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Chancery Upholds Board Decision to Void Shares of Stock due to Lack of Consideration

By Francis G.X. Pileggi

Prizm Group, Inc. v. Anderson, C.A. No. 4060-VCP (Del. Ch. May 10, 2010), read opinion here.

Issue Addressed

Whether shares were either void ab initio or merely voidable due to a lack of proper consideration paid for them.

Holding

The Court of Chancery determined that the board of Prizm Group properly exercised its right to void the shares due to the failure of the alleged shareholder to provide any consideration for them.

Procedural Posture

This is a post-trial opinion based on a suit by a corporation to seek a declaration that shares were either void or voidable due to the lack of consideration paid for them, or alternatively, to ask the Court to cancel the shares for the same reason.

Discussion

The Court applied the version of DGCL Section 142 that was in effect prior to the 2004 amendments. That pre-2004 version provided that unsecured promissory notes were not valid consideration for stock.

The Court determined that it need not decide the distinction between stock that is voidable and stock that is void ab initio. In this case, the Court determined that no adequate consideration was provided for the shares at issue and that they were properly voided by the corporation. The Court also reasoned that they stockholder waived his right to challenge the board action due to his failure to take any action for a substantial period of time despite his awareness of the board decision. 

Full post as published by Delaware Corporate and Commercial Litigation Blog on May 16, 2010 (boomark / email).