381 (1961). See also Arsht, Fiduciary Responsibilities of Directors, Officers & Key Employees, 4 Del.J.Corp.L. 652, 659 (1979).

[8] We recognize that drawing the line at a majority of the board may be an arguably arbitrary dividing point. Critics will charge that we are ignoring the structural bias common to corporate boards throughout America, as well as the other unseen socialization processes cutting against independent discussion and decisionmaking in the boardroom. The difficulty with structural bias in a demand futile case is simply one of establishing it in the complaint for purposes of Rule 23.1. We are satisfied that discretionary review by the Court of Chancery of complaints alleging specific facts pointing to bias on a particular board will be sufficient for determining demand futility.

[9] Chancery Rule 11 provides:

Every pleading of a party represented by an attorney shall be signed by at least 1 attorney of record in his individual name, whose address shall be stated. A party who is not represented by an attorney shall sign his pleading and state his address. Except when otherwise specifically provided by statute or rule, pleadings need not be verified or accompanied by affidavit. The signature of an attorney constitutes a certificate by him that he has read the pleading; that to the best of his knowledge, information, and belief there is good ground to support it; and that it is not interposed for delay. If a pleading is not signed or is signed with intent to defeat the purpose of this rule, it may be stricken as sham and false and the action may proceed as though the pleading had not been served. For a willful violation of this rule an attorney may be subjected to appropriate disciplinary action. Similar action may be taken if scandalous or indecent matter is inserted.

Del.Ch.Ct.R. 11.

[10] Plaintiff made no legal argument that the "best efforts" provision of the agreement prohibited dual consultant duties, thereby demonstrating that the contract's approval evidenced control or was otherwise wrongful.

[11] See also In re Kauffman Mutual Fund Actions, 479 F.2d 257, 265 (1st Cir.1973); Greenspun v. Del E. Webb, 634 F.2d 1204, 1210 (9th Cir.1980); Grossman v. Johnson, 674 F.2d 115, 124 (1st Cir.1982); Lewis v. Curtis, 671 F.2d 779, 785 (3d Cir.1982); Lewis v. Graves, 701 F.2d 245, 248 (2d Cir.1983).

[12] 8 Del.C. § 122(5) provides that "[e]very corporation created under this chapter shall have the power to appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation". 8 Del.C. § 122(5).

[13] Plaintiff's allegation ignores 8 Del.C. § 143 which expressly authorizes interest-free loans to "any officer or employee of the corporation... whenever, in the judgment of the directors, such loan ... may reasonably be expected to benefit the corporation." 8 Del.C. § 143.

[1050] James G. Wiles, Law Offices of James G. Wiles, New Castle, for Plaintiff.

R. Franklin Balotti, Daniel A. Dreisbach, and Luke E. Dembosky, of Richards, Layton & Finger, Wilmington, for Defendant G.J. Hart.

Collins J. Seitz, Jr., of Connolly, Bove, Lodge & Hutz, Wilmington, for All Defendants except G.J. Hart.

OPINION

ALLEN, Chancellor.

Currently before the Court is a motion to dismiss a shareholders action against the directors of TriFoods International, Inc. and certain partnerships and individuals that own stock in TriFoods. In broadest terms the motion raises the question, what must a shareholder plead in order to state a derivative claim to recover corporate losses allegedly sustain by reason of "mismanagement" unaffected by directly conflicting financial interests?

Plaintiff, Eugene Gagliardi, is the founder of the TriFoods, Inc. and in 1990 he induced certain persons to invest in the company by buying its stock. In 1993 he was removed as Chairman of the board and his employment with the company terminated. He continues to own approximately 13% of the company's common stock. The business of the company has, according to the allegations of the complaint, deteriorated very badly since Mr. Gagliardi's ouster.

The suit asserts that defendants are liable to the corporation and to plaintiff individually on a host of theories, most importantly for mismanagement. The matter is before the Court on defendants' motion to dismiss the derivative aspects of the complaint for failure to show that the preconditions established by Rule 23.1 for litigation of a derivative suit have been satisfied in this instance and, with respect to any alleged direct or individual claims, to dismiss those allegations for failure to state a claim.

To structure discussion of the issues raised by this motion, I address each of the six counts of the amended complaint seriatim, ruling on the legal sufficiency under Rule 12(b)(6) or Rule 23.1 as the case may be, before turning to the next count of the complaint. For the reasons set forth below, I conclude that, with the exception of a single claim that survives when read sympathetically in the light of a recent Supreme Court precedent (see Count II infra respecting [1051] breach of employment contract), the amended complaint is subject to dismissal at this time. To a very limited extent, as indicated below, I will permit the filing of a further amendment to correct deficiencies that may be correctable. (See Count III infra, respecting ¶ 67(e) of the Amended Complaint).

Count IV: Negligent Mismanagement:

This count, which is asserted against all defendants, alleges that "implementation of their grandiose scheme for TriFoods' future growth ... in only eighteen months destroyed TriFoods." Plaintiff asserts that the facts alleged, which sketch that "scheme" and those results, constitute mismanagement and waste.

The allegations of Count IV are detailed.

They assert most centrally that prior to his dismissal Gagliardi disagreed with Hart concerning the wisdom of TriFoods manufacturing its products itself and disagreed strongly that the company should buy a plant in Pomfret, Connecticut and move its operations to that state. Plaintiff thought it foolish (and he alleges that it was negligent judgment) to borrow funds from CDA for that purpose. ¶¶ 71-74; 77-81.

Plaintiff also alleges that Hart caused the company to acquire and fit-out a research or new product facility in Chadds Ford Pennsylvania, which "duplicated one already available and under lease to Designer Foods [the predecessor name of TriFoods], and which was therefore, a further waste of corporate assets." ¶ 76.

Next, it is alleged that "defendants either acquiesced in or approved a reckless or grossly negligent sales commission to build volume." ¶ 82.

Next, it is alleged that "Hart and the other defendants caused TriFoods to purchase [the exclusive rights to produce and sell a food product known as] Steak-umms from Heinz in April 1994." ¶ 85. The price paid compared unfavorably with a transaction in 1980 in which this product had been sold and which earlier terms are detailed. ¶ 86. "Defendants recklessly caused TriFoods to pay $15 million for Steak-umms alone (no plant, no equipment, etc) which was then doing annual sales of only $28 million." Id.

Next, it is alleged that "Hart caused TriFoods... to pay $125,000 to a consultant for its new name, logo and packaging." ¶ 87.

Next, it is alleged that Hart destroyed customer relationships by supplying inferior products. ¶¶ 88-91.

Next, it is alleged that "Hart refused to pay key manufacturers and suppliers ... thus injuring TriFoods' trade relations." ¶ 92.

Next, it is alleged that "defendants entered into a transaction whereby TriFoods was to acquire "Lloyd's Ribs" at a grossly excessive price, knowing (or recklessly not knowing) that the Company could not afford the transaction." ¶ 93.

Lastly, with respect to the mismanagement count, it is alleged that defendants ignored plaintiff's warnings as to each of the above; that Hart was fired in May 1995; and that a settlement was reached between Hart and the Company. ¶¶ 94-97. All of the foregoing lead to the current condition of the company, which is very weak financially.

Do these allegations of Count IV state a claim upon which relief may be granted? In addressing that question, I start with what I take to be an elementary precept of corporation law: in the absence of facts showing self-dealing or improper motive, a corporate officer or director is not legally responsible to the corporation for losses that may be suffered as a result of a decision that an officer made or that directors authorized in good faith.^[2] There is a theoretical exception [1052] to this general statement that holds that some decisions may be so "egregious" that liability for losses they cause may follow even in the absence of proof of conflict of interest or improper motivation. The exception, however, has resulted in no awards of money judgments against corporate officers or directors in this jurisdiction and, to my knowledge only the dubious holding in this Court of Gimbel v. Signal Companies, Inc., (Del. Ch.) 316 A.2d 599 aff'd (Del.Supr.) 316 A.2d 619 (1974), seems to grant equitable relief in the absence of a claimed conflict or improper motivation.^[3] Thus, to allege that a corporation has suffered a loss as a result of a lawful transaction, within the corporation's powers, authorized by a corporate fiduciary acting in a good faith pursuit of corporate purposes, does not state a claim for relief against that fiduciary no matter how foolish the investment may appear in retrospect.

The rule could rationally be no different. Shareholders can diversify the risks of their corporate investments. Thus, it is in their economic interest for the corporation to accept in rank order all positive net present value investment projects available to the corporation, starting with the highest risk adjusted rate of return first. Shareholders don't want (or shouldn't rationally want) directors to be risk averse. Shareholders' investment interests, across the full range of their diversifiable equity investments, will be maximized if corporate directors and managers honestly assess risk and reward and accept for the corporation the highest risk adjusted returns available that are above the firm's cost of capital.

But directors will tend to deviate from this rational acceptance of corporate risk if in authorizing the corporation to undertake a risky investment, the directors must assume some degree of personal risk relating to ex post facto claims of derivative liability for any resulting corporate loss.

Corporate directors of public companies typically have a very small proportionate ownership interest in their corporations and little or no incentive compensation. Thus, they enjoy (as residual owners) only a very small proportion of any "upside" gains earned by the corporation on risky investment projects. If, however, corporate directors were to be found liable for a corporate loss from a risky project on the ground that the investment was too risky (foolishly risky! stupidly risky! egregiously risky! — you supply the adverb), their liability would be joint and several for the whole loss (with I suppose a right of contribution). Given the scale of operation of modern public corporations, this stupefying disjunction between risk and reward for corporate directors threatens undesirable effects. Given this disjunction, only a very small probability of director liability based on "negligence", "inattention", "waste", etc., could induce a board to avoid authorizing risky investment projects to any extent! Obviously, it is in the shareholders' economic interest to offer sufficient protection to directors from liability for negligence, etc., to allow directors to conclude that, as a practical matter, there is no risk that, if they act in good faith and meet minimal proceduralist standards of attention, they can face liability as a result of a business loss.

The law protects shareholder investment interests against the uneconomic consequences that the presence of such second-guessing risk would have on director action and shareholder wealth in a number of ways. It authorizes corporations to pay for director and officer liability insurance and authorizes corporate indemnification in a broad range of cases, for example. But the first protection against a threat of sub-optimal risk acceptance is the so-called business judgment rule. That "rule" in effect provides that where a [1053] director is independent and disinterested, there can be no liability for corporate loss, unless the facts are such that no person could possibly authorize such a transaction if he or she were attempting in good faith to meet their duty. Saxe v. Brady, Del.Ch., 184 A.2d 602 (1962).

Thus, for example it does not state a claim to allege that: (1) Hart caused the corporation to pay $125,000 to a consultant for the design of a new logo and packaging. On what possible basis might a corporate officer or director be put to the expense of defending such a claim? Nothing is alleged except that an expenditure of corporate funds for a corporate purpose was made. Whether that expenditure was wise or foolish, low risk or high risk is of no concern to this Court. What is alleged certainly does not bring the allegation to within shouting distance of the Saxe v. Brady principle. (2) Nor does an allegation that defendants acquiesced in a reckless commission structure "in order to build volume" state a claim; it alleges no conflicting interest or improper motivation, nor does it state facts that might come within the Saxe v. Brady principle. It alleges only an ordinary business decision with a pejorative characterization added. (3) The allegation of "duplication" of existing product research facilities similarly simply states a matter that falls within ordinary business judgment; that plaintiff regards the decision as unwise, foolish, or even stupid in the circumstances is not legally significant; indeed that others may look back on it and agree that it was stupid is legally unimportant, in my opinion. (4) That the terms of the purchase of "Steak-umms" seem to plaintiff unwise (especially when compared to the terms of a 1980 transaction involving that product) again fail utterly to state any legal claim. No self-interest, nor facts possibly disclosing improper motive or judgment satisfying the waste standard are alleged. Similarly, (5) the allegations of corporate loss resulting from harm to customer relations by delivery of poor product and (6) harm to supplier relations by poor payment practices, again state nothing that constitutes a legal claim. Certainly these allegations state facts that, if true, constitute either mistakes, poor judgment, or reflect hard choices facing a cash-pressed company, but where is the allegation of conflicting interest or suspect motivation? In the absence of such, where are the facts that, giving the pleader all reasonable inferences in his favor, might possibly make the Saxe v. Brady principle applicable? There are none. Nothing is alleged other than poor business practices. To permit the possibility of director liability on that basis would be very destructive of shareholder welfare in the long-term.

A similar analysis holds for the allegations concerning a contract to acquire the product "Lloyd's Ribs" (7); nothing is alleged other than that the price was excessive and the directors knew (or recklessly didn't know) that "the company could not afford such a transaction." More importantly, the complaint does not allege that the contract was ever closed! Indeed in Count V it is alleged that certain defendants diverted the opportunity to acquire Lloyd's Ribs from TriFoods! Thus, with respect to this possible transaction, not only does the amended complaint contain no allegation of conflict of interest or improper motivation in TriFoods' acquiring "Lloyd's Ribs," but it contains no allegation that a transaction involving the company ever occurred.

Finally, (8) there is the allegation that despite warnings from plaintiff and despite the alleged fact that the Pomfret facility "was not reasonably fit" for the purpose, the directors authorized the purchase of the facility at a "grossly excessive" price in order to implement a business plan that would have the company manufacture some or all of its food products and that defendants caused the company to borrow substantial funds to accomplish that task. Once more there is no allegation of conflict of interest with respect to this transaction^[4], nor is there any allegation [1054] of improper motivation in authorizing the transactions. There is, in effect, only an allegation that plaintiff believes the transaction represents poor business judgment and the conclusion that "no reasonable business person would have engaged in it." ¶ 81. Thus this claim does attempt to plead the Saxe v. Brady test of corporate waste.

Does this attempt to plead a claim respecting the Pomfret move survive a motion to dismiss? Under the general notice pleading rules this conclusory addition to allegations that otherwise clearly fall within the ambit of the business judgment rule might perhaps be regarded as sufficient to proceed to discovery. CHARLES A. WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE & PROCEDURE: Civil 2d § 1215 (1990 and 1995 Supp.). But it is not clear that, where derivative claims are involved, good policy supports the same result. Asserting a derivative claim allows an attorney in the role of agent for shareholders to exert substantially magnified settlement pressure on a defendant. The risk/reward situation of the individual director defendants (discussed above), coupled with the ordinary workings of indemnification rights and insurance, means that very, very few derivative suits reach trial. Strike suits are a greater threat in this context than in civil litigation between two principals. Thus, in such cases the consequences of surviving a motion to dismiss are, as a practical matter, substantially more significant than in garden variety civil litigation.

It is rational and good policy for the law to filter such cases at an early stage more finely than the Rule 12(b)(6) test permits. This in effect can be done through the operation of Rule 23.1, which modifies the notice pleading standard by requiring plaintiff to plead with particularity either that plaintiff has sought to induce the board to bring the action and that the board has failed or refused to do so for no good reason or the reason plaintiff has not sought the board's action. See generally Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984); Rales v. Blasband, Del.Supr., 634 A.2d 927 (1993); Spiegel v. Buntrock, Del. Supr., 571 A.2d 767 (1990).

