In the world of securities class actions and derivative litigation, a spirited tomayto, tomahto debate often emerges over the use of “Stockholder” as opposed to “Shareholder.” Both terms refer to individuals or entities that own shares in a company, making them partial owners of the business. While the distinction may seem like a matter of semantics, akin to choosing between two sides of the same coin, the preference can carry subtle nuances. Yet, much like this classic idiom suggests, the difference is often more about style than substance, with no significant impact on the legal concept of company ownership.
In the Delaware Court of Chancery, there is a clear preference for the use of “Stockholder” over “Shareholder.” On October 23, 2022, a Delaware corporate and commercial litigation attorney observed in a blog post:
The Delaware Court of Chancery prefers “stockholder” as the term uniformly used in the Delaware General Corporation Law for those owning a corporation, though in the past, especially prior to the 2010 DGCL amendments, there were inconsistent references–and court decisions in the past have not always been scrupulous in observing the distinction. See generally In Re Adams Golf Shareholder Litigation, C.A. No. 7354-VCL, transcript (Del. Ch. Oct. 3, 2012) (yes, that’s 10 years ago.).[1]
Shortly thereafter, another corporate attorney commented that “lawyers all have a tendency to get a little goofy about this type of thing.”[2] He explained the distinction along the lines of “there are red birds and blue birds, but although they are both birds, red birds aren’t blue birds, and blue birds aren’t red birds.” Id.
At least in the Delaware Court of Chancery, there is a preference for the use of “Stockholder,” which is statutorily consistent. Delaware General Corporation Law, 8 Del. C. §220 defines “stockholder” as a holder of record of stock in a stock corporation or a person who is the beneficial owner of shares of such stock…” By extension, Delaware’s preference should also be applied in the context of a derivative action, even though Del. R. Ch. Ct. Rule 23.1 uses the term “derivative plaintiff.” A derivative plaintiff must be a stockholder to have standing to pursue claims on behalf of the corporation. Indeed, Westlaw commented on Del. R. Ch. Ct. Rule 23.1 that “[i]n 2023, Rule 23.1 was revised to align its language in certain respects with Federal Rule 23.1 so that authorities interpreting the federal rule could be cited more easily as persuasive authority for the interpretation of Rule 23.1.”
At first the preference seems very clear cut – use “Stockholder” instead of “Shareholder.” This suddenly becomes muddied when reading the first sentence of Fed. R. Civ. P. 23.1: “This rule applies when one or more shareholders or members of a corporation or an unincorporated association bring a derivative action to enforce a right that the corporation or association may properly assert but has failed to enforce.” (emphasis added). When the text of the law uses “Shareholder” instead, it is easy to understand why the terms are used interchangeably and are inconsistent in case law, not just in Delaware, but other courts as well. The federal rule was last amended in 2007, three years prior to the 2010 DGCL amendments that addressed the inconsistency using “Stockholder” and “Shareholder,” so the ambiguity appears in the language of the rules themselves.
Whether the federal rules and Delaware rules will intersect to resolve once and for all the confusion between “Stockholder” and “Shareholder” is yet to be foreseen. There are two things known: (i) the Delaware Court of Chancery prefers “Stockholder,” (ii) the use of “Shareholder,” at least in federal derivative actions, is still very proper. The best advice for lawyers in light of this is to be scrupulous and consistent in their choice of words and colors of birds.
[1] Francis Pileggi, Shareholder v. Stockholder–which term is preferred in Delaware?, Delaware Corporate & Commercial Litigation Blog, https://www.delawarelitigation.com/2022/10/articles/chancery-court-updates/shareholder-v-stockholder-which-term-is-preferred-in-delaware/ (Oct. 23, 2022), last visited Dec. 3, 2024.
[2] John Jenkins, Stockholders v. Shareholders: What’s in a Name?, TheCorporateCounsel.net, https://www.thecorporatecounsel.net/blog/2022/10/stockholders-v-shareholders-whats-in-a-name.html (Oct. 31, 2022), last visited Dec. 3, 2024.
The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.