“A recent Delaware Court of Chancery case examines the nature of preferred stock. In Shintom Co., Ltd. v. Audiovox Corporation, pdf, Chancellor Chandler considers a claim that the Delaware General Corporation Law (§ 151(c)) “mandates that the holders of preferred stock must receive dividend rights.” The plaintiff in this case (Shintom) argues that “because Audiovox Delaware’s preferred shares do not pay dividends, they are void as a matter of law.” According to Chancellor Chandler, “This appears to be a question of first impression.”
Section 151(c) reads as follows (emphasis added):
The holders of preferred or special stock of any class or of any series thereof shall be entitled to receive dividends at such rates, on such conditions and at such times as shall be stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directorsif any as hereinabove provided, payable in preference to, or in such relation to, the dividends payable on any other class or classes or of any other series of stock, and cumulative or noncumulative as shall be so stated and expressed. When dividends upon the preferred and special stocks, if any, to the extent of the preference to which such stocks are entitled, shall have been paid or declared and set apart for payment, a dividend on the remaining class or classes or series of stock may then be paid out of the remaining assets of the corporation available for dividends as elsewhere in this chapter provided.
Shintom wanted to read the first part of that section — “The holders of preferred or special stock of any class or of any series thereof shall be entitled to receive dividends” — as requiring dividends, but Chancellor Chandler refers to the “plain language” of § 151(c) to reject this reading: “Had the drafters of § 151(c) intended for mandatory dividends, they certainly would not have left open the very real possibility that the rates could be set at zero.” This must be the right answer. It is certainly the answer I would have given to a client, and I suspect that this is a case of first impression because the issue isn’t really very close.”