TITLE 8

Corporations

CHAPTER 1. General Corporation Law

Subchapter XIV. Close Corporations; Special Provisions

§ 341. Law applicable to close corporation.

(a) This subchapter applies to all close corporations, as defined in § 342 of this title. Unless a corporation elects to become a close corporation under this subchapter in the manner prescribed in this subchapter, it shall be subject in all respects to this chapter, except this subchapter.

(b) This chapter shall be applicable to all close corporations, as defined in § 342 of this title, except insofar as this subchapter otherwise provides.

8 Del. C. 1953, §  341;  56 Del. Laws, c. 50.

§ 342. Close corporation defined; contents of certificate of incorporation.

(a) A close corporation is a corporation organized under this chapter whose certificate of incorporation contains the provisions required by § 102 of this title and, in addition, provides that:

(1) All of the corporation’s issued stock of all classes, exclusive of treasury shares, shall be represented by certificates and shall be held of record by not more than a specified number of persons, not exceeding 30; and

(2) All of the issued stock of all classes shall be subject to 1 or more of the restrictions on transfer permitted by § 202 of this title; and

(3) The corporation shall make no offering of any of its stock of any class which would constitute a “public offering” within the meaning of the United States Securities Act of 1933 [15 U.S.C. § 77a et seq.] as it may be amended from time to time.

(b) The certificate of incorporation of a close corporation may set forth the qualifications of stockholders, either by specifying classes of persons who shall be entitled to be holders of record of stock of any class, or by specifying classes of persons who shall not be entitled to be holders of stock of any class or both.

(c) For purposes of determining the number of holders of record of the stock of a close corporation, stock which is held in joint or common tenancy or by the entireties shall be treated as held by 1 stockholder.

8 Del. C. 1953, §  342;  56 Del. Laws, c. 5064 Del. Laws, c. 112, §  59

§ 343. Formation of a close corporation.

A close corporation shall be formed in accordance with §§ 101, 102 and 103 of this title, except that:

(1) Its certificate of incorporation shall contain a heading stating the name of the corporation and that it is a close corporation; and

(2) Its certificate of incorporation shall contain the provisions required by § 342 of this title.

8 Del. C. 1953, §  343;  56 Del. Laws, c. 50.

§ 344. Election of existing corporation to become a close corporation.

Any corporation organized under this chapter may become a close corporation under this subchapter by executing, acknowledging and filing, in accordance with § 103 of this title, a certificate of amendment of its certificate of incorporation which shall contain a statement that it elects to become a close corporation, the provisions required by § 342 of this title to appear in the certificate of incorporation of a close corporation, and a heading stating the name of the corporation and that it is a close corporation. Such amendment shall be adopted in accordance with the requirements of § 241 or 242 of this title, except that it must be approved by a vote of the holders of record of at least 2/3 of the shares of each class of stock of the corporation which are outstanding.

8 Del. C. 1953, §  344;  56 Del. Laws, c. 5057 Del. Laws, c. 148, §  3470 Del. Laws, c. 587, §  32

§ 345. Limitations on continuation of close corporation status.

A close corporation continues to be such and to be subject to this subchapter until:

(1) It files with the Secretary of State a certificate of amendment deleting from its certificate of incorporation the provisions required or permitted by § 342 of this title to be stated in the certificate of incorporation to qualify it as a close corporation; or

(2) Any 1 of the provisions or conditions required or permitted by § 342 of this title to be stated in a certificate of incorporation to qualify a corporation as a close corporation has in fact been breached and neither the corporation nor any of its stockholders takes the steps required by § 348 of this title to prevent such loss of status or to remedy such breach.

8 Del. C. 1953, §  345;  56 Del. Laws, c. 50.

§ 346. Voluntary termination of close corporation status by amendment of certificate of incorporation; vote required.

(a) A corporation may voluntarily terminate its status as a close corporation and cease to be subject to this subchapter by amending its certificate of incorporation to delete therefrom the additional provisions required or permitted by § 342 of this title to be stated in the certificate of incorporation of a close corporation. Any such amendment shall be adopted and shall become effective in accordance with § 242 of this title, except that it must be approved by a vote of the holders of record of at least 2/3 of the shares of each class of stock of the corporation which are outstanding.

(b) The certificate of incorporation of a close corporation may provide that on any amendment to terminate its status as a close corporation, a vote greater than 2/3 or a vote of all shares of any class shall be required; and if the certificate of incorporation contains such a provision, that provision shall not be amended, repealed or modified by any vote less than that required to terminate the corporation’s status as a close corporation.

8 Del. C. 1953, §  346;  56 Del. Laws, c. 50.

§ 347. Issuance or transfer of stock of a close corporation in breach of qualifying conditions.

(a) If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the certificate of incorporation permitted by § 342(b) of this title to be a holder of record of stock of such corporation, and if the certificate for such stock conspicuously notes the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of such person’s ineligibility to be a stockholder.

(b) If the certificate of incorporation of a close corporation states the number of persons, not in excess of 30, who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact.