Defendants have moved to dismiss Count IV on the basis that plaintiff has failed to satisfy the pleading requirements of Rule 23.1. With respect to most of the allegations of this count, I grant the motion to dismiss on the fundamental ground that without regard to Rule 23.1 plaintiff has simply failed to allege facts from which a valid cause of action can be inferred, but with respect to the claim (8) that attempts to plead a waste or mismanagement claim premised on the facts relating to the decision to expend funds and enter into transactions in connection with the acquisition of the Pomfret facility, I grant the motion on the basis that plaintiff has admittedly made a demand upon the board, that the board has indicated both in its response to plaintiff and equally importantly through its motion to dismiss this suit, that in its judgment the corporation's interests will not be advanced by pursuing this litigation and no good reason not to respect that judgment has been alleged.^[5] The test for whether derivative adjudication of this claim may proceed is whether the TriFoods board was so situated with respect to the Pomfret transactions that any exercise of business judgment by the board with respect to those transactions (i.e., the loan, the purchase, the moving, etc.) was inherently subject to reasonable doubt as to whether it was affected by an interest or motive disqualifying it from business judgment protection. [1055] Aronson, 473 A.2d at 814; Spiegel, 571 A.2d at 774; Rales, 634 A.2d at 933. Of course no such interest or motive is alleged and thus no reason to permit the shareholder to second-guess the board decision not to prosecute this claim is alleged. I should note that it is well established that the simple expedient of naming a majority of otherwise disinterested and well motivated directors as defendants and charging them with laxity or conspiracy etc., will not itself satisfy the standards for permitting a shareholder to be excused from demand or to override a board decision not to litigate a corporate claim. See Aronson, 473 A.2d at 815; Pogostin v. Rice, Del.Supr., 480 A.2d 619, 625 (1984).

For the foregoing reason Count IV of the amended complaint will be dismissed.

* * *

Defendants may submit a form of order, on notice, in conformity with the foregoing.

[1] Under Delaware Supreme Court Rule 93(b)(ii) the Committee on Opinions approved a portion of the original opinion for publication. [Editor's Note: Counts I-III, V and VI were not approved for publication.]

[2] I include within the category of improper motivation those cases in which particularized claims of director entrenchment are made. E.g. Cheff v. Mathes, Del.Supr., 199 A.2d 548 (1964); Unitrin, Inc. v. American General Corp., Del.Supr., 651 A.2d 1361 (1995); Or in which, relatedly, transfers of corporate control by the board, as described in Revlon v. MacAndrews & Forbes Holdings, Del.Supr., 506 A.2d 173 (1986) or more pertinently Paramount Communications v. QVC Network, Del.Supr., 637 A.2d 34 (1994) are involved. Finally, I note that in making this simple statement, I count Smith v. Van Gorkom, Del.Supr., 488 A.2d 858 (1985), not as a "negligence" or due care case involving no loyalty issues, but as an early and, as of its date, not yet fully rationalized, "Revlon" or "change in control" case. See Jonathan Macey and Geoffrey Miller, TransUnion Reconsidered, 98 YALES L.J. 127. As such I see it as reflecting a concern with the TransUnion board's independence and loyalty to the company's shareholders in a critical "sale of the company" context.

[3] Interestingly, the obviously problematic nature of entering an injunction (even a preliminary injunction) against directors, while at the same time holding that they were neither suffering from any conflicting interest nor acting in bad faith, caused the Gimbel court to impose a bond that was unprecedented in size especially for the period ($25 million) and which, in fact, was never satisfied. Therefore, while the court indicated its conditional willingness in Gimbel to enter an injunction, in fact no relief ever issued.

[4] It was suggested at oral argument by plaintiff's counsel that the investors who controlled the board at this time were driven by a desire to make the company appear attractive to a future IPO market (i.e. an initial public offering of its stock) and that the desire to have some "bricks and mortar" for that purpose motivated them with respect to the Pomfret transaction, even though it was a poor deal from a business point of view. While one may disagree with the wisdom of any such strategy, if it existed, any interest in making the company appear attractive as an IPO investment, if present, was an interest that all shareholders shared and did not represent a financial conflict of interest with respect to the Pomfret transaction.

[5] Plaintiff seeks to survive this motion with an allegation that the board itself never did address his demand, but that an officer and corporate attorney did so without board involvement. Thus he says any such purported denial of his request will be proven to be ineffective. He asserts that in all events there is now a factual issue with respect to the effectiveness of the board rejection that precludes termination of his suit on the basis of Rule 23.1 at this stage. It is, however, undisputed that Mr. Gagliardi made a pre-suit demand, that the corporation did not institute the suit, that plaintiff did and that the corporation has moved to dismiss under Rule 23.1. These undisputed facts establish the board's official response to the demand and make irrelevant the issue that plaintiff seeks to explore through discovery.

Stuart M. Grant, Michael J. Barry, Christine M. Mackinstosh, Jennifer A. Williams, Rebecca A. Musarra, GRANT & EISENHOFER P.A., Wilmington, Delaware; Attorneys for Petitioners Curtiss-Wright Corporation Retirement Plan; Manulife US Large Cap Value Equity Fund; The Milliken Retirement Plan; Northwestern Mutual Series Fund, Inc., on behalf of its Equity Income Portfolio; and T. Rowe Price Funds SICAV US Large Cap Value Equity Fund.

Gregory P. Williams, John D. Hendershot, Susan M. Hannigan, Andrew J. Peach, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; John L. Latham, Susan E. Hurd, ALSTON & BIRD LLP, Atlanta, Georgia; Gideon M. Caine, ALSTON & BIRD LLP, East Palo Alto, California; Charles W. Cox, ALSTON & BIRD LLP, Los Angeles, California; Attorneys for Respondent Dell Inc.

MEMORANDUM OPINION

LASTER, Vice Chancellor.

The petitioners are five institutions^[1] who owned common stock of Dell, Inc. They sought appraisal after Dell announced a going-private merger. Dell contends that they did not hold their shares continuously through the effective date of the merger and therefore lost their appraisal rights.

The Funds held their shares through custodial banks. By virtue of this relationship, the Funds did not have legal title to the shares; they were beneficial owners. But the custodial banks did not have legal title either. The shares they held were registered in the name of Cede & Co., which is the nominee of the Depository Trust Company ("DTC").^[2]

DTC's place in the ownership structure results from the federal response to a paperwork crisis on Wall Street during the late 1960s and early 1970s. Increased trading volume in the securities markets overwhelmed the back offices of brokerage firms and the capabilities of transfer agents. No one could cope with the burdens of documenting stock trades using paper certificates. The markets were forced to declare trading holidays so administrators could catch up. With trading volumes continuing to climb, it was obvious that reform was needed. Congress directed the SEC to evaluate alternatives that would facilitate trading.

After studying the issue, the SEC adopted a national policy of share immobilization. To carry out its policy, the SEC placed a new entity—the depository institution—at the bottom the ownership chain. DTC emerged as the only domestic depository. Over 800 custodial banks and brokers are participating members of DTC and maintain accounts with that institution. DTC holds shares on their behalf in fungible bulk, meaning that none of the shares are issued in the names of DTC's participants. Instead, all of the shares are issued in the name of Cede. Through a Fast Automated Securities Transfer account (the "FAST Account"), DTC uses an electronic book entry system to track the number of shares of stock that each participant holds.

By adding DTC to the bottom of the ownership chain, the SEC eliminated the need for the overwhelming majority of legal transfers. Before share immobilization, custodial banks and brokers held shares through their own nominees, so new certificates had to be issued frequently when shares traded. With share immobilization, legal title remains with Cede. No new certificates are required.

Although the depository system solved the paperwork crisis, it complicated other aspects of the legal system. Appraisal is one of those areas. When a transaction triggers appraisal rights, Section 262 of the Delaware General Corporation Law (the "DGCL") permits "[a]ny stockholder of a corporation" who complies with its requirements to litigate a proceeding that will result in a judicial determination of the "fair value of the shares." 8 Del. C. §§ 262(a) & (h). The statute states that "[a]s used in this section, the word `stockholder' means a holder of record of stock in a corporation." Id. § 262(a) (the "Record Holder Requirement"). One of the statutory requirements is that a stockholder who wishes to pursue appraisal must "continuously hold[] such shares through the effective date of the merger." Id. (the "Continuous Holder Requirement").

Many appraisal decisions have involved disputes over these requirements. In one recurring scenario, companies argued that a petitioner had lost its appraisal rights when DTC followed its usual procedures, surrendered the shares held in fungible bulk for the merger consideration, and distributed the merger consideration to its participants, who then deposited it in their customers' accounts.^[3] In Alabama By-Products Corp. v. Cede & Co., 657 A.2d 254 (Del. 1995), the Delaware Supreme Court held that if a petitioner had properly perfected its appraisal rights through Cede, then the petitioner would not lose its appraisal rights if DTC surrendered the shares in exchange for the merger consideration. The court reached this conclusion because the surrender did not comply with the appraisal statute's requirements for withdrawing or settling a properly perfected appraisal claim. The practical effect of this decision was to "impose upon the corporation the responsibility of overseeing the surrender of shares after a merger." Id. at 263.

To help issuers oversee the surrender of shares, DTC modified its procedures. Now, when a beneficial owner causes Cede to demand appraisal, DTC removes the shares covered by the demand from the fungible bulk tracked in the FAST Account. DTC does this by causing the issuer's transfer agent to issue a paper stock certificate for the number of shares held by the beneficial owner. The paper certificate is issued in Cede's name, so the same record holder continues to hold the shares for purposes of the Continuous Holder Requirement.

In this case, DTC followed its procedures and issued paper stock certificates in Cede's name for the Funds' shares. DTC then contacted the custodial banks to make arrangements for delivering the resulting valuable pieces of paper. But here another back-office procedure kicked in. For various understandable business reasons (insurance requirements, recordkeeping for internal audit, mitigating risk of theft, etc.), some banks and brokers only hold stock certificates that are issued in the names of their own nominees. The Funds' custodial banks followed this policy.

When DTC contacted the custodial banks, each instructed Dell's transfer agent to record a transfer of the shares to its nominee and issue a certificate in its nominee's name. Dell's transfer agent complied. The Funds remained the beneficial owners. The custodians remained the custodians. But now there were new nominees on the stock ledger.

Dell has moved for summary judgment, arguing that these back-office steps resulted in new record holders and broke the chain of title for purposes of the Continuous Holder Requirement. Under Delaware cases that pre-dated the federal policy of share immobilization, the record holder for purposes of the DGCL was the person that appeared on the stock ledger. After the SEC created the depository system, the Delaware courts adhered to this rule. They did not distinguish the voluntary relationship between a client and its custodial bank or broker (the "broker level" of ownership) from the federally mandated relationship between the custodial bank or broker and DTC (the "depository level" of ownership). Delaware cases simply treated Cede as the holder of record and applied the Continuous Holder Requirement strictly. Under these decisions, the motion must be granted.

A different approach is possible and, in my view, preferable. Federal law looks through Cede and recognizes the custodial banks and brokers as record holders, just as before the federal mandate. If Delaware law took a similar approach, the Funds would retain their appraisal rights, because ownership by the relevant DTC participants never changed. Were I writing on a blank slate, I would account for the federal policy of share immobilization by interpreting the term "stockholder of record" as used in Section 262(a) to parallel its content under the federal securities laws. In other words, the term "stockholder of record" would include a DTC participant. But that is not how our cases have interpreted the statutory term, and this court is bound by those precedents. Dell's motion for summary judgment is therefore granted.

I. FACTUAL BACKGROUND

The facts are drawn from the parties' submissions in connection with Dell's motion for summary judgment. There are no disputes of material fact about the Funds' exercise of their appraisal rights or the re-titling of their shares.

A. The Funds' Ownership Of Dell Shares

On February 5, 2013, Dell agreed to a merger in which each publicly held share of Dell common stock would be converted into the right to receive $13.75 in cash, subject to the right of stockholders to seek appraisal. The Funds held at least 922,975 shares of Dell common stock. Like most investors, the Funds did not hold legal title to their shares. The Funds owned the shares indirectly through accounts at custodial banks. Two of the Funds used J.P. Morgan Chase ("JP Morgan") as their custodian. The others used The Bank of New York Mellon ("BONY").

The custodial banks did not own record title either. JP Morgan and BONY are two of more than 800 custodial banks and brokers who are participating members of DTC.

The vast majority of publicly traded shares in the United States are registered on the companies' books not in the name of beneficial owners— i.e., those investors who paid for, and have the right to vote and dispose of, the shares—but rather in the name of "Cede & Co.," the name used by The Depository Trust Company ("DTC").

Shares registered in this manner are commonly referred to as being held in "street name." . . . DTC holds the shares on behalf of banks and brokers, which in turn hold on behalf of their clients (who are the underlying beneficial owners or other intermediaries).

John C. Wilcox, John J. Purcell III, & Hye-Won Choi, "Street Name" Registration & The Proxy Solicitation Process, in A Practical Guide to SEC Proxy and Compensation Rules 10-3, 10-3 (Amy Goodman et al. eds., 4th ed. 2007 & 2008 Supp.) [hereinafter Street Name] (footnote omitted).

The history of how we arrived at this ownership structure is important and informative.^[4]

Prior to 1970, negotiation was the most common method used to transfer stock in the United States. The owner would endorse the physical certificate to the name of the assignee on the back of the certificate. This endorsement instruct[ed] the corporation, upon notification, [about] the change in ownership of the shares on its corporate books. If the parties used the services of a broker, the seller would transfer the certificate to his brokerage firm. The brokerage firm representing the customer buying the security would receive the physical certificate and transfer it to the buyer as the new record owner of the security. Occasionally, the new owner might request that the physical certificate remain at the street address of the brokerage firm to facilitate the transfer of the certificate in a subsequent sale.

Wolfe, supra, at 180 (footnotes omitted).

Transfer of securities in the traditional certificate-based system was a complicated, labor-intensive process. Each time securities were traded, the physical certificates had to be delivered from the seller to the buyer, and in the case of registered securities the certificates had to be surrendered to the issuer or its transfer agent for registration of transfer.

Prefatory Note at 2.

By the late 1960s, increased trading rendered the certificate system obsolete. The paperwork burden reached "crisis proportions." Id.

Stock certificates and related documents were piled "halfway to the ceiling" in some offices; clerical personnel were working overtime, six and seven days a week, with some firms using a second or even a third shift to process each day's transaction. Hours of trading on the exchange and over the counter were curtailed to give back offices additional time after the closing bell. Deliveries to customers and similar activities dropped seriously behind, and the number of errors in brokers' records, as well as the time to trace and correct these errors, exacerbated the crisis.

Wolfe, supra, at 181 n.49 (quoting SEC Study at 219 n.1). "The difficulty that brokers and dealers experienced in keeping their records due to the volume of transactions and their thin capitalization caused many brokerage firms to declare bankruptcy and many investors to realize losses." Id. at 182.

Congress responded by passing the Securities Investor Protection Act of 1970, which directed the SEC to study the practices leading to the growing crisis in securities transfer. 15 U.S.C. § 78kkk(g). The SEC recommended discontinuing the physical movement of certificates and adopting a depository system. Wolfe, supra, at 182 n.58 (citing SEC Study at 13). Congress then passed the Securities Acts Amendments of 1975, which directed the SEC to "use its authority under this chapter to end the physical movement of securities certificates in connection with the settlement among brokers and dealers of transactions in securities consummated by means of the mails or any means or instrumentalities of interstate commerce." 15 U.S.C. § 78q-1(e). In a resulting report, the SEC found that "registering securities in other than the name of the beneficial owner" was essential to establishing "a national system for the prompt and accurate clearance and settlement of securities transactions." Kahan & Rock, supra, at 1237 n.49.

Thus was born the federal policy of immobilizing share certificates through a depository system. "Congress called for a more efficient process for comparison, clearing, and settlement in a national market system, and for the end of the physical movement of securities certificates in connection with the settlement of transactions among brokers and dealers." Egon Guttman, Transfer of Securities: State and Federal Interaction, 12 Cardozo L. Rev. 437, 447 (1990); accord S. REP. NO. 94-75 at 5 (1975) ("A national clearance and settlement system is clearly needed."). To comply, "[b]rokerages and banks created [depositories] to allow them to deposit certificates centrally (so-called `jumbo certificates,' often representing tens or hundreds of thousands of shares) and leave them at rest." Larry T. Garvin, The Changed (And Changing?) Uniform Commercial Code, 26 Fla. St. U. L. Rev. 285, 315 (1999).

