Delaware Business Litigation Report

Court of Chancery Explains Beneficial Ownership

Mangano v. Pericor Therapeutics Inc., C.A. 3777-VCN (December 1, 2009)

This decision illustrates another loop hole in a stockholder agreement designed to restrict voting rights. Briefly, the agreement provided that an otherwise controlling stockholder would place his stock in a voting trust that would then vote his stock as did the other stockholders. However, there was a provision that permitted the otherwise majority stockholder to transfer his stock to a family member and another provision that terminated the trust if the majority stockholder's stock in trust fell below 45% of the stock outstanding.

Of course, what the majority stockholder did was transfer enough stock to his sister to make him own less than 45% and thereby terminated the trust. His sister then voted with him, and they took control of the corporation.

The Court held that the stockholder did not have a beneficial ownership in the sister's stock as she had no obligation to vote with him or give him any benefit from her ownership of the stock.  To be a beneficial owner you have to have some interest in the stock.

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