Yesterday's post took note of a proposed initial public offering by Bally's Chicago, Inc. that would impose a stockholder qualification based on race, gender and ethnic status. This qualification requirement is intended to satisfy the requirements of a Host Community Agreement entered into with the City of Chicago.
I noted that Section 204(a)(3) of the California Corporations Code expressly allows a California corporation to include in its articles provisions that impose "special qualifications of persons who may be shareholders". Section 102 of the Delaware General Corporation Law includes no similar authorization.
Stanley Keller kindly pointed me in the direction of Delaware Code Section 202 which authorizes restrictions on the transfer or registration of a Delaware corporation's securities to be imposed by the certificate of incorporation, by the bylaws, or by agreement. Section 202(c)(5) permits a restriction on transfer or registration if it is not "manifestly unreasonable". Section 205(d)(2) further provides that such a restriction shall be conclusively presumed to be for a reasonable purpose if it is for "complying with any statutory or regulatory requirements under applicable local, state, federal or foreign law".
In the case of Bally's, it might be argued that the restriction is for the purpose of complying with an agreement (the Host Community Agreement) rather than a statutory or regulatory requirement. However, the Host Community Agreement requirement was intended to meet the requirements of the Illinois Gambling Act, 230 ILCS 10/1, et seq. which requires that any applicant for a casino owners’ license demonstrate it “used its best efforts to reach a goal of 25% ownership representation by minority persons and 5% ownership representation by women.” 230 ILCS 10/6(a-5)(9).
If it is ultimately determined that the Host Community Agreement and/or the Illinois Gambling Act are unconstitutional, an interesting question will arise whether the conclusive presumption in Section 205(d)(2) should be applied to an unconstitutional requirement.
[View source.]
