Delaware Requires Annual Shareholder Meeting Regardless of SEC Prerequisites

Rich v. Fuqi Int’l, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012). 

Why this opinion is noteworthy: The Delaware Court of Chancery reaffirms in this pithy opinion that the Delaware General Corporation Law’s requirement in Section 211 that a shareholders’ meeting must be held annually, will not be suspended due to arguably conflicting provisions of the federal securities laws. That seems counterintuitive in light of the supremacy clause, but the court explains in a scholarly manner why a corporation will not be relieved of its obligation under DGCL Section 211 simply because of federal securities laws or regulations that may also impose certain prerequisites to holding an annual meeting.

Supplemental Introductory Background

This ruling is consistent with prior Delaware rulings on nearly identical issues. See, e.g., Newcastle Partners, L.P. v. Vesta Insurance Group, Inc., 887 A.2d 975 (Del. Ch. 2005), aff’d, Vesta Insur. Group, Inc. v. Newcastle P’rs, L.P., 906 A.2d 807 (Del. 2005). The Vesta decision, highlighted on these pages here, held that the requirement in the Delaware General Corporation Law’s Section 211 to hold an annual meeting will not be suspended due to the failure to satisfy the prerequisites of having audited financial statements prior to holding such a meeting as required by the federal securities laws. The Vesta decision’s reasoning was extended in  Esopus Creek Value LP  v. Hauf, 2006 WL 3499526 (Del. Ch., Nov. 29, 2006), read opinion here, which was highlighted on those pages here. See also the Romero case, highlighted here, which did not find a conflict between DGCL Section 220 and federal law.

Quick Overview of Rich v. Fuqi In’tl, Inc.

Fuqi is a Delaware corporation with operations based in China. It was on the NASDAQ until being recently delisted. This case was brought under DGCL Section 211 to compel a meeting of the stockholders. Fuqi contends that the Vesta case, linked above, should not control the outcome of this case because after that decision, the SEC promulgated a new rule providing for exemption requests from Rules 14A and 14C when companies are unable to comply with both federal proxy rules and state corporate law.  The court rejected that argument–and required Fuqi to hold its annual meeting despite its alleged inability to satisfy SEC requirements, for reasons carefully explained in the opinion.

Highlights of Analysis

The Vesta court rejected the same arguments made by Fuqi in the instant case.The Vesta court required a shareholders’ meeting to be held despite Vesta’s purported inability to produce audited financial statements as required by applicable federal securities law. See footnotes 44 to 49 and accompanying text.

For example, the court instructed that the post-Vesta decision promulgation by the SEC of Exchange Act Release 57,262 actually “harmonized Delaware and federal law by outlining criteria under which a company may seek an exemption from federal reporting requirements, thereby reducing the likelihood of any outright conflict between the annual meeting requirement and the proxy rules.” See footnote 52 and accompanying text.

The court further reasoned that the SEC rules requiring audited financial statements complement the purpose of the Delaware statute that allows stockholders to exercise their voting franchise, and added that:  “… a stockholder’s right to a meeting is especially strong when financial management is so questionable as to dealy the provision of audited financial statements for three full years.” Slip op. at.13.

The Court also addressed a Rule 54(b) motion regarding the finality of the judment as well as an alternative argument for an interlocutory appeal, both of which were denied.

Postscript: Professor Larry Hamermesh, Director of the Institute of Delaware Corporate & Business Law, and a former SEC attorney, provides erudite insights about the case here.