In 1973, just after the paperwork crisis and with the federal writing on the wall, the members of the New York Stock Exchange created DTC to serve as a depository and clearing agency. Originally there were three regional depositories in addition to DTC: the Midwest Securities Depository Trust Company, which held through its nominee, Kray & Co.; the Pacific Securities Depository Trust Company, which held through its nominee, Pacific & Co; and the Philadelphia Depository Trust Company, which held through its nominee, Philadep & Co. "[I]n the 1990's DTC . . . assumed the activities of the [other] depositories." Carnell & Hanks, supra, at 26. Today DTC is the world's largest securities depository and the only domestic depository. Kahan & Rock, supra, at 1238 n.50. "DTC is owned by its `participants,' which are the member organizations of the various national stock exchanges (e.g., State Street Bank, Merrill Lynch, Goldman Sachs & Co.)." Street Name at 10-6 to 10-7.

DTC has been estimated to hold "about three-quarters of [the] shares in publicly traded companies." Garvin, supra, at 315; accord Kahan & Rock, supra, at 1236; Street Name at 10-4 n.2. "The shares of each company held by DTC are typically represented by only one or more `immobilized' jumbo stock certificates held in DTC's vaults." Street Name at 10-7. "The immobilized jumbo certificates are the direct result of Section 17A(e) of the Exchange Act, in which Congress instructed the SEC to `use its authority . . . to end the physical movement of securities certificates. . . .'" Id. at 10-7 n.10.

The depository system is what enables public trading of securities to take place. In 2014, the NYSE reported average daily volume of approximately 1 billion shares and approximately 4 million separate trades. See NYSE Factbook, http://www.nysedata.com/factbook (last visited June 19, 2015). The failure of the certificate-based system to keep up with much lower trading volumes in the 1960s demonstrates that it cannot meet current demand. Prefatory Note at 2. Without immobilization and DTC, "implementing a system to settle securities within five business days (T+5), much less today's norm of T+3 or the current goals of T+1 or T+0, would simply be impossible." Kahan & Rock, supra, at 1238. Trading at current levels is only possible because of share immobilization and DTC. Street Name at 10-7; accord Garvin, supra, at 315-16; Prefatory Note at 2-3.

Because of the federal policy of share immobilization, it is now Cede—not the ultimate beneficial owner and not the DTC-participant banks and brokers—that appears on the stock ledger of a Delaware corporation. Cede is typically the largest holder on the stock ledger of most publicly traded Delaware corporations. Street Name at 10-6. To preserve the pre-immobilization status quo—at least at the federal level—the SEC provided that for purposes of federal law, the custodial banks and brokers remain the record holders. Depositories are defined as "clearing agencies." 15 U.S.C. § 78c(23)(A). The term "record holder" is defined as "any broker, dealer, voting trustee, bank, association or other entity that exercises fiduciary powers which holds securities of record in nominee name or otherwise or as a participant in a clearing agency registered pursuant to section 17A of the Act." 17 C.F.R. § 240.14c-1(i). The term "entity that exercises fiduciary powers" is similarly defined as "any entity that holds securities in nominee name or otherwise on behalf of a beneficial owner but does not include a clearing agency registered pursuant to section 17A of the Act or a broker or a dealer." Id. § 240.14c-1(c). Federal law thus looks through DTC when determining a corporation's record holders. For example, when determining whether an issuer has 500 or more record holders of a class of its equity securities such that it must register under 15 U.S.C. § 781(g), DTC does not count as a single holder of record. Each DTC participant member counts as a holder of record. Michael K. Molitor, Will More Sunlight Fade The Pink Sheets?, 39 Ind. L. Rev. 309, 315-16 (2006) (citing SEC interpretive releases).

The federal regulations also ensure that a corporation can easily find out the identities of the banks and brokers who hold shares through DTC. Federal regulations require that DTC "furnish a securities position listing promptly to each issuer whose securities are held in the name of the clearing agency or its nominee." 17 C.F.R. § 240.17Ad-8(b). The participant listing is known colloquially as the "Cede breakdown," and it identifies for a particular date the custodial banks and brokers that hold shares in fungible bulk as of that date along with the number of shares held. A Delaware corporation can obtain a Cede breakdown with ease. In 1981, this court noted that a Cede breakdown could be obtained in a matter of minutes. Hatleigh Corp. v. Lane Bryant, Inc., 428 A.2d 350, 354 (Del. Ch. 1981). A Cede breakdown can now be obtained through DTC's website or by calling the DTC "Proxy Services Hotline." Issuers use the Cede breakdown to understand their stockholder profile, and proxy solicitors use it when advising clients. Commentary regards the information as reliable. Handbook for the Conduct of Shareholders' Meetings 40 (ABA Business Law Section, Corporate Governance Committee ed., 2000) (identifying the "lists of holders obtained from depositories" as one of the documents that can be relied on in "determining the shares entitled to vote and tabulating the vote").

A publicly traded corporation cannot avoid going through DTC. Federal law requires that when submitting a matter for a stockholder vote, an issuer must send a broker search card at least twenty business days prior to the record date to any "broker, dealer, voting trustee, bank, association, or other entity that exercises fiduciary powers in nominee name" that the company "knows" is holding shares for beneficial owners. 17 C.F.R. § 240.14a-13(a). Rule 14a-13 provides that "[i]f the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to Section 17A of the Act (e.g., `Cede & Co.,' nominee for Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency." Id. § 240.14a-13(a) n.1 (emphasis added). An issuer cannot look only at its own records and treat Cede as a single, monolithic owner.

B. The Funds Seek Appraisal, And DTC Certificates The Shares.

Dell was a publicly traded company and the merger involved a stockholder vote, so Dell had to go through the federally mandated process to identify the custodial banks and brokers that held its shares through DTC, then send information through them to the beneficial holders. The list of DTC-participants included JP Morgan and BONY. Through JP Morgan and BONY, information reached the Funds.

The Funds exercised appraisal rights for the 922,975 shares that are the subject of this motion. Because they owned their shares in street name through their custodial banks, the Funds caused Cede to demand appraisal on their behalf. On July 12, 2013, before the vote on the merger, Cede made appraisal demands for the Funds.

DTC held all of the Dell shares registered in street name in fungible bulk, which enabled DTC to track their ownership through electronic bookkeeping entries in the FAST Account. When the Funds caused Cede to make appraisal demands for their shares, DTC moved a corresponding number of shares out of the FAST Account by directing Dell's transfer agent to issue uniquely numbered certificates. By issuing paper certificates, DTC sought to avoid inadvertently surrendering the shares for the merger consideration along with other shares in the FAST Account. This procedure protected Dell, which effectively had "the responsibility of overseeing the surrender of shares after a merger." Ala. By-Prods., 857 A.2d at 263.

Dell's transfer agent is the American Stock Transfer & Trust Company, LLC (the "Transfer Agent"). On July 24, 2013, at DTC's request, the Transfer Agent issued paper stock certificates in Cede's name for the shares owned beneficially by the Funds

C. DTC Delivers The Certificates To The Custodians, Who Re-Title Them.

As a matter of course, DTC does not act as a custodian of paper stock certificates for its participants, even if those certificates are issued in Cede's name. A participant can pay to have a vault at DTC for its certificates, but that is a separate service. Unless a participant has arranged for a vault, DTC will contact the participant and deliver the paper certificate to the participant for safekeeping.

JP Morgan and BONY do not have vaults at DTC. Therefore, after the Transfer Agent delivered the paper certificates for the Funds' shares, DTC made arrangements to deliver them to JP Morgan and BONY.

When a DTC participant receives a paper certificate from DTC, procedures differ. Some leave the certificates in Cede's name and place them in their vaults. Others require that the certificates be re-registered in the names of their own nominees. JP Morgan's and BONY's internal policies do not permit them to hold paper certificates unless the shares are titled in the names of their own nominees. The custodial banks therefore instructed Cede to authorize the shares to be re-titled in the names of their nominees.

On August 5, 2014, Cede endorsed the Funds' certificates to the custodial banks. Over the next three weeks, the custodial banks arranged for the Transfer Agent to reissue the shares in the names of their nominees. The Transfer Agent reissued the shares held for Milliken and Manulife in the name of Hare & Co. and the shares held for Curtiss-Wright in the name of Mac & Co., which are BONY's nominees. The Transfer Agent reissued the shares held for T. Rowe Price in the name of Kane & Co. and the shares held for Northwestern in the name of Cudd & Co., which are JP Morgan's nominees.

There was an additional hiccough at BONY. Shortly after the Transfer Agent reissued the shares, BONY conducted a routine weekly sweep of its vault. BONY found the stock certificates for the shares beneficially owned by Manulife and Milliken and re-deposited them with DTC in the FAST Account.

On September 12, 2013, a majority of Dell's shares voted in favor of the merger. A few weeks later, on October 4, BONY realized that the shares beneficially owned by Manulife and Milliken had been re-deposited in the FAST Account. BONY withdrew them from DTC and had new certificates issued in the name of Hare & Co.

Other than taking steps to cause DTC to demand appraisal for their shares through Cede, the Funds had no involvement in any of the transfers. The Funds did not explicitly approve any or the transfers or cause any of them to take place. The Funds concede that under their agreements with their custodial banks, they gave their custodians authority to make these types of back-office transfers.

D. The Merger Closes, And The Funds Seek Appraisal.

The merger closed on October 29, 2013. The Funds filed timely petitions seeking appraisal. They disclosed the issues relating to the re-titling of their shares. Dell moved for summary judgment.

II. LEGAL ANALYSIS

Under Court of Chancery Rule 56, summary judgment "shall be rendered forthwith if . . . there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Ct. Ch. R. 56(c). The facts underlying the motion are undisputed, and its outcome turns purely on the following question of law: Does the Continuous Holder Requirement bar a beneficial owner from pursuing appraisal if there has been an administrative transfer at the depository level? Under current law, the answer is yes.

Read together, the Continuous Holder Requirement and the Record Holder Requirement mandate that an appraisal petitioner "continuously hold" the shares for which appraisal is sought as a "holder of record" through the effective date of the merger. 8 Del. C. § 262(a). There is no dispute that the Funds continuously held their shares as beneficial owners through the effective date of the merger. There is also no dispute that the Funds' custodial banks continuously held the shares on behalf of the Funds through the effective date of the merger. The outcome of the motion turns on the implications of a single event for "holder of record" status: a change in the name on the shares from DTC's nominee to the custodial banks' nominees.

The appraisal statute does not define what it means to be a "holder of record." No other provision of the DGCL defines what it means to be a "holder of record." The current interpretation is circular: "The appraisal statute confers the right to an appraisal only upon the stockholder of record in the corporation. Consequently, only the person appearing on the corporate records as the owner of stock in the corporation may qualify for an appraisal. . . ." Engel v. Magnavox Co., 1976 WL 1705, at *1 (Del. Ch. Apr. 22, 1976). But that statement begs the question: What are the records of the corporation for purposes of determining legal ownership?

In a simplified model of a Delaware corporation, the corporate secretary maintains a document called the stock ledger. From the corporation's standpoint, the stock ledger identifies all of the legally relevant transactions in the corporation's shares, including the date when any person acquires shares and the number of shares acquired, and the date when any person transfers shares and the number of shares sold. If a holder transfers shares without notifying the corporation, the corporation is not required to discover that fact, nor need the corporation voluntarily treat the new holder as the legal owner. The corporation can rely on its records until a stockholder takes proper steps to transfer title to the shares. Under this system, a paper stock certificate is not actually a share of stock. It is only evidence of ownership of a share of stock.^[5]

If the corporation needs to determine who its current stockholders are as of a particular date, the corporate secretary uses the stock ledger to prepare a stock list. The stock list identifies those stockholders who own stock as of a given date, together with the number and type of shares owned, based on the records. See 8 Del. C. § 219(a) & (c). Evidencing the connection between this process and the concept of a record holder, the date used for preparing the stock list is called the "record date."^[6]

For most contemporary public corporations, the simplified model no longer holds. Virtually all public corporations have outsourced the maintaining of the stock ledger to a transfer agent, as Dell did. The stock ledger and the stock list as of a particular record date are corporate records, but they exist and are maintained outside the corporation.

A. Existing Delaware Law Applied To This Case

If the only relevant records are those maintained by Dell or the Transfer Agent, then summary judgment must be granted in favor of Dell. Under existing precedent, Cede was the stockholder of record for purposes of the Funds' shares and therefore made the appraisal demand. "The record holder must . . . continuously hold such shares [seeking appraisal] through the effective date of the merger. . . ." In re Appraisal of Transkaryotic Therapies, Inc., 2007 WL 1378345, at *3 (Del. Ch. May 2, 2007). It is the "record holder—not the beneficial owner—[that] is subject to the statutory requirements for showing entitlement to appraisal and demonstrating perfection of appraisal rights under Sections 262(a) and (d)." In re Ancestry.com, Inc., 2015 WL 66825, at *8 (Del. Ch. Jan. 5, 2015). The re-titling of a certificated share after the demand but before the effective date violates the Continuous Holder Requirement by causing record ownership to change. See Nelson v. Frank E. Best Inc., 768 A.2d 473, 477 (Del. Ch. 2000) (Strine, V.C.) (noting that after Cede transferred record ownership of shares seeking appraisal to appraisal petitioner "Cede's demand was invalid, because Cede would not `continuously' be the holder of record between the . . . date of Cede's demand and the effective date of the Merger, as is required by 8 Del. C. § 262(a).").

There is no dispute that on Dell's records as maintained by the Transfer Agent, legal ownership of Funds' shares changed from Cede to the four current nominees: Mac & Co., Kane & Co., Hare & Co., and Cudd & Co. When the shares were re-titled, the Funds lost their appraisal rights.

In an effort avoid this result, the Funds cite Alabama By-Products and contend that "because the right to appraisal vests at the time of perfection, the redemption of the beneficial owners' shares by the custodian and record holder without the knowledge of the beneficial owners [does] not extinguish the beneficial owners' right to appraisal of the fair value of their shares." Petitioners' Br. at 13. The issue in Alabama By-Products was whether the surrender by DTC of the appraisal petitioners' shares and the subsequent distribution of the merger consideration deprived the appraisal petitioners of properly perfected appraisal rights. At the time of the surrender, more than sixty days had elapsed since the closing of the merger, and an appraisal petition had been filed within the statutory time period. Under the appraisal statute, a stockholder cannot unilaterally withdraw an appraisal demand more than sixty days after the merger closes, and any withdrawal after the filing of a petition requires court approval. 8 Del. C. § 262(h). The Delaware Supreme Court held that DTC's surrender of the shares more than sixty days after the merger closed, post petition, and without court approval did not compromise the petitioners' appraisal rights because the surrender did not satisfy the statutory requirements.

To bring themselves within the scope of Alabama By-Products, the Funds describe their appraisal rights as "perfected," but the only step in the statutory process that had been completed at the time of the re-titling was the making of a demand. The merger had not yet closed, the time for unilateral withdrawals had not yet elapsed, and no appraisal petition had been filed. When the Funds' shares were re-titled, their appraisal rights remained fragile and easily lost through voluntary action by the holder. The custodial banks instructed DTC and the Transfer Agent to re-title the shares, and under current law, ownership changes driven by DTC's role in the depository system are regarded as voluntary transfers. At the stage when the re-titling occurred, the statutory provisions found controlling in Alabama By-Products did not yet apply.

The Funds also contend that the Continuous Holder Requirement should be "liberally construed for the protection of objecting stockholders, within the boundaries of orderly corporate procedures and the purpose of the requirement," which is a passage quoted from Raab v. Villager Industries, Inc., 355 A.2d 888, 891 (Del. 1976). But as the language of this passage shows, Raab addressed the procedure for making objections under the version of the appraisal statute that existed before 1976. In that statutory scheme, a stockholder who wanted to exercise appraisal rights had to send a written objection to the corporation before the merger vote, then submit a written demand for appraisal after the merger vote. See 2 Balotti & Finkelstein, supra, § 262 at IX-159. The purpose of the first step—the written objection—was "merely to give notice." Zeeb v. Atlas Powder Co., 87 A.2d 123, 127 (Del. 1952). The Delaware Supreme Court construed the objection requirement more liberally than the demand requirement because "[t]he purpose of the objection [was] of lesser importance than the demand for payment." Raab, 355 A.2d at 891.

