Delaware General Corporation Law – Subchapter XIV.

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§ 341. | § 342. | § 343. | § 344. | § 345. | § 346. | § 347. | § 348. | § 349. | § 350. | § 351. | § 352. | § 353. | § 354. | § 355. | § 356.

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. 50; 64 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 two thirds of
the shares of each class of stock of the corporation which are
outstanding. (8 Del. C. 1953, § 344; 56 Del. Laws, c. 50; 57 Del. Laws,
c. 148, § 34; 70 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 two-thirds
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 two-thirds 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 subsection
(b) of § 342 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. 50; 71
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. 50; 65 Del. Laws, c. 127, § 10; 71 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 subsection (b) of § 352 of this
title. (8 Del. C. 1953, § 353; 56 Del. Laws, c. 50; 71 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 two thirds 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. 50; 56 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.)

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