## Facts

- Phixios Holdings, Inc. adopted a stock-transfer restriction in a stockholder agreement allowing a majority of stockholders to revoke a stockholder’s shares if they determined the stockholder acted in ways “damaging to the corporation.”
- Jon Henry was issued (or acquired) Phixios stock, but the transfer restriction was not noted conspicuously on his stock certificate.
- Henry did not have actual knowledge of the restriction before he acquired the stock.
- After acquiring the stock, Henry became aware of the restriction, but he did not vote to approve it and did not sign or otherwise agree to be bound by it.
- Phixios later accused Henry of competitive or harmful conduct and purported to rescind his shares under the restriction.
- Henry made a demand under 8 Del. C. § 220 to inspect Phixios’s books and records to investigate potential mismanagement and wrongdoing, communicate with other stockholders, and value his shares.
- In support of a suspected wrongdoing investigation, Henry pointed to evidence including admissions by a Phixios officer regarding use of corporate funds for personal expenses and the company’s strained financial condition.
- Phixios denied the demand, asserting Henry lacked standing because his shares had been revoked and he was no longer a stockholder.
- Henry filed suit in the Delaware Court of Chancery seeking a declaration that the restriction was unenforceable against him, that the rescission was ineffective, and an order compelling inspection under § 220.

## Issues

1. Under 8 Del. C. § 202, is a stock-transfer restriction that is not noted conspicuously on the stock certificate enforceable against a stockholder who lacked actual knowledge of the restriction when acquiring stock and did not later agree to it?
2. If the restriction is unenforceable, did Henry remain a stockholder with standing to pursue a books-and-records demand under 8 Del. C. § 220?
3. Did Henry show a proper purpose and a credible basis to investigate wrongdoing sufficient to obtain inspection under § 220, and what production was warranted?

## Decision

- The court held that Phixios could not enforce the off-certificate transfer restriction against Henry because Phixios did not prove Henry had actual knowledge of the restriction before acquiring the shares and did not prove Henry later affirmatively assented to it.
- Because the restriction was unenforceable as to Henry, Phixios’s attempted rescission of his stock was ineffective, and Henry remained a stockholder for § 220 purposes.
- The court found Henry stated a proper purpose—investigating potential mismanagement and wrongdoing—and met the “credible basis” standard with evidence including admissions of personal use of corporate funds and the company’s financial condition.
- The court ordered Phixios to produce books and records limited to those necessary and essential to Henry’s stated purposes.

## Legal Principles

- Under 8 Del. C. § 202, a stock-transfer restriction not noted conspicuously on a stock certificate is enforceable against a stockholder only if the stockholder had actual knowledge of the restriction before acquiring the stock.
- If the stockholder lacked actual knowledge at acquisition, the stockholder can become bound after acquisition only by affirmatively assenting to the restriction, such as by voting to approve it or expressly agreeing to it.
- Mere post-issuance awareness or receipt of corporate documents describing a restriction, without affirmative assent, does not bind the stockholder to an off-certificate restriction under § 202.
- A corporation may not defeat § 220 standing by asserting that a stockholder’s shares were revoked under a restriction that is unenforceable against that stockholder.
- Under 8 Del. C. § 220, investigating potential mismanagement is a proper purpose, and a stockholder must show a credible basis from which the court can infer possible wrongdoing; inspection is limited to materials necessary and essential to that purpose.

## Conclusion

In *Henry v. Phixios Holdings, Inc.*, the Court of Chancery held that a stock-transfer (revocation) restriction not stated on the stock certificate could not be enforced against a stockholder absent proof of actual knowledge at the time of acquisition or later affirmative assent, rendering Phixios’s attempted rescission ineffective and leaving Henry a stockholder entitled to a tailored § 220 inspection based on a proper purpose supported by a credible basis of possible mismanagement.


Henry v. Phixios Holdings, Inc., 2017 WL 2928034 (2017)