(c) If a stock certificate of any close corporation conspicuously notes the fact of a restriction on transfer of stock of the corporation, and the restriction is one which is permitted by § 202 of this title, the transferee of the stock is conclusively presumed to have notice of the fact that such person has acquired stock in violation of the restriction, if such acquisition violates the restriction.

(d) Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either:

(1) That such person is a person not eligible to be a holder of stock of the corporation, or

(2) That transfer of stock to such person would cause the stock of the corporation to be held by more than the number of persons permitted by its certificate of incorporation to hold stock of the corporation, or

(3) That the transfer of stock is in violation of a restriction on transfer of stock,

the corporation may, at its option, refuse to register transfer of the stock into the name of the transferee.

(e) Subsection (d) of this section shall not be applicable if the transfer of stock, even though otherwise contrary to subsection (a), (b) or (c) of this section has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its certificate of incorporation in accordance with § 346 of this title.

(f) The term “transfer,” as used in this section, is not limited to a transfer for value.

(g) The provisions of this section do not in any way impair any rights of a transferee regarding any right to rescind the transaction or to recover under any applicable warranty express or implied.

8 Del. C. 1953, §  347;  56 Del. Laws, c. 5071 Del. Laws, c. 339, §§  74-76

§ 348. Involuntary termination of close corporation status; proceeding to prevent loss of status.

(a) If any event occurs as a result of which 1 or more of the provisions or conditions included in a close corporation’s certificate of incorporation pursuant to § 342 of this title to qualify it as a close corporation has been breached, the corporation’s status as a close corporation under this subchapter shall terminate unless:

(1) Within 30 days after the occurrence of the event, or within 30 days after the event has been discovered, whichever is later, the corporation files with the Secretary of State a certificate, executed and acknowledged in accordance with § 103 of this title, stating that a specified provision or condition included in its certificate of incorporation pursuant to § 342 of this title to qualify it as a close corporation has ceased to be applicable, and furnishes a copy of such certificate to each stockholder; and

(2) The corporation concurrently with the filing of such certificate takes such steps as are necessary to correct the situation which threatens its status as a close corporation, including, without limitation, the refusal to register the transfer of stock which has been wrongfully transferred as provided by § 347 of this title, or a proceeding under subsection (b) of this section.

(b) The Court of Chancery, upon the suit of the corporation or any stockholder, shall have jurisdiction to issue all orders necessary to prevent the corporation from losing its status as a close corporation, or to restore its status as a close corporation by enjoining or setting aside any act or threatened act on the part of the corporation or a stockholder which would be inconsistent with any of the provisions or conditions required or permitted by § 342 of this title to be stated in the certificate of incorporation of a close corporation, unless it is an act approved in accordance with § 346 of this title. The Court of Chancery may enjoin or set aside any transfer or threatened transfer of stock of a close corporation which is contrary to the terms of its certificate of incorporation or of any transfer restriction permitted by § 202 of this title, and may enjoin any public offering, as defined in § 342 of this title, or threatened public offering of stock of the close corporation.

8 Del. C. 1953, §  348;  56 Del. Laws, c. 50.

§ 349. Corporate option where a restriction on transfer of a security is held invalid.

If a restriction on transfer of a security of a close corporation is held not to be authorized by § 202 of this title, the corporation shall nevertheless have an option, for a period of 30 days after the judgment setting aside the restriction becomes final, to acquire the restricted security at a price which is agreed upon by the parties, or if no agreement is reached as to price, then at the fair value as determined by the Court of Chancery. In order to determine fair value, the Court may appoint an appraiser to receive evidence and report to the Court such appraiser’s findings and recommendation as to fair value.

8 Del. C. 1953, §  349;  56 Del. Laws, c. 5065 Del. Laws, c. 127, §  1071 Del. Laws, c. 339, §  77

§ 350. Agreements restricting discretion of directors.

A written agreement among the stockholders of a close corporation holding a majority of the outstanding stock entitled to vote, whether solely among themselves or with a party not a stockholder, is not invalid, as between the parties to the agreement, on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors. The effect of any such agreement shall be to relieve the directors and impose upon the stockholders who are parties to the agreement the liability for managerial acts or omissions which is imposed on directors to the extent and so long as the discretion or powers of the board in its management of corporate affairs is controlled by such agreement.

8 Del. C. 1953, §  350;  56 Del. Laws, c. 50.

§ 351. Management by stockholders.

The certificate of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:

(1) No meeting of stockholders need be called to elect directors;

(2) Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for purposes of applying provisions of this chapter; and

(3) The stockholders of the corporation shall be subject to all liabilities of directors.

Such a provision may be inserted in the certificate of incorporation by amendment if all incorporators and subscribers or all holders of record of all of the outstanding stock, whether or not having voting power, authorize such a provision. An amendment to the certificate of incorporation to delete such a provision shall be adopted by a vote of the holders of a majority of all outstanding stock of the corporation, whether or not otherwise entitled to vote. If the certificate of incorporation contains a provision authorized by this section, the existence of such provision shall be noted conspicuously on the face or back of every stock certificate issued by such corporation.

