Innocence Lost: The Rebuttable Presumption Of Stock Ownership

By Joanna Diakos Kordalis and Priya Chadha

In Pogue v. Hybrid Energy, Inc., C.A. No. 11563-VCG (Aug. 5, 2016), the Court of Chancery held that inclusion of a party (in this case the plaintiff) in a stock record provides a prima facie but rebuttable case that such party is a stockholder of record for purposes of seeking books and records under DGCL Section 220.  In Pogue, the Court held that the defendant had successfully rebutted the presumption that plaintiff was a stockholder by clear and convincing evidence and therefore the Court denied the plaintiff the relief sought and granted the defendant’s motion for summary judgement.

The plaintiff, James Pogue (“Pogue”), was a former employee of the defendant, Hybrid Energy, Inc. (“Hybrid”).  When Pogue was hired in 2011, Hybrid issued him a stock certificate representing one million common shares of Hybrid stock.  Unbeknownst to Pogue, Hybrid did not have one million shares available for issuance under the Hybrid certificate of incorporation, which only authorized the issuance of 1,500 shares, all of which were then held by the company’s CEO.  Though the issuance to Pogue was void, Hybrid nonetheless included Pogue on its stock ledger and, according to Pogue, even paid him dividends on the shares and provided him with a Form 1099-DIV.

Pogue filed an action seeking books and records under DGCL Section 220 after Hybrid denied Pogue’s request to review Hybrid’s books and records.  Hybrid filed a motion for summary judgment, arguing that Pogue lacked standing under DGCL Section 220 because he was not a stockholder.  Pogue countered that the stock ledger created an irrebutable presumption of ownership for purposes of Section 220.  The Court of Chancery rejected that argument, holding that “inclusion on a stock ledger is prima facie evidence of stock ownership, but that, as here the corporate defendant may rebut that presumption by clear and convincing evidence.”

In reaching its conclusion, the Court of Chancery considered the language and purpose of the statute itself.  Section 220 only allows requests for books and records that are “reasonably related” to the party’s interest as a stockholder.  Here, Pogue was seeking books and records to support a future lawsuit against Hybrid, which the Court of Chancery referred to as an “individual interest,” not an interest of a stockholder.  Thus, the Court refused to “indulge the legal fiction of ownership” because it “would be nonsensical and inimical to the purpose of the statute.”

The Court also rejected an argument by the plaintiff that it was bound by an earlier Delaware Supreme Court ruling in Rainbow Navigation, Inc. v. Pan Ocean Navigation, Inc., which held that courts may examine extrinsic evidence only when they stock ledger is blank or nonexistent.  The Court held that Rainbow did not control because it did not address the current version of Section 220, and its analysis was dependent on prior versions of Sections 219 and 220.

Finally, the Court made clear that it was addressing only the narrow legal issue presented to it and noted that Pogue may have causes of action against Hybrid for fraud.

Pogue v Hybrid Energy

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