This past week I was the subject of an online video interview that was livestreamed on Facebook. LexBlog, the company that provides the “backroom” software support to host this blog, conducted the interview and we talked about the genesis of this blog and why I have continued to publish this blog over the last 15 plus years. For any lawyers, or others, interested in blogging in general, the interview may provide useful information.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently decided AmerisourceBergen Corporation shareholders’ breach-of-duty suit was one of the few Caremark claims to pass Delaware’s pre-suit demand test because it may prove the directors and officers turned a blind eye to a subsidiary’s criminal enterprise of cancer drug repackaging in Teamsters Local 443 Health Services & Insurance Plan et al. v. Chou, et al., No. 2019-0816-SG memorandum opinion issued (Del. Ch. Aug. 24, 2020).

Vice Chancellor Sam Glasscock’s Aug. 24 memorandum opinion refused to dismiss charges by employee pension fund plaintiffs that sufficiently alleged ABC’s directors likely faced bad faith liability and therefore lacked the independence and objectivity necessary to decide, as the company’s managers, whether the derivative suit should live or die.

In an opinion that will be studied in law offices and boardrooms nationwide, the vice chancellor acknowledged the widely-held belief of Delaware jurists and litigators that Caremark duty-to-supervise charges are the most difficult to get past the threshold test for claims brought against officers and directors on behalf of the company.

What the directors didn’t do

He said that’s because Caremark suits center not on what the defendant officers and directors purportedly did but what they allegedly didn’t do – and whether there is proof that shareholders suffered because directors and officers intentionally “utterly failed” to establish or check monitoring systems for the company’s “mission critical” operations that hinged on regulatory compliance.

Chancellor William Allen’s 1996 In re Caremark International ruling set tough standards for shareholder plaintiffs to recover on behalf the corporation itself in the rare case where, “directors, otherwise unconflicted, should nonetheless take actions knowingly inimical to the corporate interest, such as ignoring a known duty to act to prevent the corporation from violating positive law.” Vice Chancellor Glasscock said. In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).

Background

According to the 2019 complaint, that is exactly what happened in 2001 when AmerisourceBergen Corp., a Delaware-chartered pharmaceutical distribution and sourcing company based in Chesterbrook, Pa., acquired Oncology Supply Pharmacy Services and made it part of AmerisourceBergen Specialty Group.

The consolidated complaint of a half-dozen union pension plans says that company’s sole official business was to buy single-dose sterile vials of oncology drugs, put those drugs into syringes, and sell the syringes for injection into a cancer patient’s body; but instead, OSPS emptied the syringes—including the excess in each used to eject air bubbles — into a pool of medicine that produced enough for extra syringes with full dosages.

The complaint alleged that Pharmacy not only illegally “pooled” and sold the overfill as extra syringe doses, its unsterile process produced medicine contaminated with “floaters,” in more than 32,000 pre-filled syringes between 2007 and 2013 alone. Pharmacy and ABC both pocketed the extra revenue, and undercut the competition by providing kickbacks to buyers to increase market share, the complaint said. In addition, Pharmacy was not really a pharmacy, but it generated fake prescriptions to masquerade as a pharmacy business in order to avoid scrutiny by the U.S. Food and Drug Administration as a drug manufacturer.

ABC’s directors and top officers – including Steven H. Collis, ABC’s Chairman, President, and Chief Executive Officer, who was President of Pharmacy from 1999 until its closure in 2014 – moved to dismiss, arguing that Pharmacy’s business accounted for a comparatively small slice of ABC’s total business.

Four red flags

In his opinion, Vice Chancellor Glasscock said the key to establishing that officers and directors showed bad faith in utterly failing to supervise Pharmacy so that it would operate within the law and the regulations of the pharmaceutical industry was the proof that they failed to respond to four critical “red flags:”

1. On September 11, 2017, the United States Department of Justice filed a Criminal Information against Pharmacy and its parent, charging that the repackaging program illegally introduced misbranded drugs into interstate commerce under the Food and Drug Commission Act under 21 U.S.C. §§ 33c1(a), 333(a)(1), 352(o), and 360, and 18 U.S.C. §§ 2, 3551, et seq. On September 27, 2017 Pharmacy and its parent pleaded guilty to violating the FDCA and the companies paid $260 million to the Department of Justice, consisting of a $208 million criminal fine and a criminal money forfeiture of $52 million ABC had obtained from unlawful sales of pre-filled syringes.

During the relevant time period, the ABC board did not set aside a portion of board meetings devoted to drug safety and compliance and the Criminal Information served as the first disclosure to ABC’s stockholders of the alleged misconduct that occurred at Pharmacy. The board did not act or even discuss what to do, the court said.

2. In 2007 ABC, engaged Davis Polk & Wardwell to undertake an assessment of the adequacy of ABC’s compliance program, to recommend improvements and to report the results of the assessment — that Specialty was not integrated into ABC’s compliance and reporting function and that oversight responsibilities were being left to officers and directors of the various ABC subsidiaries. But the ABC board and its committees allegedly never followed up on any of the recommendations that came from the report.