Stockholders seeking appraisal no longer have to make a separate objection, so Raab's language regarding the "liberal construction" of this requirement is no longer relevant. Delaware decisions have not generally construed other aspects of the appraisal statute liberally in favor of stockholders. See generally Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in Mergers & Consolidations at A-97 (5th ed. 2010) (collecting cases). The Delaware Supreme Court has endorsed a principle of strict construction, explaining that "[b]y exacting strict compliance . . ., the appraisal statute ensures the expedient and certain appraisal of stock." Ala. By-Prods., 657 A.2d at 263. In subsequently re-affirming its adherence to the principle, the Delaware Supreme Court cautioned that strict construction should be applied "even-handedly, not as a one-way street." Berger v. Pubco Corp., 976 A.2d 132, 144 (Del. 2009). In other words, both petitioners and the corporation must adhere strictly to the appraisal statute's requirements; neither gets the benefit of the doubt under more a lenient rule of "liberal construction." Given these pronouncements and existing precedent, the Funds cannot rely on a principle of liberal construction to preserve their appraisal rights.

Finally, the Funds have pointed to the fact that they did not know about or approve the nominee-level transfers. It is undisputed that their agreements with their custodial banks permitted the banks to re-title the shares. Our law currently treats ownership changes driven by the depository system as voluntary transfers, making this a risk that the Funds accepted. By choosing to hold through intermediaries, the Funds assumed the risk that the intermediaries might "act contrary to [their] interests." Ala. By-Prods., 657 A.2d at 262.

B. The Possibility Of A Different Approach

There is another possible interpretation of the Record Holder Requirement. When Congress and the SEC created the depository system, they added DTC at the bottom of the ownership chain and introduced Cede as the new omnibus record holder, but the identities of the custodial banks and brokers did not go away. They continue to appear on the DTC participant list. As discussed in the Factual Background, the DTC participant list is an integral part of the federally mandated ownership scheme. A publicly traded corporation cannot avoid going through DTC. See 17 C.F.R. § 240.14a-13(a). Rule 14a-13 requires that the issuer "make appropriate inquiry" of DTC to identify the custodial banks and brokers who own shares through Cede. Id. § 240.14a-13(a) n.1. An issuer cannot rely on the stock ledger maintained by its transfer agent, pretend that Cede is a single record holder, and ignore the Cede breakdown. For purposes of federal law, Cede is not a record holder. 15 U.S.C. § 78c(23)(A). The record holders are the banks and brokers on the DTC participant list. 17 C.F.R. § 240.14c-1(i).

Were I writing on a blank slate, I would hold that the "records" of the corporation for purposes of determining who is a "stockholder of record" include the DTC participant list. Under this interpretation, the custodial banks and brokers who appear on the DTC participant list would be stockholders of record for purposes of Delaware law, just as they are for federal law and just as they were before share immobilization. If that rule applied, then the motion for summary judgment would be denied, because there was no change of ownership at the DTC participant level.

In my view, this interpretation better reflects current reality. Viewed pragmatically, the federal policy of share immobilization compelled publicly traded Delaware corporations to outsource one part of the stock ledger—the DTC participant list—to DTC, just as Delaware corporations have chosen to outsource other parts of the stock ledger to transfer agents. Before share immobilization, banks and brokers appeared on the stock ledger as registered holders. After share immobilization, the same banks and brokers appear on the stock ledger indirectly through DTC and the Cede breakdown. Just as Delaware law treats the outsourced stock ledger as a record of the corporation, albeit one maintained by a third party, Delaware law likewise should treat the outsourced DTC participant list as a record of the corporation, albeit one maintained by DTC.

Adopting this approach would recognize that the changes in ownership driven by the role of DTC in the depository system result from the federal policy of share immobilization. This case provides a fitting example. But for the federal mandate, JP Morgan and BONY would have appeared through their nominees on the stock ledger maintained by the Transfer Agent. There would have been no need to re-title the shares. The Funds lost their appraisal rights because of a system imposed by federal law.

But in light of existing precedent, I do not believe that this court is free to interpret the "holder of record" language in this manner. I previously advocated treating DTC participants as holders of record for purposes of analyzing whether the shares they held could be voted without a DTC omnibus proxy. See Kurz v. Holbrook, 989 A.2d 140 (Del. Ch.), aff'd in part, rev'd on other grounds sub nom. Crown EMAK P'rs, LLC v. Kurz, 992 A.2d 377 (Del. 2010). The Kurz decision posited that recognizing DTC participants as record owners would have beneficial effects for other areas of Delaware law, including appraisal. See Kurz, 989 A.2d at 174 ("In some circumstances, Delaware corporations should benefit from looking through DTC to the holdings of the participant banks and brokers. Reducing the number of shares available for appraisal arbitrage is one area that springs to mind.").

On appeal, the Delaware Supreme Court reversed the Kurz decision on other grounds, rendering it unnecessary for the high court to consider whether DTC participants should be treated as record holders. The Delaware Supreme Court nevertheless characterized the discussion of the DTC participant list as "obiter dictum" that was "without precedential effect."^[7] The high court stated that

a legislative cure is preferable. The DGCL is a comprehensive and carefully crafted statutory scheme that is periodically reviewed by the General Assembly. Indeed, the General Assembly made coordinated amendments to section 219 and section 220 in 2003. Any adjustment to the intricate scheme of which section 219 is but a part should be accomplished by the General Assembly through a coordinated amendment process.

EMAK P'rs, 992 A.2d at 398.

I respectfully disagree with expressed preference for a legislative cure. In my view, the question of what constitutes the records of the corporation for purposes of determining who is a "holder of record" is a quintessential issue of statutory interpretation appropriate for the judiciary to address. As the Delaware Supreme Court has explained, "[i]n our constitutional system, this court's role is to interpret the statutory language that the General Assembly actually adopts, even if unclear and explain what we ascertain to be the legislative intent without rewriting the statute to fit a particular policy position." Taylor v. Diamond State Port Corp., 14 A.3d 536, 542 (Del. 2011). "[T]he Constitution invests the Judiciary, not the Legislature, with the final power to construe the law." Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 325 (1992). The interpretation of statutory text is "one of the Judiciary's characteristic roles." Japan Whaling Ass'n v. Am. Cetacean Soc., 478 U.S. 221, 230 (1986).

The Delaware courts play a particularly significant role in the corporate arena.^[8] Historically the judiciary, rather than the General Assembly, has taken the lead when addressing corporate law issues.^[9] Two leading commentators have noted that the Delaware Supreme Court has not traditionally deferred to the prospect of legislative action. Rather, "the Delaware Supreme Court has shown a certain degree of discomfort with, perhaps even hostility to, legislative intrusions into its domain."^[10]

The significant role played by the Delaware courts stems from the fact that, contra EMAK, the DGCL has not been viewed traditionally as a comprehensive code, but rather as a broadly enabling statute that leaves ample room for private ordering and interpretation.^[11] In an article written while serving as a Vice Chancellor, Chief Justice Strine distinguished between the "Delaware Model," in which the statute is "largely enabling and provides a wide realm for private ordering," and the "Mandatory Statutory Model," under which the corporate code would be "quite detailed and prescriptive." Leo E. Strine, Jr., Delaware's Corporate-Law System: Is Corporate America Buying an Exquisite Jewel or A Diamond in the Rough? A Response to Kahan & Kamar's Price Discrimination in the Market for Corporate Law, 86 Cornell L. Rev. 1257, 1260 (2001). Because the latter type of statute "would dictate how things should happen, there would be less room for judicial interpretation, but also less space for director choice." Id. Chief Justice Veasey has drawn a similar distinction in his own scholarly writings:

A flexible or indeterminate regime, such as we have had in Delaware, is distinct from a rigid codification system that prevails in many systems outside the United States. That is part of the genius of our law. Life in the boardroom is not black and white; directors and officers make decisions in shades of gray all the time. A "clear" law, in the sense of one that is codified, is simply not realistic. . . . There can be no viable corporate governance regime that is founded on a "one size fits all" notion.

E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992-2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 1412-13 (2005) (footnotes omitted). The "skeletal framework" set forth in the flexible DGCL necessarily requires judicial interpretation. Id. at 1411.

A review of applicable precedent teaches that for purposes of the issue discussed in this case, there is ample room for a continuing judicial role. A statutory amendment is one method of modernizing the law, but it is not the only way.

1. The Creation Of The Record Holder Requirement

The statutory appraisal remedy dates back to the adoption of the DGCL in 1899. The original statute contained a section that stated:

If any stockholder in either corporation consolidating aforesaid, who objected thereto in writing, shall within twenty days after the agreement of consolidation has been filed and recorded, as aforesaid, demand in writing from the consolidated corporation payment of his stock, such consolidated corporation shall, within three months thereafter, pay to him the value of the stock at the date of consolidation.

21 Del. Laws c. 273 § 56 (1899). The provision referred only to the right of "any stockholder" to seek payment of the value of his stock, without specifying whether the stockholder had to be a holder of record.

Nearly five decades later, despite a series of intervening amendments, the Delaware appraisal statute continued to refer to "any stockholder" having the right to seek appraisal. The question of whether a beneficial owner could seek appraisal was finally raised in a proceeding arising out of the merger between Salt Dome Oil Corporation and Gulfboard Oil Corporation. See Schenck v. Salt Dome Oil Corp., 34 A.2d 249 (Del. Ch. 1943), rev'd, 41 A.2d 583 (Del. 1945).

William Schenck and his fellow petitioners owned a total of 7,100 shares of Salt Dome common stock, which were registered on its books in the name of Guido Pantaleoni, Jr. They also owned a total of 10,000 shares of Gulfboard common stock, which were registered on its books in the name of Berberich & Co. The petitioners made timely objections to the merger and submitted timely demands for appraisal. They did so in their own names, although their objections and demands identified the record holders and the number of shares for which appraisal was sought. The respondent corporations argued that the petitioners could not seek appraisal unless their names appeared on the stock ledger, regardless of whatever other information they might provide or documentation they might introduce to substantiate their ownership.

Chancellor Harrington rejected this argument, reasoning that on the facts presented, a court of equity could recognize the petitioners as the real owners of the shares. Schenck, 34 A.2d at 252. He declined to construe the term stockholder "in a strictly legal sense" as limited to holders of record. Id. Instead, he reasoned that "Section 61 of the General Corporation Law [the appraisal statute] is clearly for the protection of objecting shareholders [and] should be liberally construed to that end." Id. Although the Chancellor acknowledged that a corporation can only look to its stock list to determine who its stockholders are, he concluded that "the real owner of the shares, nevertheless, has substantial rights that may be materially affected by a corporate consolidation." Id.

The companies appealed, and the Delaware Supreme Court took the opposite view. In reaching its conclusion, the high court discussed (i) the nature of the appraisal remedy, which it regarded as an action at law rather than a proceeding in equity, (ii) existing authorities which said that a corporation could rely exclusively on the information in its records to determine stockholder status, and (iii) a balancing of competing public policies, in which the importance of certainty and predictability prevailed, particularly given the absence of any benefit to the corporation from the then-prevailing system of beneficial ownership.

First, the Delaware Supreme Court viewed the appraisal proceeding as a legal rather than equitable proceeding. Because appraisal was a statutory remedy, the high court reasoned that "[t]he right of an unregistered transferee of stock to object to a proposed agreement of merger must be looked for in the statute." Salt Dome, 41 A.2d at 587. The court found "nothing in the language of the statute that makes clear the legislative intent to bestow the remedy provided upon an equitable owner of stock, but much, indeed, to the contrary." Id. at 588. Rather than an equitable action for breach of fiduciary duty, the appraisal proceeding resembled a debt collection action. A stockholder could collect an appraisal award "as other debts are by law collectible, that is, by suit at law, judgment at law, and by the usual legal process." Id.

Second, the Delaware Supreme Court summarized existing authorities addressing the rights that a beneficial owner had at law:

The term, `stockholder', ordinarily, is taken to apply to the holder of the legal title to shares of stock. In most jurisdictions registration, or its equivalent, is essential to pass the legal title as against the corporation; and the unregistered transferee is not entitled to the rights and privileges of a stockholder in his relations with the corporation. Whatever may be the equitable rights that may arise by a delivery of the stock certificate accompanied with a power of attorney for its transfer, the legal title and legal rights and liabilities of the stockholder of record remain unchanged until the transfer is actually accomplished. The record owner may be but the nominal owner, and, technically, a trustee for the holder of the certificate, but legally he is still a stockholder, and may be treated as the owner by the corporation.

Id. at 585 (citations omitted). After reviewing Delaware authorities addressing other

stockholder rights, most notably the right to vote, the court concluded that only a registered stockholder was entitled to exercise legal rights and be treated as a stockholder by the corporation. See id. at 585-89.

Third, the Salt Dome court turned to considerations of public policy:

With respect to matters intracorporate affecting the internal economy of the corporation, or involving a change in the relationship which the members bear to the corporation, there must be order and certainty, and a sure source of information, so that the corporation may know who its members are and with whom it must treat, and that the members may know, in a proper case, who their associates are. Especially is this true in a merger proceeding which is essentially an intracorporate affair. The merging corporations are entitled to know who the objecting stockholders are so that the amount of money to be paid to them may be provided. The stockholders in general are entitled to know the dissentients and the extent of the dissent. The corporation ought not to be involved in possible misunderstandings or clashes of opinion between the non-registered and registered holder of shares. It may rightfully look to the corporate books as the sole evidence of membership.

Id. at 589 (citation omitted). The Supreme Court reasoned that the relationship between the customer and the broker was a voluntary one, making it appropriate to place any attendant risk on the stockholder: "If, for any reason, [a stockholder] chooses to allow his shares to be registered on the corporate books in the name of another, it is not a denial of his right of actual ownership to require him to establish his rights and pursue his remedy through the nominee of his own selection." Salt Dome, 41 A.2d at 589. The high court therefore held that "only the registered holder of stock is a `stockholder' within the sense of the word as used in" the appraisal statute. Id.

Importantly for present purposes, Salt Dome only addressed the broker level of the beneficial ownership chain. The decision obviously pre-dated the federal policy of share immobilization—still three decades in the future—so the Delaware Supreme Court could not have considered whether any distinctions were warranted at the depository level of ownership, the competing policy considerations raised by the federal response to Wall Street's paperwork crisis, or the benefits that the system provided to issuers. At the time, the decision to hold in street name properly could be regarded as a matter of choice, rather than involving at least one level of beneficial ownership (the depository level) that resulted from federal law. The Delaware Supreme Court also could regard exclusive reliance on the stock ledger as promoting "order and certainty" and providing a "sure source of information." After the federal policy of share immobilization, a legal rule that looks no further than Cede has the opposite effect. It masks the implications of beneficial ownership and promotes uncertainty.

Perhaps most important, the Salt Dome decision did not pre-judge what documents might encompass the appropriate records for determining registered status and whether, after the adoption of the depository system, those records should include the DTC participant list. What the Salt Dome decision does show, however, is that interpreting the appraisal statute to determine which stockholders are entitled to appraisal is an appropriate subject for the courts.

2. Post-Salt Dome, Pre-Codification Cases

After Salt Dome, the Delaware Supreme Court adhered to the Record Holder Requirement in Olivetti Underwood Corp. v. Jacques Coe & Co., 217 A.2d 683 (Del. 1966) and Carl M. Loeb, Rhoades & Co. v. Hilton Hotels Corp., 222 A.2d 789 (Del. 1966). The Court of Chancery applied it in Application of General Realty & Utilities Corp., 42 A.2d 24 (Del. Ch. 1945). The Olivetti decision is noteworthy because it re-framed the corporation's prerogative to rely on its records as a restriction on the corporation's ability to look any further than its records.

