How Most States Chose “Shareholder” as Delaware Kept “Stockholder”

“Shareholder” and “stockholder” are synonyms. This post explains how most states came to use the former term in their laws, while Delaware consistently has used the latter.

Before Delaware had a general corporation law, Delaware’s legislature created each corporation. The Constitution of Delaware – 1831 so provided in Article II, Section 17, but made no mention of stockholders (or shareholders).

Following a constitutional amendment, Delaware adopted its first general corporation law in 1875. (See Laws of the State of Delaware, Vol. 15 – Part 1, beginning at page 181.) That law includes a few references to “stockholder”, none to “shareholder”.

Delaware Generally Uses Stockholder

Following yet another constitutional amendment, in 1883 Delaware adopted the laws that are the basis for the Delaware General Corporation Law (DGCL) that we know today. (See Laws of the State of Delaware, Vol. XVII – Part 1, beginning at page 212.)

Interestingly, while the 1883 law does use the term “stockholder”, there is one occurrence of “shareholder” (actually, the plural “shareholders”)!

The first two paragraphs of Section 17 of that law are as follows (emphasis added):

The business of every corporation created under this act shall be managed and conducted by the directors thereof, who shall, respectively, be shareholders therein, and such other officers, agents and factors as the company shall think proper to authorize for that purpose; and every such company shall have a secretary and treasurer, who may or may not be the same person.

The directors shall not be less than three in number, and they shall be chosen annually by the stockholders, at such time and place as shall be provided by the by-laws, and shall hold their offices for one year, and until others are chosen and qualified in their stead; and one of the directors shall be chosen president, either by the directors or stockholders, as shall be directed by the by-laws.

The one use of “shareholders” is neither a mistake nor a random occurrence.

• The law discusses the two most important roles in corporate governance, that of stockholders and that of directors.
• The first paragraph quoted above states that directors must be shareholders of the corporation. In my opinion, the term “shareholders” is used to designate that directors must hold corporate shares; the term “stockholders” is not used because, in this instance, the reference is not to a role in corporate governance.

Other States Challenge Delaware…and use “Shareholder”

The DGCL, the first “modern” corporation law, led to Delaware’s preeminence as a state of incorporation. But, in response to Delaware’s “chartermongering”, other states fought back, modernizing their own laws.

“The Modernization of Corporation Law, 1920-1940” provides an excellent discussion of other states’ actions during this period. For the purposes of this post, discussion of the Uniform Business Corporation Act (UBCA) is most helpful.

The National Conference of Commissioners on Uniform State Laws spent more than a decade developing the UBCA. Ultimately, only three states adopted it so, in a sense, it was a failure. (The American Bar Association’s Model Business Corporation Act ended up being the winner.)

Nevertheless, the UBCA served as a starting point, with other sources, for corporate laws that states adopted during the modernization period.

For the purposes of this post, terminology used by the UBCA is hugely important.

• Early on, the UBCA, like the DGCL, used the term “stockholder”.
• But by the time the UBCA was in its final form, it used the term “shareholder”, “stockholder” not appearing anywhere. The first sentence of Section 1, Subsection VII stated:

A “Shareholder” is one who owns one or more shares.

• And that was the term that various states used as they built upon the UBCA and one another’s corporate laws. So, for example, California’s 1931 corporation law (see Statutes of California, 1931, Chapter 862) generally refers to “shareholders”, but it expressly refers to “stockholders” in the context of prior corporation law.

Outstanding Question

So, although I now am pleased to know how and when states started referring to “shareholders”, an intriguing question remains:

Why did the UBCA, thus various states, change from “stockholder” to “shareholder”?

My research continues….

Related post: What’s the Difference between a Shareholder and a Stockholder?

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.