3. Michael Mullen was an executive at Specialty beginning in 2003 and promoted to COO of Specialty in September 2009, where he was responsible for Specialty’s eight business units including Pharmacy. By January 2010, Mullen had identified significant issues across all of Specialty’s business units, including serious issues with Specialty’s oncology business model that created regulatory exposure. After months of raising concerns about Specialty’s oncology business and lobbying for ABC to address the compliance issues at Specialty, Mullen was terminated on April 8, 2010, and management never told the board about Mullen’s compliance concerns or firing. The reporting system failed completely, the court said.

Mullen filed a qui tam complaint under seal in federal district court in New York on October 21, 2010, but no remedial action was taken against any employee for the misconduct identified in Mullen’s qui tam complaint, and appears not to have even been discussed by the board, the vice chancellor said.

4. In January 2014, ABC and Specialty ended the Pre-Filled Syringe Program by closing the Oncology facility in Dothan, Alabama. The board’s audit committee’s first mention of ending the Pre-Filled Syringe Program was on April 23, 2014, where the Audit Committee was informed that “the [Specialty] operating income included the loss of income from a [Specialty] pharmacy closure in Dothan, Alabama.” No board discussion occurred regarding why the Oncology facility was closing.

Ruling based on Rales

Vice Chancellor Glasscock ruled that because the plaintiffs challenged board inaction, and not a specific board decision, demand futility is analyzed under the test articulated in Rales v. Blasband, 634 A.2d 927 (Del. 1993). Under that standard, the high probability that the majority of the directors face liability for their failure to oversee ABC’s legal operation means they could not have made an independent or objective decision on any charges against the directors and officers, so pre-suit demand would have been futile under either prong of Caremark he said.

Under “prong one,” of Caremark, “a director may be held liable if she acts in bad faith in the sense that she made no good faith effort to ensure that the company had in place any system of controls.” A “prong two” claim, on the other hand, arises where “having implemented such a system or controls, [the directors] consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention,” the Vice Chancellor’s decision says.

He found that the importance of the directors’ attention to the company’s “mission critical” regulatory issues is outlined in the Delaware Supreme Court’s Marchand v. Barnhill decision because the ABC board’s failure to both institute monitoring systems and to implement them exposed the company to significant liability. Marchand v. Barnhill 212 A.3d 805 (Del. 2019).

Time-will-tell take-aways?

A possible time-will-tell take-away from this opinion could make it easier for Caremark claim plaintiffs to survive the pre-suit demand test. Jurists and corporate attorneys may minimize the impact of this ruling if most of them see it as an outlier produced mainly by unusual facts.

But most may read it as a signal from the nation’s preeminent business court that in this post-Covid world, failure-to-supervise claims involving the director response to red-flagged problems with mission-critical operations at closely-regulated health-related businesses deserve increased scrutiny – especially at the crucial pleading stage.

And some may even see the need to apply that increased scrutiny to director decisions in suits against any closely-regulated business, especially one that impacts human health.

 

A recent Court of Chancery letter ruling provides useful definitions and related statements of Delaware contract law in connection with issues that arose over an asset purchase agreement. In CHS/Community Health Systems, Inc. v. Steward Health Care System LLC, C.A. No. 2019-0165-JRS (Del. Ch. Aug. 21, 2020), the following statements of law provided by the court are useful for corporate and commercial litigators:

  • The court defined the standard for determining whether a party may be a third-party beneficiary to a contract, and denied a motion to dismiss even though the agreement at issue disclaimed an intent that there be any such beneficiary. See footnote 32 and accompanying text.
  • Also useful for the toolbox of Delaware litigators is the court’s description of those circumstances when an unjust enrichment claim may survive a motion to dismiss, or when a breach of contract claim may foreclose that cause of action. See footnote 44 and accompanying text.
  • When a contract is unambiguous a motion to dismiss may be timely. Otherwise, if extrinsic evidence is needed, an MTD may be premature. See Slip op. at 8.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently ruled, on an issue of first impression, that The We Company’s management did not have the authority to unilaterally preclude a director faction from accessing the office space provider’s privileged information in a dispute over a Japanese investment group with a controlling interest in the matter of In re WeWork Litigation, C.A. No. 2020-0258-AGB, opinion issued (Del. Ch. Aug. 21, 2020).

Chancellor Andre Bouchard’s Aug. 21 opinion ordered We Co. to quickly produce privileged information relating to the circumstances under which management abruptly replaced a specially-appointed two-director committee that had sued investor SoftBank Group Corp. and its ally, SoftBank Vision Fund with a new committee that had agreed to drop the suit.

Delaware law on its head

“It is the board of directors of a corporation—not management—that has the ultimate responsibility for overseeing the affairs of the corporation under 8 Del. C. § 141(a)” but in claiming the right to shield company privileged information from a warring board of directors, “management turns these bedrock principles of Delaware law on their head,” the Chancellor wrote.