The petitioners in Olivetti were brokers who were registered stockholders of Olivetti Underwood Corporation. The brokers made appraisal demands in which they notified Olivetti that they were record holders and did not beneficially own the stock registered in their names. Underwood moved to dismiss the petitions, arguing that the brokers failed to submit proof of their authority to act for the beneficial owners. Citing Salt Dome, the Court of Chancery reasoned that the corporation "ha[d] no right to raise any issue as to the right of a registered owner to seek a statutory appraisal and such a stockholder has no duty to supply proof as to that issue." Abraham & Co. v. Olivetti Underwood Corp., 204 A.2d 740, 741 (Del. Ch. 1964). Underwood appealed.

The Delaware Supreme Court affirmed. After quoting Salt Dome at length, the high court summarized "the rule of the Salt Dome case" as follows: "[T]here is no recognizable stockowner under the merger-appraisal provisions of our Corporation Law except a registered stockholder." Olivetti, 217 A.2d at 686. By restating the holding of the earlier decision in this fashion, the Delaware Supreme Court expanded the rule. Where the Salt Dome decision permitted a corporation to confine itself to dealing with registered stockholders in intra-corporate affairs, the Olivetti opinion required it. The court went further and stated that the corporation "should avoid becoming involved in the affairs of registered stockholders vis-á-vis beneficial owners," admonishing that "the relationship between, and the rights and obligations of, a registered stockholder and his beneficial owner are not relevant issues in a proceeding of this kind." Id. at 686, 687.

3. The Codification Of The Record Holder Requirement

During the 1967 revisions to the DGCL, the General Assembly codified the Record Holder Requirement. The new version of the appraisal statute included the following language:

When used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and as a member of record of a non-stock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a non-stock corporation.

56 Del. Laws c. 50 § 262(a) (1967). In his landmark treatise, Professor Folk explained the purpose of the new text.

Section 262(a), as revised in 1967, defines "stockholder," for purposes of the appraisal remedy, as a holder of record. Although the prior statute was not couched in terms so confined, the prior cases consistently limited the remedy to record owners on the theory that a corporation should, in estimating the number of dissenters, be able to rely exclusively upon corporate records of stock ownership and should not become involved in disputes between registered and nonregistered stockholders. Moreover, the unregistered stockholder is not harmed, since it is within the power to obtain the advantages of record ownership by a transfer into his own name.

Ernest L. Folk, III, The Delaware General Corporation Law: A Commentary and Analysis 373 (1972) (footnotes omitted). Professor Folk also warned that the concept of record ownership did not operate only as an impediment to appraisal petitioners: "The registered stockholder requirement cuts both ways. Not only is the corporation entitled to look solely to record ownership, but in fact it may ordinarily not inquire into the authority of a registered holder to act for beneficial owners." Id. at 374 (footnotes omitted).

All of the qualifications and limitations of the common law version of the Record Holder Requirement apply to the statutory version. The amendment pre-dated the federal policy of share immobilization, although that initiative soon would loom on the horizon. Because the depository system had not yet been established, the General Assembly had no ability to consider the depository level of ownership or the competing policy considerations that led to its creation. Notably, the language of the statutory provision only required that the stockholder be "a holder of record of stock in a stock corporation and as a member of record of a non-stock corporation. . . ." It did not specify what documents might encompass the appropriate records for determining registered status and whether, after the adoption of the depository system, those records should include the DTC participant list.

4. Delaware's Limited Acknowledgement Of Share Immobilization

During the mid-1970s, the SEC implemented the federal policy of share immobilization. Delaware decisions largely ignored this development. Rather than distinguishing between the broker level and the depository level, they treated both as a matter of convenience that resulted exclusively from the private contractual relationship between a broker and its clients. That perception was inaccurate.

A representative decision is Carico v. McCrory Corp., 4 Del. J. Corp. L. 595 (Del. Ch. July 13, 1978). The defendant corporation received a timely written objection from the beneficial holder of the corporation's stock. The objection failed to disclose the identity of the record holder, Cede. The corporation objected to the claim on the ground that a proper written objection was not received from or on behalf of the record holder of the stock in issue. This court agreed, noting that "[t]t is well established that an objection which does not enable the resulting corporation to identify the actual record holder is insufficient." Id. at 598. The court reasoned similarly in Engel v. Magnavox Co., 1976 WL 1705, as did the Delaware Supreme Court in Raab. In fairness, these decisions involved merger objections made by beneficial owners at the top of the ownership chain, so it did not matter whether the record owner was Cede or a broker or custodial bank. In either case, the wrong party made the objection.

In contrast to these decisions, when considering actions brought under a different section of the DGCL, the Court of Chancery showed greater sensitivity to the depository revolution. When stockholders sought to obtain a stock list under Section 220, Delaware decisions held that the Cede breakdown was part of the list.^[12] Ever since, Delaware decisions have ordered the production of a Cede breakdown as part of the stock list.^[13] The decisions did not limit stockholder status to the names appearing on the stock ledger, in which case the inquiry would have stopped with Cede and the breakdown would have been irrelevant. See Olson v. Buffington, 1985 WL 11575, at *3 (Del. Ch. July 17, 1985) ("This Court has recognized that a party entitled to a stocklist pursuant to § 220 is also entitled to a Cede breakdown even though technically Cede is the record holder on the company's books.").

5. An Opportunity Lost: The Enstar Decisions

An opportunity to confront the implications of the depository system for appraisal finally arose in litigation arising out of a merger involving Enstar Corporation. See In re Appraisal of Enstar Corp. (Enstar I), 1986 WL 8062 (Del. Ch. July 17, 1986), rev'd sub nom. Enstar Corp. v. Senouf (Enstar II), 535 A.2d 1351 (Del. 1987). The litigation began as an appraisal proceeding, but Enstar reached a global settlement of the appraisal litigation. After Enstar refused to pay two of the appraisal petitioners, the matter transformed itself into a breach of contract case, with the petitioners seeking to enforce their entitlement to the settlement consideration.

One petitioner was Lucie Senouf. Before the merger, she held 10,441 shares in an account with Drexel Burnham Lambert Incorporated, which in turn held them through DTC. The other petitioner was Margaret Earle. Before the merger, she held 20,000 shares in an account with Prudential-Bache Securities Inc., which in turn held them through DTC. Neither Senouf nor Earle caused Cede to make an appraisal demand. An individual named Mr. Champy made the demand for Senouf. Prudential-Bache made a demand for Earle. Enstar argued that neither petitioner had validly perfected appraisal rights and was not entitled to participate in the settlement.

Senouf and Earle sought to take advantage of the settlement, and the case went to trial before then-Vice Chancellor, later Justice Hartnett. The petitioners did not argue that, by virtue of the depository system and the DTC participant list, Drexel and Prudential-Bache should be considered stockholders of record. Instead, they contended that the disclosures in Enstar's proxy statement did not accurately describe the role of DTC and Cede and misleadingly stated that "[a] record holder such as a broker who holds Common Shares . . . as nominee for beneficial owners . . . must exercise appraisal rights on behalf of such beneficial owners. . . ." Enstar I, 1986 WL 8062, at *4 (emphasis added).

Vice Chancellor Hartnett held that on the facts presented, Senouf and Earle had satisfied the Record Holder Requirement. He described the depository system in some detail, although predominantly as a voluntary choice by brokers. To get the flavor, it is worth quoting his description at length:

CEDE & Co. is a partnership used by The Depository Trust Company as its nominee to hold securities for its participants—all of which are brokerage firms, banks and other financial institutions. Neither The Depository Trust Company nor CEDE & CO. hold any shares for themselves but only hold shares as nominees for the participants in The Depository Trust Company. At the time of the merger CEDE & Co. was listed on the books of ENSTAR as holding over 7 million shares of its stock and there was no breakdown on the books of ENSTAR of the actual beneficial ownership of the CEDE holdings.

The use of CEDE & Co. and similar central security depositories to hold shares for stockbrokers, which shares are in turn held by the stockbrokers for their customers, has emerged as a major, if not dominant, method for the holding of shares of publicly traded corporations. The function performed by the central security depositories is to provide a central facility for the storage of enormous numbers of stock certificates and to provide a means for the transfer of shares without the actual transfer of certificates.

* * *

The publicly held corporations are well aware of the system and it is obviously to their advantage to have their shares held by central security depositories because this aids capital formation and it relieves the corporation of the paperwork which would be required if every owner of a share of stock had his shares listed in his own name on the books of the corporation.

Id. at *1-2.

Vice Chancellor Hartnett contrasted the petitioners' knowledge about Cede with what Enstar knew. In short, he found that neither Senouf nor Earle knew that her broker was a DTC participant or that her shares were registered in Cede's name. By contrast, there was

no question that ENSTAR knew that a large number of its shares were held in the name of CEDE . . . and that CEDE . . . was a nominee used by [DTC] which in turn held the shares for [its] participants—stock brokerage firms, banks and other financial institutions which in turn held them for their customers, the actual beneficial owners.

Id. at *2. He also discussed the Cede breakdown, finding that

ENSTAR received a monthly breakdown from [DTC] of all the shares held in CEDE['s] name which showed the name of the stock broker, etc., for whom the shares were being held and which purportedly listed the number of shares held for each broker. ENSTAR was also entitled to receive, on request, supplementary lists.

Id. At the time of the merger, Enstar knew from participant list that Cede "held 379,268

shares for customers of Prudential-Bache and 40,169 shares for customers of Drexel-Burnham Lambert." Id. Vice Chancellor Hartnett stressed that despite knowing about Cede, Enstar's proxy materials made no mention of it.

Vice Chancellor Hartnett ultimately resolved the case on equitable grounds. He concluded that

[w]hen the totality of the circumstances present here are considered, it is clear that ENSTAR had reasonable constructive notice that Mrs. Earle's and Mrs. Senouf's shares were listed on the corporation records under the name "CEDE & CO." and that its refusal to permit Mrs. Earle and Mrs. Senouf to receive the settlement consideration [provided to appraisal claimants] is based on impermissible hypertechnicalities.

Id. at *7. He thus ordered Enstar to pay the settlement consideration to the petitioners.

Enstar appealed, and the Delaware Supreme Court reversed. The high court viewed the case as a traditional dispute involving beneficial holder status, rather than a new scenario resulting from the depository system. The high court thus relied predominantly on existing precedent, such as Salt Dome, and subsequent cases interpreting the statutory language of the Record Holder Requirement. Enstar II, 535 A.2d at 1354. The court also observed that requiring record holder status was consistent with cases interpreting of other sections of the DGCL, including 8 Del. C. § 219(c), and that the rule was "harmonious with the Uniform Commercial Code," which permits a corporation to "treat the registered owner as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner." Id. (emphasis in original) (quoting 6 Del. C. § 8-207(1)). The court does not appear to have been presented with the argument that by virtue of the DTC participant list, Drexel and Prudential-Bache should have been considered registered owners.

Although the Delaware Supreme Court touched on the practice of holding through DTC, the high court did not consider the origins of the requirement or the overlay of federal law. The Supreme Court regarded DTC as simply a new form of doing business, observing that that "[t]he use of security depositories by brokerage firms now is a common practice." Id. Of particular note, the court commented that "[t]he decision [to use DTC] is a matter which is strictly between the broker and its clients." Id. As support for this proposition, the Supreme Court cited the testimony of Mr. Karasek, an employee of Prudential-Bache who signed the appraisal demand for Earle. He had testified that

[i]f the client wants their (sic) stock in street name, then Prudential-Bache will buy the securities for the client . . .; the client has determined she wants it in street name. That's how it's done.

* * *

The choice is up to the client.

Id. (alterations in original). Reflecting on Mr. Karasek's testimony and citing Delaware cases pre-dating share immobilization, the high court commented that "[i]n making that choice [i.e., the choice to hold in street name], the burden must be upon the stockholder to obtain the advantages of record ownership. The legal and practical effects of having one's stock registered in street name cannot be visited upon the issuer. The attendant risks are those of the stockholder, and where appropriate, the broker." Id. (citations omitted).

Later in the decision, the Supreme Court reiterated its view that Cede's role in the case resulted from a private decision made by the petitioners and their brokers:

Here, the problem is one between the plaintiffs and their brokers. Enstar cannot, and should not, be blamed for the failure of a nominee or broker to correctly perfect appraisal rights for a beneficial owner. Several other brokers properly instructed CEDE & Co. to demand an appraisal on behalf of their customers. The failures of Prudential-Bache or Drexel in that regard should not be shifted to, or borne by, Enstar. The dispute, if any, is between these brokers and their clients.

Enstar II, 535 A.2d at 1355. Elsewhere, the Supreme Court quoted at length from Salt Dome and held:

Thus, in the interest of promoting certainty in the appraisal process . . ., a valid demand must be executed by or on behalf of the holder of record, whether that holder is the beneficial owner, a trustee, agent or nominee. Any other result would embroil merging corporations in a morass of confusion and uncertainty, none of which was of their making.

Id. at 1356.

Finally, the Delaware Supreme Court rejected the argument that Enstar's disclosures about perfecting appraisal rights were misleading. The high court held that the disclosures gave proper instructions for perfecting appraisal rights and that "the relationship between a beneficial stockholder and a nominee are not relevant matters of concern to the merging corporations." Id. at 1357.

In my view, the Delaware Supreme Court's decision in Enstar II reflected incorrect assumptions about the depository system. First, Enstar II assumed that custodial banks and brokers freely chose to move to the depository system for their own convenience.^[14] To the contrary, the depository system was a necessary response to the late 1960s paperwork crisis and embodied in a federal mandate. The Enstar II court similarly treated the holding of shares through depositaries as something that is optional for end-users, i.e., actual investors. While it is true theoretically that any particular investor could opt out of the depository system and chose to hold in record name,^[15] only a few could do so before the system would break down. Just as some individuals can choose not to receive vaccinations and free ride on the immunity of the group, so too can a small minority of stockholders elect to hold shares directly. But without widespread participation in the depository system, securities markets would again drown in paperwork. The system was imposed by Congress and the SEC, and almost-universal participation is a de facto requirement.

Second, Enstar II assumed that the depository system imposes only costs on issuers and yielded them no benefits.^[16] Yet by the time of the Enstar II decision, the depository system was what enabled public trading of securities to take place. Issuers could not undertake an initial public offering or otherwise access the equity markets without depository ownership. Being able to raise capital through the public markets is an obvious benefit to issuers. So is avoiding the costly paperwork burdens that previously brought the markets to a stop. See Part I.A., supra. These benefits have only grown more profound since Enstar II.

Third, Enstar II reiterated the Salt Dome decision's concern about the uncertainty and practical difficulties a Delaware corporation would face in identifying its stockholders if asked to look beyond the stock ledger. With the Cede breakdown, those concerns do not exist. When Enstar II was written, a Cede breakdown could be obtained easily, and it provided a reliable listing of the depository institutions that held through DTC. Today, it is even easier to obtain a Cede breakdown, and because trades are now tracked in real time rather than awaiting an end-of-the-day netting-out process, the list is even more accurate.

Finally, Enstar II asserted at several points that the nominee relationship was not a matter of concern for the merging corporation.^[17] That is not accurate either. Under federal law, the corporation whose stockholders would vote on the merger—and who could be eligible for appraisal rights—must go through DTC to identify its custodian banks and brokers for purposes of mailing out proxy materials. The issuer cannot ignore DTC and pretend that Cede is a single holder of record.

Notably, Enstar II did not address whether DTC participants should be regarded as record holders for purposes of Delaware law, as they are for federal law. No one seems to have made the argument, and neither court considered it. Although Enstar II seems to have collapsed the distinction between the broker level of beneficial ownership and the depository level, it did so on the assumption that the pertinent legislative facts had not changed since Salt Dome.^[18] In my view, that was misguided.

Enstar II does appear to have regarded construing the Record Holder Requirement as an appropriate exercise of judicial authority. As I see it, the question of whether DTC participants should be regarded as holders of record remains open for the Delaware Supreme Court to decide, should it wish to do so.

