Vice Chancellor Tamika Montgomery-Reeves ruled that Jon Henry, a Rockland County, New York-based businessman, who sued to aid in his investigation into allegations of mismanagement by directors of Phixios Holdings Inc., was not aware of the company's stock-transfer rule which the firm said would govern his status as a shareholder when he joined the company in 2015. Nor did he agree to be bound by its provisions, which allow a majority of the company's stockholders to revoke securities if a stockholder is determined to be actively harming the company, Montgomery-Reeves wrote in a 44-page opinion.
Phixios had taken the position it didn't need to comply with the demand, arguing Henry was no longer a stockholder. The agreement establishing the rule was incorporated into the company's bylaws well before Henry went to work for the firm in exchange for a deferred salary of $130,000 and 50,000 shares in the company, Phixios said.
Though the restrictions were not explicitly outlined on the stock certificate, the company alleged that Henry had actual knowledge of the rules, both before and after his stock was issued. Either way, Delaware law supported the stockholder's ability to strip Henry of his stock, the company argued in court filings and at a half-day trial in December.
But Montgomery-Reeves said Phixios' position didn't comport with the statute, which requires that restrictions on stock transfers be "noted conspicuously" on the certificate and mandates that subsequent purchasers both be informed about the restrictions and affirmatively consent to be bound by them.
"Taken to its logical conclusion, the company's position would allow it to entice an investor into purchasing securities with the expectation that transfer is unrestricted because no restrictions are noted on the certificate representing the securities, while withholding the existence of potentially value-reducing restrictions," the vice chancellor wrote.
"This absurd result would completely undercut the purpose of Section 202 to protect the stockholder's bargained-for rights."
Phixios had painted Henry's books-and-records demand as retaliation for a 2016 shareholder vote, which rescinded his stock. The company said its directors believed Henry was working with a consulting company to compete with Phixios.
Henry, who has since retired, said he had been working with the outside firm at Phixios' request and had properly reported back to a director. He also said he didn't receive the stockholder agreement until August 2015, when Penni Blake, Phixios' chief operating officer, sent it to him in attachment to an email. Even then, Henry said he thought it was a set of instructions for tendering stock.