Brief Fact Summary. Lehrman (P) and Cohen (D), rival factions, have dispute over the issuance of Class AD stock and its voting power.
Synopsis of Rule of Law. Creating a new class of voting stock does not dilute and separate the voting rights, they remain vested in the stockholders who made that class, from other elements in the ownership of said stock.
Issue. In creating a new class of voting stock, does it dilute and separate the voting rights, which normally remain vested in the stockholders who made that class, from other elements in the ownership of said stock?
Held. (Herrmann, J.) No. AD’s stock does not separate the voting rights of the two other stocks from the other elements of ownership. The other classes each retained complete control over their stock. Even with voting power dispersed, Lehrman’s (P) assertion that the percentage of reduction created a voting trust is still wrong. The first test of a voting trust is the separation element, which has not happened here. The 10 year period contention was not met here since it was never a trust. Lehrman (P) still claims that even if not a voting trust, the AD stock is still illegal because it had only voting rights and no participating ownership interest which goes against Delaware law. This is not a requirement in Delaware law, see Statute 218, and nonvoting stock is directly authorized in Statute 151 (a). The usually purpose of voting trust statutes is to avoid the plotting of stockholders seeking to acquire voting control to the determinant of other stockholders. There is nothing wrong with the intent of the AD agreement to break deadlocks. Affirmed.
Discussion. Voting trusts or pooling agreements need legitimate purpose to be enforceable. It will not be enforced if used to gain control from minority shareholders, to guarantee employment or salaries for management, or to freeze domination in an incumbent group, or to protect a minority interest in the business.