6. The Rise Of Appraisal Arbitrage

The most recent decisions to consider the role of DTC have involved the practice of appraisal arbitrage, a strategy in which investors purchase shares in order to pursue appraisal. In Transkaryotic, this court held that funds who bought shares after the record date for a merger could seek an appraisal for the shares purchased after the record date, without having to show that the shares were not voted in favor of the merger. 2007 WL 1378345, at *3. Subsequent decisions have followed Transkaryotic.^[19]

The outcome in Transkaryotic turned on the role of Cede as the omnibus holder of record. On the record date for the merger, Cede held 29,720,074 shares. Acting in accordance with the instructions of its participants, Cede voted 12,882,000 shares in favor of the merger, leaving 16,838,074 shares eligible for appraisal. The petitioners beneficially owned 2,901,433 shares on the record date and acquired another 8,071,217 shares after the record date. They sought appraisal for all 10,972,650 shares, which was less than the total number of appraisal-eligible shares. This court regarded that fact as dispositive because under Olivetti, "the actions of the beneficial holders are irrelevant," and only "the record holder's actions determine perfection of the right to seek appraisal." Id. at *4, *3. Elaborating, the court explained that

[t]he issue here mirrors that in Olivetti. . . . [Transkaryotic] seeks to examine relationships between Cede (the record holder) and certain non-registered, beneficial holders in order to determine the existence of appraisal rights. But the Supreme Court has already deemed this relationship to be an improper and impermissible subject of inquiry in the context of an appraisal. The law is unequivocal. A corporation need not and should not delve into the intricacies of the relationship between the record holder and the beneficial holder and, instead, must rely on its records as the sole determinant of membership in the context of appraisal.

Id. at *4.

In my view, the rise of appraisal arbitrage suggests the need for a more realistic assessment of the depository system that looks through Cede to the DTC participants. But first, a caveat: Looking through DTC would not eliminate the ability of appraisal petitioners to seek appraisal for shares acquired after the record date, which is an outcome that opponents of appraisal arbitrage frequently advocate. As to that possibility, it is not clear to me why the law should treat a stockholder's right to seek an appraisal differently than how it treats other legal rights. An appraisal claim is simply a chose in action. As such, the claim passes with the shares.^[20] In a market economy, the ability to transfer property, including intangible property, is generally thought to be a good thing; it allows the property to flow to the highest-valuing holder, thereby increasing societal wealth. For creditors, the ability to sell a bundle of property rights that the buyer can enforce is unquestioned. When a creditor assigns a loan, even one in default, the right to enforce the loan passes to the new holder. No one objects that the assignee purchased a lawsuit. It is not apparent to me why a right held by the equity side of the capital structure should be treated differently, particularly when the right to bring an appraisal proceeding has been compared by the Delaware Supreme Court to a debt collection action.^[21] Consequently, no one should view my arguments in favor of looking through DTC as a way to eliminate appraisal arbitrage entirely—itself a debatable policy goal.^[22] Custodial banks and brokers still could buy shares after the record date and seek appraisal for those shares. And of course, even under a regime that denied appraisal rights to shares purchased after the record date, investors still could accumulate large appraisal-eligible stakes between the time of deal announcement and the record date. See Salomon Bros. Inc. v. Interstate Bakeries Corp., 576 A.2d 650, 654 (Del. Ch. 1989) (finding "nothing inequitable about an investor purchasing stock in a company after a merger has been announced with the thought that, if the merger is consummated on the announced terms, the investor may seek appraisal").

Nevertheless, in my view, looking through Cede to the DTC participants would be an improvement. Under the appraisal statute, a record holder is only supposed to be able to seek appraisal for shares (i) owned on the date of statutorily compliant demand for appraisal, (ii) held continuously through the effective date of the merger, and (iii) not voted in favor of the merger. Ancestry.com, 2015 WL 66825, at *4. Taken together, Cede's dominant holdings and the current one-size-fits-all interpretation of the Record Holder Requirement prevent courts from applying these requirements effectively. Cede owns too many shares, and with share immobilization, ownership does not change.

By contrast, if the focus were to move beyond Cede, it should be possible to develop a more nuanced jurisprudence. The number of shares held by banks and brokers does change, and those changes may have legal salience. Or situations may arise that lend themselves to specific rulings, such as if a broker acquires a large block of shares after the record date in a negotiated transaction. In that case, the seller should be readily identifiable, and it should be an easy matter to determine how the shares were voted. The federal securities laws require that banks and brokers obtain voting instructions from their clients, and banks and brokers satisfy this requirement by sending out voting instruction forms. See generally Keir D. Gumbs et al., Debunking the Myths Behind Voting Instruction Forms and Vote Reporting, 21 Corp. Gov. Adv. 1 (July/Aug. 2013). It also may be possible to use voter instruction forms for other purposes, such as confirming whether or not particular shares held by an appraisal claimant on the record date were voted in favor of the merger. And as this case shows, there also may be records at the broker level which, if examined, would allow the courts to apply other statutory limitations more accurately. We already make these types of distinctions when dealing with the right to vote, which was the principal right relied on by analogy in Salt Dome for the creation of the Record Holder Requirement.^[23] Under this more flexible approach, the corporation "generally is entitled to rely on its own stock list," but the list is not conclusive; questions of ownership and the ability to exercise associated rights can be the subject of proof. Preston, 650 A.2d at 649.

It would have been preferable, in my view, to begin developing this case law in 2010. See Kurz, 989 A.2d at 174 (arguing that treating DTC participants as holders of record could help "[r]educ[e] the number of shares available for appraisal arbitrage"). Yet the need for a more flexible approach has not gone away. Looking through Cede is obviously imperfect, but until share tracing becomes possible, the perfect should not be the enemy of the good. Viewed pragmatically, looking through Cede to the custodial banks and brokers on the participant list merely returns Delaware law to the state in which it existed before the federal policy of share immobilization, restoring the conditions that prevailed when Salt Dome was written and later when the Record Holder Requirement was codified.

III. CONCLUSION

Under current law, Dell's motion for summary judgment must be granted. The Funds lost their appraisal rights when their shares were re-titled in the names of their custodial banks' nominees. Were it up to me, I would hold that the concept of a "stockholder of record" includes the custodial banks and brokers on the DTC participant list. But given existing precedent, I believe that only the Delaware Supreme Court can change how our case law interprets the Record Holder Requirement. This court obviously has no ability to tell the Delaware Supreme Court what to do. This decision has attempted only to present the reasons why one trial judge believes that a different approach would be superior.

[1] The five institutions are (i) the Northwestern Mutual Series Fund, Inc. Equity Income Portfolio ("Northwestern"), (ii) the Manulife US Large Cap Value Equity Fund ("Manulife"), (iii) the T. Rowe Price Funds SICAV US Large Cap Value Equity Fund ("T. Rowe Price"), (iv) the Milliken Retirement Plan ("Milliken"), and (v) the Curtiss-Wright Corporation Retirement Plan ("Curtiss-Wright"). Although three are "funds" and two are "plans," this decision refers to them as the Funds. The collective referent is purely for convenience.

[2] Technically, both the Funds and the custodial banks were "entitlement holders." This term defined is under Article 8 of the Delaware Uniform Commercial Code as a "person identified in the records of a securities intermediary as the person having a security entitlement against the securities intermediary." 6 Del. C. § 8-102(a)(7). The term "securities intermediary" means either "a clearing corporation," i.e. DTC, or "a person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity," i.e., the custodial banks. Id. § 8-102(a)(14).

[3] See, e.g., S. Prod. Co. v. Sabah, 87 A.2d 128 (Del. 1952); Roam-Tel P'rs v. AT&T; Mobility Wireless Op. Hldgs. Inc., 2010 WL 5276991 (Del. Ch. Dec. 17, 2010) (Strine, V.C.); Matter of Enstar Corp., 513 A.2d 206 (Del. Ch. 1986); LeCompte v. Oakbrook Consol., Inc., 1986 WL 2827 (Del. Ch. Mar. 7, 1986); Engel v. Magnavox Co., 1976 WL 1705 (Del. Ch. Feb. 5, 1976); Abraham & Co. v. Olivetti Underwood Corp., 204 A.2d 740 (Del. Ch. 1964), aff'd sub nom. Olivetti Underwood Corp. v. Jacques Coe & Co., 217 A.2d 683 (Del. 1966). See generally 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations & Business Organizations § 9.44, at 9-116 (3d ed. 2014) ("Prior to the Delaware Supreme Court's ruling in Alabama By-Products Corp. v. Cede & Co., appraisal rights could be forfeited through any tender at any time, even if the tender was inadvertent and an appraisal petition had been filed." (footnote omitted)). The Delaware cases traditionally treated the receipt of the transaction consideration as something inadvertent. Under Article 8 of the UCC, a securities intermediary is required by law to "take action to obtain a payment or distribution made by the issuer of a financial asset" and is "obligated to its entitlement holder for a payment or distribution made by the issuer of a financial asset if the payment or distribution is received by the securities intermediary." 6 Del. C. § 8-505(a) & (b).

[4] A variety of sources provide consistent accounts of the origins of the depository system. See, e.g., Securities and Exchange Commission, Study Of Unsafe And Unsound Practices Of Brokers And Dealers, H.R. Doc. No. 92-231, 92d Cong., 2d Sess. 9-10 (1971) [hereinafter SEC Study]; Uniform Commercial Code, Prefatory Note to Article 8 (revised 1994) [hereinafter Prefatory Note]; Street Name at 10-6 n.5; Teresa Carnell & James J. Hanks, Jr., Shareholder Voting and Proxy Solicitation: The Fundamentals, Maryland Bar Journal 23, 26 (Jan./Feb. 2004); David C. Donald, Heart of Darkness: The Problem at the Core of the U.S. Proxy System and Its Solution, 6 Va. L. & Bus. Rev. 41, 45, 50-61 (2011); Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 96 Geo. L. J. 1227, 1237-38 & nn.45-50, 1273-74 (2008); Emily I. Osiecki, Alabama By-Products Corp. v. Cede & Co.: Shareholder Protection Through Strict Statutory Construction, 22 Del. J. Corp. L. 221, 223-28 (1997); Suellen M. Wolfe, Escheat and the Challenge of Apportionment: A Bright Line Test To Slice A Shadow, 27 Ariz. St. L.J. 173, 178-88 (1995); Businesses & Subsidiaries-The Depository Trust Company (DTC), http://www.dtcc.com/about/businesses-and-subsidiaries/dtc.aspx (last visited June 5, 2015).

[5] See 8 Del. C. § 158 ("The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares.") (emphasis added); Testa v. Jarvis, 1994 WL 30517, at *6 (Del. Ch. Jan. 12, 1994) (Allen, C.) (noting that "possession of a certificate does not itself constitute ownership of shares"); Haskell v. Middle States Petroleum Corp., 165 A. 562, 563 (Del. Ch. 1933) ("[A] person may be the legal owner of stock even though he has received no certificate; therefore, the certificate is only evidence of ownership."); Smith v. Universal Serv. Motors Co., 147 A. 247, 248 (Del. Ch. 1929) ("The status of stockholder in a corporation is not dependent on the issuance to him of a certificate of stock. The certificate is only an evidence of ownership—a muniment of title."); Mau v. Mont. Pac. Oil Co., 141 A. 828, 831 (Del. Ch. 1928) ("Possession of a certificate is not essential to the ownership of stock."); Baker v. Bankers' Mortg. Co., 135 A. 486, 488 (Del. Ch. 1926) ("Certificates of stock are themselves only evidence of shares. They are not the shares.") (Wolcott, Jos., C.), aff'd sub nom. Sohland v. Baker, 141 A. 277 (Del. 1927).

[6] See id. § 213 (establishing procedures for fixing a record date for determining the stockholders of record entitled (i) to notice of any meeting of stockholders (§ 213(a)), (ii) to vote at any meeting of stockholders (§ 213(a)), (iii) to act by written consent without a meeting (§ 213(b)), or (iv) to receive a dividend or other distribution or allotment of rights (§ 213(c))).

[7] EMAK P'rs, 992 A.2d at 398. There is perhaps some irony in using dictum to characterize a portion of a decision as dictum, although perhaps greater irony in using dictum to instruct trial judges not to use dictum. See Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012). See generally Mohsen Manesh, Damning Dictum: The Default Duty Debate In Delaware, 39 J. Corp. L. 35, 54-63 (2013) (exploring tensions in Gatz). My discussion of an alternative approach to the Record Holder Requirement is admittedly dictum. I considered the alternative of setting forth these views in a law review article or speech, as Gatz suggested, but it seemed to me that to the extent a trial judge wished to suggest to an alternative approach that the Delaware Supreme Court might consider, a judicial opinion that could be reviewed by the Delaware Supreme Court would provide an appropriate and efficient vehicle. See, e.g., In re Cox Commc'ns, Inc. S'holder Litig., 879 A.2d 604, 642-48 (Del. Ch. 2005) (Strine, V.C.) (recommending change in standard of review for controller squeeze-outs); Agostino v. Hicks, 845 A.2d 1110, 1121 (Del. Ch. 2004) (recommending change in standard for distinguishing between direct and derivative actions); In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959, 967-70 (Del. Ch. 1996) (Allen, C.) (recommending change in the law's approach to the duty of oversight). One obvious benefit is that in the event of an appeal, should there by one, the Delaware Supreme Court will have all of the arguments before it in one place. Unless and until the alternative approach discussed in this opinion is adopted by the Delaware Supreme Court, no one should be misled into believing that it has precedential effect. Cf. Gotham P'rs, L.P. v. Hallwood Realty P'rs, L.P., 817 A.2d 160, 167 (Del. 2002) (expressing concern that dictum in trial court opinion "should not be ignored because it could be misinterpreted in future cases as a correct rule of law" and "could be relied upon adversely by courts, commentators and practitioners in the future").

[8] Lawrence Hamermesh, How We Make Law in Delaware, and What to Expect from Us in the Future, 2 J. Bus. & Tech. L. 409, 409 (2007) ("The best-known of the principal policymakers in Delaware are the members of the judiciary."); Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 Vand. L. Rev. 1573, 1591 (2005) ("The most noteworthy trait of Delaware's corporate law is the extent to which important and controversial legal rules are promulgated by the judiciary, rather than enacted by the legislature."); Jill E. Fisch, The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters, 68 U. Cin. L. Rev. 1061, 1075 (2000) ("Delaware corporate law relies on judicial lawmaking to a greater extent than other states.").

[9] See, e.g., Hamermesh, supra, at 414 ("[W]e view the courts as the first line of defense, the first responders in dealing with complex situations. When drafting legislation, we abstain from addressing complicated matters that are hard to figure out, allowing them to develop through the common law."); Omari Scott Simmons, Branding the Small Wonder: Delaware's Dominance and the Market for Corporate Law, 42 U. Rich. L. Rev. 1129, 1159 (2008) ("As a result of the legislature's preference against regulatory prescription and its deference to the judicial branch, Delaware courts are often the first responders to corporate law controversies."); see also Lawrence A. Hamermesh & Norman M. Monhait, A Delaware Response to Delaware's Choice, 39 Del. J. Corp. L. 71, 75 (2014) (agreeing that the Corporation Law Council and the General Assembly "have often subscribed to a . . . `wait-and-see approach' proposing and enacting, respectively, amendments to the DGCL only when there are persuasive reasons to do so" and endorsing a continuing policy of "reticence to initiate legislative action").

[10] Kahan & Rock, Symbiotic Federalism, supra, at 1594. The commentators referred to "numerous examples of this tendency" and provided five examples. Id. at 1594-96. All involved statutory interpretation. Id. One involved the interpretation of the appraisal statute. Id. (citing the narrow interpretation given to language in 8 Del. C. § 262(h) in Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983)).