8 Del. C. 1953, §  351;  56 Del. Laws, c. 50.

§ 352. Appointment of custodian for close corporation.

(a) In addition to § 226 of this title respecting the appointment of a custodian for any corporation, the Court of Chancery, upon application of any stockholder, may appoint 1 or more persons to be custodians, and, if the corporation is insolvent, to be receivers, of any close corporation when:

(1) Pursuant to § 351 of this title the business and affairs of the corporation are managed by the stockholders and they are so divided that the business of the corporation is suffering or is threatened with irreparable injury and any remedy with respect to such deadlock provided in the certificate of incorporation or bylaws or in any written agreement of the stockholders has failed; or

(2) The petitioning stockholder has the right to the dissolution of the corporation under a provision of the certificate of incorporation permitted by § 355 of this title.

(b) In lieu of appointing a custodian for a close corporation under this section or § 226 of this title the Court of Chancery may appoint a provisional director, whose powers and status shall be as provided in § 353 of this title if the Court determines that it would be in the best interest of the corporation. Such appointment shall not preclude any subsequent order of the Court appointing a custodian for such corporation.

8 Del. C. 1953, §  352;  56 Del. Laws, c. 50.

§ 353. Appointment of a provisional director in certain cases.

(a) Notwithstanding any contrary provision of the certificate of incorporation or the bylaws or agreement of the stockholders, the Court of Chancery may appoint a provisional director for a close corporation if the directors are so divided respecting the management of the corporation’s business and affairs that the votes required for action by the board of directors cannot be obtained with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally.

(b) An application for relief under this section must be filed (1) by at least one half of the number of directors then in office, (2) by the holders of at least one third of all stock then entitled to elect directors, or, (3) if there be more than 1 class of stock then entitled to elect 1 or more directors, by the holders of two thirds of the stock of any such class; but the certificate of incorporation of a close corporation may provide that a lesser proportion of the directors or of the stockholders or of a class of stockholders may apply for relief under this section.

(c) A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Court of Chancery. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver appointed under §§ 226 and 291 of this title. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as such person shall be removed by order of the Court of Chancery or by the holders of a majority of all shares then entitled to vote to elect directors or by the holders of two thirds of the shares of that class of voting shares which filed the application for appointment of a provisional director. A provisional director’s compensation shall be determined by agreement between such person and the corporation subject to approval of the Court of Chancery, which may fix such person’s compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation.

(d) Even though the requirements of subsection (b) of this section relating to the number of directors or stockholders who may petition for appointment of a provisional director are not satisfied, the Court of Chancery may nevertheless appoint a provisional director if permitted by § 352(b) of this title.

8 Del. C. 1953, §  353;  56 Del. Laws, c. 5071 Del. Laws, c. 339, §  78

§ 354. Operating corporation as partnership.

No written agreement among stockholders of a close corporation, nor any provision of the certificate of incorporation or of the bylaws of the corporation, which agreement or provision relates to any phase of the affairs of such corporation, including but not limited to the management of its business or declaration and payment of dividends or other division of profits or the election of directors or officers or the employment of stockholders by the corporation or the arbitration of disputes, shall be invalid on the ground that it is an attempt by the parties to the agreement or by the stockholders of the corporation to treat the corporation as if it were a partnership or to arrange relations among the stockholders or between the stockholders and the corporation in a manner that would be appropriate only among partners.

8 Del. C. 1953, §  354;  56 Del. Laws, c. 50.

§ 355. Stockholders’ option to dissolve corporation.

(a) The certificate of incorporation of any close corporation may include a provision granting to any stockholder, or to the holders of any specified number or percentage of shares of any class of stock, an option to have the corporation dissolved at will or upon the occurrence of any specified event or contingency. Whenever any such option to dissolve is exercised, the stockholders exercising such option shall give written notice thereof to all other stockholders. After the expiration of 30 days following the sending of such notice, the dissolution of the corporation shall proceed as if the required number of stockholders having voting power had consented in writing to dissolution of the corporation as provided by § 228 of this title.

(b) If the certificate of incorporation as originally filed does not contain a provision authorized by subsection (a) of this section, the certificate may be amended to include such provision if adopted by the affirmative vote of the holders of all the outstanding stock, whether or not entitled to vote, unless the certificate of incorporation specifically authorizes such an amendment by a vote which shall be not less than 2/3 of all the outstanding stock whether or not entitled to vote.

(c) Each stock certificate in any corporation whose certificate of incorporation authorizes dissolution as permitted by this section shall conspicuously note on the face thereof the existence of the provision. Unless noted conspicuously on the face of the stock certificate, the provision is ineffective.

8 Del. C. 1953, §  355;  56 Del. Laws, c. 5056 Del. Laws, c. 186, §  27

§ 356. Effect of this subchapter on other laws.

This subchapter shall not be deemed to repeal any statute or rule of law which is or would be applicable to any corporation which is organized under this chapter but is not a close corporation.

8 Del. C. 1953, §  356;  56 Del. Laws, c. 50.