[11] See, e.g., Shintom Co. v. Audiovox Corp., 888 A.2d 225, 227 (Del. 2005) (describing the DGCL as "an enabling statute that provides great flexibility for creating the capital structure of a Delaware corporation."); In re Topps Co. S'holders Litig., 924 A.2d 951, 958 (Del. Ch. 2007) (Strine, V.C.) (describing the DGCL as "a broadly enabling statute"); Jones Apparel Gp., Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845 (Del. Ch. 2004) (Strine, V.C.) (noting that the DGCL is "is widely regarded as the most flexible in the nation because it leaves the parties to the corporate contract (managers and stockholders) with great leeway to structure their relations, subject to relatively loose statutory constraints"); Matter of Appraisal of Ford Hldgs., Inc. Preferred Stock, 698 A.2d 973, 976 (Del. Ch. 1997) (Allen, C.) (explaining that "unlike the corporation law of the nineteenth century, modern corporation law contains few mandatory terms; it is largely enabling in character"); accord E. Norman Veasey & Christine T. Di Guglielmo, History Informs American Corporate Law: The Necessity of Maintaining A Delicate Balance in the Federal "Ecosystem", 1 Va. L. & Bus. Rev. 201, 204 (2006) ("Corporate statutes, like the Delaware General Corporation Law, continue to take an enabling approach and allow wide latitude for private ordering."); Edward P. Welch & Robert S. Saunders, Freedom and Its Limits in the Delaware General Corporation Law, 33 Del. J. Corp. L. 845, 847 (2008) ("The DGCL gives incorporators enormous freedom to adopt the terms they believe are most appropriate for the organization, finance, and governance of their particular enterprise.").

[12] See Hatleigh Corp. v. Lane Bryant, Inc., 428 A.2d 350 (Del. Ch. 1981); Giovanini v. Horizon Corp., 1979 WL 178568 (Del. Ch. Sept. 10, 1979).

[13] E.g., Berger v. Pubco Corp., 2008 WL 4173860, at *3 (Del. Ch. Sept. 8, 2008); Wynnefield P'rs Small Cap Value, L.P. v. Niagara Corp., 2006 WL 2521434, at *2 (Del. Ch. Aug. 9, 2006); Envtl. Diagnostics, Inc. v. Disease Detection Intern., Inc., 1988 WL 909658, at *3 (Del. Ch. July 15, 1988) (Allen, C.); RB Assocs. of N.J., L.P. v. Gillette Co., 1988 WL 27731, at *2 (Del. Ch. Mar. 22, 1988) (Allen, C.); Shamrock Assocs. v. Tex. Am. Energy Corp., 517 A.2d 658, 661 (Del. Ch. 1986); Weiss v. Anderson, Clayton & Co., 1986 WL 5970, at *4 (Del. Ch. May 22, 1986) (Allen, C.).

[14] See Enstar II, 535 A.2d at 1354 ("The decision [to use DTC] is a matter which is strictly between the broker and its clients."). Other Delaware decisions during this period reflected the same assumption. See, e.g., RB Assocs., 1988 WL 27731, at *3 (describing DTC system as a "mechanism of convenience for the brokerage firms"); Olson, 1985 WL 11575, at *3 (describing Cede as "but a name used for the convenience of the brokerage houses"); Hatleigh, 428 A.2d at 353 (remarking that DTC exists "for the benefit of those firms participating in the Depository Trust Company so as to simplify their stock transfer transactions on behalf of their customers"); Giovanini, 1979 WL 178568, at *1 (describing Cede as a "mechanism of convenience for the brokerage firms").

[15] See, e.g., 6 Del. C. § 8-508 ("A securities intermediary shall act at the direction of an entitlement holder to change a security entitlement into another available form of holding for which the entitlement holder is eligible, or to cause the financial asset to be transferred to a securities account of the entitlement holder with another securities intermediary."); id. cmt. 1 ("If security certificates in registered form are issued for the security, and individuals are eligible to have the security registered in their own name, the entitlement holder can request that the intermediary deliver or cause to be delivered to the entitlement holder a certificate registered in the name of the entitlement holder or a certificate indorsed in blank or specially indorsed to the entitlement holder. . . . If the security can be held by individuals directly in uncertificated form, the entitlement holder can request that the security be registered in its name."); see also 8 Del. C. § 158 ("Every holder of stock represented by a certificate shall be entitled to have a certificate . . . representing the number of shares registered in certificate form.").

[16] See Enstar II, 535 A.2d at 1353 n.2 ("Whether a beneficial stockholder participates in a depository system is a matter between the beneficial stockholder and his broker, and is not a consideration for issuers."); accord Wynnefield P'rs Small Cap Value L.P. v. Niagara Corp., 2006 WL 1737862, at *3 (Del. Ch. June 19, 2006) (same), rev'd on other grounds, 907 A.2d 146 (Del. 2006) (ORDER); Am. Hardware Corp. v. Savage Arms Co., 136 A.2d 690, 692 (Del. 1957) ("If an owner of stock chooses to register his shares in the name of a nominee, he takes the risks attendant upon such an arrangement. . . .").

[17] Enstar II, 535 A.2d at 1354 ("The legal and practical effects of having one's stock registered in street name cannot be visited upon the issuer. The attendant risks are those of the stockholder, and where appropriate, the broker."); id. at 1355 ("Here, the problem is one between the plaintiffs and their brokers. Enstar cannot, and should not, be blamed for the failure of a nominee or broker to correctly perfect appraisal rights for a beneficial owner. . . . The dispute, if any, is between these brokers and their clients.")

[18] The concept of "legislative facts" refers to the empirical assumptions about the world that courts necessarily make when deciding cases. See In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 940 (Del. Ch. 2003) (Strine, V.C.) (deploying concept and citing Kenneth Culp Davis, An Approach to Problems of Evidence in the Administrative Process, 55 Harv. L. Rev. 364, 402-403 (1942)). See generally Leo E. Strine, Jr., The Inescapably Empirical Foundation of the Common Law of Corporations, 27 Del. J. Corp. L. 499, 502-503 (2002) (describing concept at greater length).

[19] See, e.g., Merion Capital LP v. BMC Software, Inc., 2015 WL 67586 (Del. Ch. Jan. 5, 2015); Ancestry.com, 2015 WL 66825.

[20] See generally In re Activision Blizzard Inc. S'holder Litig., ___ A.3d ___, 2015 WL 2438067, *13-25 (Del. Ch. May 21, 2015). Choses in action are transferrable under Delaware law when they are the types of claims that would survive the death of the transferor and pass to his personal representative. See Indus. Trust Co. v. Stidham, 33 A.2d 159, 160-61 (Del. Super. 1942). By statute in Delaware, "[a]ll causes of action, except actions for defamation, malicious prosecution, or upon penal statutes, shall survive. . . ." 10 Del. C. § 3701.

[21] See Salt Dome, 41 A.2d at 588. Indeed, even the right to control how shares vote transfers with the shares, notwithstanding the legal expedient of the record date, because the subsequent holder can compel the seller to issue him a proxy (assuming the seller can be identified). Commonwealth Assocs. v. Providence Health Care, Inc., 641 A.2d 155, 158 (Del. Ch. 1993) (Allen, C.); In re Giant Portland Cement Co., 21 A.2d 697, 701 (Del. Ch. 1941); In re Canal Constr. Co., 182 A. 545, 547-48 (Del. 1936) (Wolcott, Jos., C.); Italo Petroleum Corp. of Am. v. Producers' Oil Corp. of Am., 174 A. 276, 280 (Del. Ch. 1934) (Wolcott, Jos., C.).

[22] Strong arguments can be made that appraisal represents a more rational and efficient alternative to traditional fiduciary duty litigation. See Charles R. Korsmo & Minor Myers, Competition and the Future of M&A; Litigation, 100 Iowa L. Rev. Bull. 19, 25-28 (2015); Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of Public Company M&A;, 92 Wash U. L. Rev. (forthcoming 2015); Charles Korsmo & Minor Myers, The Structure of Stockholder Litigation: When Do The Merits Matter, 75 Ohio State L.J. 829, 859-67 (2014). At one point, the Delaware Supreme Court appeared to prioritize appraisal over fiduciary duty litigation by holding that "a plaintiff's monetary remedy [following a merger] ordinarily should be confined to the more liberalized appraisal proceeding herein established." Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983). That promise did not survive the decisions in Rabkin v. Philip A. Hunt Chemical Corp., 498 A.2d 1099 (Del. 1985), and Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988). See generally Andra v. Blount, 772 A.2d 183, 192 (Del. Ch. 2000) (Strine, V.C.) (explaining that Rabkin and Cede effectively overruled the appraisal-as-basic-remedy aspect of Weinberger).

[23] See, supra, n.19 (citing cases in which court permitted post-record date acquirer of shares to determine how shares were voted, notwithstanding legal ownership on stock list); Preston v. Allison, 650 A.2d 646, 649 (Del. 1994) (looking through name of registered holder on stock list and recognizing voting rights of beneficial owners where form of ownership was mandated by federal law); Sutter Opportunity Fund 2 LLC v. Cede & Co., 838 A.2d 1123, 1129 (Del. Ch. 2003) (permitting issue to look through Cede for purpose of analyzing whether proponebts of a proposal for a matter to be submitted to a vote met a 10% minimum threshold in partnership agreement); Seidman & Assocs., L.L.C. v. G.A. Fin., Inc., 837 A.2d 21, 29 (Del. Ch. 2003) (same); In re Ne. Water Co., 38 A.2d 918, 923 (Del. Ch. 1944) (treating statutory reference to stockholder status being determined by name on stock list as "a limited but practical rule of evidence for the ready ascertainment of persons entitled to notice of and to vote at a stockholders' meeting" but not dispositive in all cases); In re Diamond State Brewery, Inc., 2 A.2d 254, 257 (Del. Ch. 1938) (Wolcott, Jos., C.) ("The court is not bound in a review proceeding [of an election] by the showing of stockholders made on the corporation's books."); cf. Rainbow Navigation, Inc. v. Pan Ocean Navigation, Inc., 535 A.2d 1357, 1359 (Del. 1987) ("We now hold that when the stock ledger is blank or non-existent, the Court of Chancery has the power to consider other evidence to ascertain and establish stockholder status.").

[555] [556] Jonathan Eisenberg, Washington, D.C., for plaintiff.

Hadrian R. Katz, Washington, D.C., for defendant.

MEMORANDUM

GASCH, District Judge.

I. BACKGROUND

This matter is now before the Court on plaintiff's motion for preliminary injunction.

Plaintiff Peter C. Lovenheim, owner of two hundred shares of common stock in Iroquois Brands, Ltd. (hereinafter "Iroquois/Delaware"),^[1] seeks to bar Iroquois/Delaware from excluding from the proxy materials being sent to all shareholders in preparation for an upcoming shareholder meeting information concerning a proposed resolution he intends to offer at the meeting. Mr. Lovenheim's proposed resolution relates to the procedure used to force-feed geese for production of paté de foie gras in France,^[2] a type of paté imported by Iroquois/Delaware. Specifically, his resolution calls upon the Directors of Iroquois/Delaware to:

form a committee to study the methods by which its French supplier produces paté de foie gras, and report to the shareholders its findings and opinions, based on expert consultation, on whether this production method causes undue distress, pain or suffering to the animals involved and, if so, whether further distribution of this product should be discontinued until a more humane production method is developed.

Attachment to Affidavit of Peter C. Lovenheim.

Mr. Lovenheim's right to compel Iroquois/Delaware to insert information concerning his proposal in the proxy materials turns on the applicability of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) ("the Exchange Act"), and the shareholder proposal rule promulgated by the Securities and Exchange Commission ("SEC"), Rule 14a-8.^[3] That rule states in pertinent part:

If any security holder of an issuer notifies the issuer of his intention to present a proposal for action at a forthcoming [557] meeting of the issuer's security holders, the issuer shall set forth the proposal in its proxy statement and identify it in its form of proxy and provide means by which security holders [presenting a proposal may present in the proxy statement a statement of not more than 200 words in support of the proposal^[4]].

Iroquois/Delaware has refused to allow information concerning Mr. Lovenheim's proposal to be included in proxy materials being sent in connection with the next annual shareholders meeting. In doing so, Iroquois/Delaware relies on an exception to the general requirement of Rule 14a-8, Rule 14a-8(c)(5). That exception provides that an issuer of securities "may omit a proposal and any statement in support thereof" from its proxy statement and form of proxy:

if the proposal relates to operations which account for less than 5 percent of the issuer's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the issuer's business.

Rule 14a-8(c)(5), 17 C.F.R. § 240.14a-8(c)(5).

In addition to asserting that this exception applies, Iroquois/Delaware has raised two other challenges to the granting of a preliminary injunction: a) that the suit should be dismissed for lack of proper service of process; and b) that jurisdiction is not proper as to Iroquois/Delaware in this Court.

II. LIKELIHOOD OF PLAINTIFF PREVAILING ON MERITS

A. Service of Process

Iroquois/Delaware first asserts in opposition to plaintiff's motion for preliminary injunction that plaintiff has failed to serve process upon Iroquois/Delaware.^[5]

It is undisputed that plaintiff made service by hand upon C.T. Corporation, the District of Columbia registered agent for a company named Iroquois Brands, Ltd., which is organized under the laws of the State of New York (hereinafter Iroquois/New York) and is distinct from Iroquois/Delaware. Service upon Iroquois/New York was defective as Iroquois/New York is not identified as a defendant.^[6]

A copy of the complaint was also mailed by regular mail to the headquarters of Iroquois/Delaware and to Iroquois/Delaware's general counsel. Iroquois/Delaware asserts that this service was defective as it included only an unexecuted summons and was sent by regular mail instead of service by mail with signed receipt. See D.C.Code § 13-431.

Were these the only attempts at service, Iroquois/Delaware's assertion of no proper service might have merit. However, plaintiff also attempted to serve the complaint together with an executed summons by sending them Federal Express to James P. McCaffrey, President of Iroquois/Delaware, and Joseph H. Sweeney, Senior Vice President of Iroquois. These materials were sent together with a notice of acknowledgment of receipt of summons and complaint. Iroquois/Delaware has not provided the Court with any basis for finding this latest attempt at service insufficient at this time.

B. Jurisdiction

Iroquois/Delaware's second basis for opposing plaintiff's motion for preliminary injunction is its assertion that it is not subject to the jurisdiction of this Court.

[558] Both plaintiff and Iroquois/Delaware agree that section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, governs the jurisdictional issue. That section provides:

Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder, or to enjoin any violations of such chapter or rules and regulations, may be brought in any such district [wherein any act or transaction constituting the violation occurred] or in the district wherein the defendant is found or is an inhabitant or transacts business ....

Id. According to an affidavit provided by the President of Iroquois/Delaware, the company maintains no offices or facilities in the District of Columbia, employs no persons here, owns no property here, and transacts no business here. Affidavit of James P. McCaffrey, ¶ 3.

Plaintiff, however, does not assert that defendant is found or transacts business in the District. Instead, plaintiff asserts that jurisdiction is proper in this District as the alleged violation of Rule 14a-8 plaintiff challenges, the mailing of the proxy statement without including a reference to Mr. Lovenheim's proposal, occurred in this jurisdiction when past proxy statements excluding Mr. Lovenheim's proposal were received by shareholders in the District of Columbia.^[7]

As plaintiff properly notes, jurisdiction and venue are proper under section 27 in any district where any violation of the Exchange Act has occurred. The case law construing this section establishes that the mailing of proxy statements that violate the Exchange Act into a district by interstate mail is sufficient to establish jurisdiction over the party mailing such materials. See, e.g., DeMoss v. First Artists Production Co., Ltd., 571 F.Supp. 409 (N.D.Ohio 1983), appeal dismissed without op., 734 F.2d 14 (6th Cir.1984); Abramson v. INA Capital Management Corp., 459 F.Supp. 917, 920-21 (E.D.N.Y.1978); Mayer v. Development Corp. of America, 396 F.Supp. 917, 928-30 (D.Del.1975); Oxford First Corp. v. PNC Liquidating Corp., 372 F.Supp. 191 (E.D.Pa.1974).

Iroquois/Delaware challenges the applicability of this authority, asserting that "there is no allegation that any violation of the Exchange Act `occurred' in the District of Columbia." Supplemental Memorandum of Defendant Iroquois Brands, Ltd. on Jurisdictional Issues at 4. Instead, Iroquois/Delaware asserts that plaintiff alleges only "that a violation may take place in the future." Id. at 6. However this reasoning overlooks the fact that the complaint does allege a violation of the Exchange Act and shareholder proposal rule when Iroquois/Delaware refused to include plaintiff's proposal in its proxy materials in 1984. See supra, note 7. Accordingly, the Court rejects Iroquois/Delaware's jurisdictional challenge at this time.

C. Applicability of Rule 14a-8(c)(5) Exception

In light of the above discussion of the service and jurisdiction issues, the likelihood of plaintiff's prevailing in this litigation turns primarily on the applicability to plaintiff's proposal of the exception to the shareholder proposal rule contained in Rule 14a-8(c)(5).

Iroquois/Delaware's reliance on the argument that this exception applies is based on the following information contained in the affidavit of its president: Iroquois/Delaware has annual revenues of $141 million with $6 million in annual profits and $78 million in assets. In contrast, its paté de foie gras sales were just $79,000 last year, representing a net loss on paté sales of $3,121. Iroquois/Delaware has only $34,000 [559] in assets related to paté. Thus none of the company's net earnings and less than .05 percent of its assets are implicated by plaintiff's proposal. McCaffrey Affidavit ¶ 6. These levels are obviously far below the five percent threshold set forth in the first portion of the exception claimed by Iroquois/Delaware.

Plaintiff does not contest that his proposed resolution relates to a matter of little economic significance to Iroquois/Delaware. Nevertheless he contends that the Rule 14a-8(c)(5) exception is not applicable as it cannot be said that his proposal "is not otherwise significantly related to the issuer's business" as is required by the final portion of that exception. In other words, plaintiff's argument that Rule 14a-8 does not permit omission of his proposal rests on the assertion that the rule and statute on which it is based do not permit omission merely because a proposal is not economically significant where a proposal has "ethical or social significance."^[8]

Iroquois/Delaware challenges plaintiff's view that ethical and social proposals cannot be excluded even if they do not meet the economic or five percent test. Instead, Iroquois/Delaware views the exception solely in economic terms as permitting omission of any proposals relating to a de minimis share of assets and profits. Iroquois/Delaware asserts that since corporations are economic entities, only an economic test is appropriate.

The Court would note that the applicability of the Rule 14a-8(c)(5) exception to Mr. Lovenheim's proposal represents a close question given the lack of clarity in the exception itself. In effect, plaintiff relies on the word "otherwise," suggesting that it indicates the drafters of the rule intended that other noneconomic tests of significance be used. Iroquois/Delaware relies on the fact that the rule examines other significance in relation to the issuer's business. Because of the apparent ambiguity of the rule, the Court considers the history of the shareholder proposal rule in determining the proper interpretation of the most recent version of that rule.

Prior to 1983, paragraph 14a-8(c)(5) excluded proposals "not significantly related to the issuer's business" but did not contain an objective economic significance test such as the five percent of sales, assets, and earnings specified in the first part of the current version.^[9] Although a series of SEC decisions through 1976 allowing issuers to exclude proposals challenging compliance with the Arab economic boycott of Israel allowed exclusion if the issuer did less than one percent of their business with Arab countries or Israel,^[10] the Commission stated later in 1976 that it did "not believe that subparagraph (c)(5) should be hinged solely on the economic relativity of a proposal." Securities Exchange Act Release No. 12,999, 41 Fed. Reg. 52,994, 52,997 (1976). Thus the Commission required inclusion "in many situations in which the related business comprised less than one percent" of the company's revenues, profits or assets "where the proposal has raised policy questions important enough to be [560] considered `significantly related' to the issuer's business."^[11]

As indicated above, the 1983 revision adopted the five percent test of economic significance in an effort to create a more objective standard. Nevertheless, in adopting this standard, the Commission stated that proposals will be includable notwithstanding their "failure to reach the specified economic thresholds if a significant relationship to the issuer's business is demonstrated on the face of the resolution or supporting statement." Securities Exchange Act Release No. 19,135, 47 Fed. Reg. 47,420, 47,428 (1982). Thus it seems clear based on the history of the rule that "the meaning of `significantly related' is not limited to economic significance." Comment, 1983 Amendments, supra note 10 at 183 (emphasis in original).

The only decision in this Circuit cited by the parties relating to the scope of section 14 and the shareholder proposal rule is Medical Committee for Human Rights v. SEC, 432 F.2d 659 (D.C.Cir.1970).^[12] That case concerned an effort by shareholders of Dow Chemical Company to advise other shareholders of their proposal directed at prohibiting Dow's production of napalm. Dow had relied on the counterpart of the 14a-8(c)(5) exemption then in effect^[13] to exclude the proposal from proxy materials and the SEC accepted Dow's position without elaborating on its basis for doing so.^[14] In remanding the matter back to the SEC for the Commission to provide the basis for its decision, id. at 682, the Court noted what it termed "substantial questions" as to whether an interpretation of the shareholder proposal rule "which permitted omission of [a] proposal as one motivated primarily by general political or social concerns would conflict with the congressional intent underlying section 14(a) of the [Exchange] Act." 432 F.2d at 680 (emphasis in original).^[15]

Iroquois/Delaware attempts to distinguish Medical Committee for Human Rights as a case where a company sought to exclude a proposal that, unlike Mr. Lovenheim's proposal, was economically significant merely because the motivation of the proponents was political. The argument is not without appeal given the fact that the Medical Committee Court was confronted with a regulation that contained no reference to economic significance. See supra note 13. Yet the Medical Committee decision contains language suggesting that the Court assumed napalm was not economically significant to Dow:

The management of Dow Chemical Company is repeatedly quoted in sources which include the company's own publications as proclaiming that the decision to continue manufacturing and marketing napalm was made not because of business considerations, but in spite of them; that management in essence decided [561] to pursue a course of activity which generated little profit for the shareholders....

Id. at 681 (emphasis in original).

This Court need not consider, as the Medical Committee decision implied, whether a rule allowing exclusion of all proposals not meeting specified levels of economic significance violates the scope of section 14(a) of the Exchange Act. See 432 F.2d at 680. Whether or not the Securities and Exchange Commission could properly adopt such a rule, the Court cannot ignore the history of the rule which reveals no decision by the Commission to limit the determination to the economic criteria relied on by Iroquois/Delaware. The Court therefore holds that in light of the ethical and social significance of plaintiff's proposal and the fact that it implicates significant levels of sales, plaintiff has shown a likelihood of prevailing on the merits with regard to the issue of whether his proposal is "otherwise significantly related" to Iroquois/Delaware's business.^[16]

III. OTHER FACTORS BEARING ON INJUNCTIVE RELIEF

In addition to considering the likelihood of plaintiff's prevailing on the merits, consideration of plaintiff's motion for preliminary injunction requires a determination as to whether plaintiff will suffer irreparable injury without such relief, whether issuance of the requested relief will substantially harm other parties, and the public interest. Holiday Tours v. WMATA, 559 F.2d 841 (D.C.Cir.1977); Virginia Petroleum Jobbers Ass'n v. FPC, 259 F.2d 921, 925 (D.C.Cir.1958), cert. denied, 368 U.S. 940, 82 S.Ct. 377, 7 L.Ed.2d 339 (1961).

A. Irreparable Injury

In bringing this action, plaintiff sought to include his proposal in Iroquois/Delaware's 1985 proxy statement. Counsel for Iroquois/Delaware represents that the proxy statement is to be mailed on or immediately after April 6, 1985. Thus plaintiff contends that absent preliminary relief, the relief sought in his action will be moot.

In response, Iroquois/Delaware asserts there is no possibility of irreparable injury as plaintiff has conceded his resolution is likely to fail and even if the resolution passes, it would only require appointment of a study committee. This argument misstates the significance of the shareholder proposal rule which is aimed at guaranteeing that shareholders have access to proxy statements whether or not their proposals are likely to pass^[17] and regardless of the immediate force of the resolution if enacted. Absent a preliminary injunction, plaintiff will suffer irreparable harm by losing the opportunity to communicate his concern with those shareholders not attending the upcoming shareholder meeting.

B. Injury to Iroquois/Delaware

Plaintiff asserts that requiring Iroquois/Delaware to include the Lovenheim proposal in its proxy statement would not cause undue harm to the company. Indeed, Iroquois/Delaware included the proposal in its 1983 proxy materials and has not claimed any resulting harm.

Iroquois/Delaware asserts that granting the injunction plaintiff seeks could have a distinctly adverse impact on the company. This contention is based on the affidavit of Iroquois/Delaware's president which reports that investors tend to react negatively to the institution of litigation and to the issuance of injunctions against a company. McCaffrey Affidavit ¶ 9. The affidavit also raises the possibility that investors may conclude that Iroquois/Delaware is involved in the mistreatment [562] of animals. Id. at ¶¶ 10-11. However, these contentions would appear to be largely speculative.

C. Public Interest

Plaintiff contends that the public interest represented in the Exchange Act is served by granting injunctive relief and allowing all shareholders to make an informed vote on the proposal. In contrast, Iroquois/Delaware submits that an injunction would be contrary to the "public interest in permitting businesses to function free from harassment, and in preventing proxy statements from becoming cluttered." Given the "overriding" public interest embodied in section 14(a) and the shareholder proposal rule in assuring shareholders the right to control the important decisions which affect corporations, Medical Committee, 432 F.2d at 680-81, the Court finds that granting the preliminary injunction would be consistent with the public interest.

IV. CONCLUSION

For the reasons discussed above, the Court concludes that plaintiff's motion for preliminary injunction should be granted.

ORDER

Upon consideration of plaintiff's application for a preliminary injunction, the opposition thereto, and the arguments of counsel in open Court, and, as discussed fully in the memorandum accompanying this order, it appearing that plaintiff has demonstrated a likelihood of success on the merits of his claim that the shareholder proposal he has submitted to the defendant may not be omitted from the defendant's proxy statement under Rule 14a-8(c)(5), 17 C.F.R. § 240.14a-8(c)(5), and it further appearing that absent preliminary injunctive relief plaintiff will suffer irreparable harm, and it further appearing that the defendant will not be unduly harmed by the grant of a preliminary injunction and that the public interest will be served by the grant of such relief, it is by the Court this 27th day of March, 1985,

ORDERED that plaintiff's application for a preliminary injunction be, and hereby is, granted; and that defendant Iroquois Brands, Ltd., a company organized under the laws of the State of Delaware, be, and hereby is, enjoined from omitting plaintiff's shareholder proposal from its 1985 proxy statement; and it is further

ORDERED that plaintiff post bond of One Hundred Dollars ($100.00) as security for any costs awarded pursuant to Federal Rule of Civil Procedure 65(c). This requirement will be satisfied by the filing with the Clerk of the Court of a personal check from plaintiff or plaintiff's counsel.

[1] As will be discussed infra, much of the controversy in this case centers on the need to distinguish between two different corporations named Iroquois Brands, Ltd. — one organized under the laws of the State of Delaware (Iroquois/Delaware) and one organized under the laws of the State of New York (Iroquois/New York).

[2]Paté de foie gras is made from the liver of geese. According to Mr. Lovenheim's affidavit, force-feeding is frequently used in order to expand the liver and thereby produce a larger quantity of paté. Mr. Lovenheim's affidavit also contains a description of the force-feeding process:

Force-feeding usually begins when the geese are four months old. On some farms where feeding is mechanized, the bird's body and wings are placed in a metal brace and its neck is stretched. Through a funnel inserted 10-12 inches down the throat of the goose, a machine pumps up to 400 grams of corn-based mash into its stomach. An elastic band around the goose's throat prevents regurgitation. When feeding is manual, a handler uses a funnel and stick to force the mash down.

Affidavit of Peter C. Lovenheim at ¶ 7. Plaintiff contends that such force-feeding is a form of cruelty to animals. Id.

Plaintiff has offered no evidence that force-feeding is used by Iroquois/Delaware's supplier in producing the paté imported by Iroquois/Delaware. However his proposal calls upon the committee he seeks to create to investigate this question.

[3] 17 C.F.R. § 240.14a-8.

[4] Rule 14a-8 incorporates by reference Rule 14a-4(b), 17 C.F.R. § 240.14a-4(b), which requires issuers of securities to also include statements by proponents of shareholder proposals.

[5] Because Iroquois/Delaware asserts that it has not been properly made a party to this litigation, it has not filed a formal motion to dismiss under Rule 12(b) of the Federal Rules of Civil Procedure but has instead filed a brief as amicus curiae.

[6] Indeed, counsel for Iroquois/New York represents that the New York firm is not publicly traded, and therefore issues no proxy statements, and is not engaged in the paté business.

[7] In addition to challenging Iroquois/Delaware's decision to omit reference to plaintiff's proposal from the proxy materials being sent in connection with the upcoming 1985 shareholder meeting, the complaint alleges that Iroquois/Delaware violated section 14(a) of the Exchange Act and Rule 14a-8 by refusing to include plaintiff's proposal in the proxy materials mailed in April 1984 in connection with the company's 1984 shareholder meeting. See Complaint ¶¶ 14, 18, 24.

[8] The assertion that the proposal is significant in an ethical and social sense relies on plaintiff's argument that "the very availability of a market for products that may be obtained through the inhumane force-feeding of geese cannot help but contribute to the continuation of such treatment." Plaintiff's brief characterizes the humane treatment of animals as among the foundations of western culture and cites in support of this view the Seven Laws of Noah, an animal protection statute enacted by the Massachusetts Bay Colony in 1641, numerous federal statutes enacted since 1877, and animal protection laws existing in all fifty states and the District of Columbia. An additional indication of the significance of plaintiff's proposal is the support of such leading organizations in the field of animal care as the American Society for the Prevention of Cruelty to Animals and The Humane Society of the United States for measures aimed at discontinuing use of force-feeding. See Complaint ¶ 10.

[9] See Comment, The 1983 Amendments to Shareholder Proposal Rule 14a-8: A Retreat from Corporate Democracy?, 59 Tulane L.Rev. 161, 183-84 (1984) (hereinafter "Comment, 1983 Amendments").

[10] 17 C.F.R. § 240.14a-8(c)(5) (1983).

[11] Comment, 1983 Amendments, supra note 10 at 185 (emphasis supplied). For example, "[p]roposals requesting the cessation of further development, planning and construction of nuclear power plants and proposals requesting shareholders be informed as to all aspects of the company's business in European communist countries have been included in this way." Id. (footnotes omitted).

[12] The Medical Committee decision was vacated as moot by the Supreme Court after the shareholder proposal at issue failed to get support from three percent of all shareholders, thereby triggering a separate basis for exclusion, Rule 14a-8(c)(4)(i), 17 C.F.R. § 240.14a-8(c)(4)(i). See SEC v. Medical Committee for Human Rights, 404 U.S. 403, 406, 92 S.Ct. 577, 579, 30 L.Ed.2d 560 (1972).

[13] Rule 14a-8(c)(2), 17 C.F.R. § 240.14a-8(c)(2) (1970), permitted exclusion if a proposal was submitted "primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes."

[14] Medical Committee arose as a direct appeal of the Commission's formal determination. In the instant case, the propriety of excluding the shareholder proposal has not gone before the full Commission although the staff of the SEC has advised Iroquois/Delaware that it will recommend that no enforcement action be taken if the company excludes plaintiff's proposal.

[15] The Court defined the purpose of section 14(a) of assuring that shareholders exercise their right "to control the important decisions which affect them in their capacity as stockholders and owners of the corporation." 432 F.2d at 680-81.

[16] The result would, of course, be different if plaintiff's proposal was ethically significant in the abstract but had no meaningful relationship to the business of Iroquois/Delaware as Iroquois/Delaware was not engaged in the business of importing paté de foie gras.

[17] The one exception is that shareholders may not require inclusion of a previously offered proposal which failed to obtain the votes necessary for resubmission under Rule 14a-8(c)(5). Iroquois/Delaware has not contended that this exception is applicable.