He said a special committee of the We Company’s board of directors formed in October 2019 had investigated the circumstances of SoftBank’s proposal to help stave off the company’s liquidity crisis by instituting corporate reforms and investing $3 billion in a stock buy that never transpired.

The special committee, on behalf of We Company, charged in its April Chancery suit, that investors SoftBank and SoftBank Vision Fund breached a contract to use their best efforts to consummate the $3 billion stock buy tender offer; but one month later the company recruited two new temporary directors to form a new special committee to undo the original committee’s work.

New vs. Old Committee

The original committee’s members opposed a motion by the new committee to dismiss their suit and sought information on how the new committee was established and how it may have been influenced by the company’s management, the Chief Executive Officer of which was chosen by SoftBank, he said.  Their suit did not seek access to the new committee’s legal advice.

The Chancellor said in Kalisman v. Friedman, Vice Chancellor J. Travis Laster elaborated on the fundamental principle of Delaware law that a director’s right to information is essentially unfettered in nature,” and “directors of Delaware corporations are generally entitled to share in legal advice the corporation receives.”  Kalisman v. Friedman WL 1668205 (Del. Ch. Apr. 17, 2013).

Kalisman said one exception to that principle is that “a board or a committee can withhold privileged information once sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel.”

No exceptions here

But in this case, the board made no decision to withhold privileged information from the special committee after analyzing whether those directors had a “reasonable expectation that [they were] a client of the board’s counsel.”  Instead, “management made that decision unilaterally” he said.

“Directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation” he said in ordering production, “and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.”

 

The Delaware Statute of Limitations for contract claims v. claims for wages was compared and contrasted in Weik, Nitsche & Dougherty, LLC v. Pratcher, C.A. No. 2018-0803-MTZ (Del. Ch. Aug. 26, 2020). In sum:

  • Delaware has a three-year statute of limitations for most contract claims pursuant to 10 Del. C. section 8106
  • For wage claims, generally a one-year statute of limitation applies under 10 Del. C. section 8111, but:
  • where those types of claims overlap and the dividing line between them is not clear, then:
  • this letter ruling should be read carefully for its analysis of this topic. See Slip op. at 15-19.

A one-page Delaware Court of Chancery letter decision recently addressed the practical issue created by the intersection of a public trial with the confidential treatment of the content of pleadings and other court filings that have been cloaked with the protection of Rule 5.1 of the Court of Chancery Rules. Bottom line: the court will not close the entire proceedings of a public hearing or trial notwithstanding the confidential treatment given to court filings under Rule 5.1–but rather, if testimony or other disclosures of a confidential nature are expected to arise during the trial “the public (if any) may be briefly excused from the hearing.” Searchlight PST, L.P. v. MediaMath, Holdings, Inc., C.A. No. 2020-0652-SG (Del. Ch. Aug. 24, 2020).

A recent Court of Chancery decision is almost as noteworthy for what it decided as for what was not decided. In JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Delaware’s court of equity enforced an exclusive forum selection clause in a company charter, based at least in part on the internal affairs doctrine, to prevent a stockholder in a Delaware corporation from filing suit in California in reliance on a California statute to demand the inspection of corporate records, notwithstanding a California statute that appears to allow a stockholder to sue in California for corporate records if the Delaware company has its principal place of business in California.

What the court did not decide is whether a stockholder may contractually waive her rights under DGCL section 220. Count this writer as a skeptic on that point. The court reviewed several overlapping agreements, such as a stock option exercise agreement, that the stockholder signed and that purported, at least in the company’s view, to waive inspection rights under DGCL section 220. Some of the agreements were governed by Delaware law and some by California law.

This decision could be the topic of a law review article due to the many core principles of corporate law and doctrinal underpinnings the court carefully analyzes. Alas, for now, I’ll only provide a few bullet points with an exhortation that the whole opinion be reviewed closely.

    • The court provides an in-depth discussion of the foundational concepts that undergird the internal affairs doctrine as it applies to the request for corporate records, as well as related constitutional issues that arise.
    • But footnote 7 acknowledges contrary authority that suggests that a local jurisdiction may apply its law to a demand by a local resident for corporate records of a foreign corporation.
    • The court compares DGCL section 220 with its counterpart in the California statutory regime.
    • The exclusive forum selection clause in the charter was addressed, and the court explained that but for this provision, the California court would be able to apply DGCL section 220.
    • Importantly, the court emphasized that is was not deciding whether a waiver of DGCL section 220 rights would be enforceable. Although at footnote 14 the court provides citations to many Delaware cases that sowed doubt about the viability of that position–but then the court also cited cases at footnote 15 that more generally recognized the ability to waive even constitutional rights.
    • Footnote 16 cites to many scholarly articles, and muses about the public policy aspects of the unilateral adoption of provisions in constitutive documents, such as forum selection clauses in Bylaws. Early in the opinion, at footnote 7, by comparison the court waxes philosophical about the concept of the corporation as a nexus of contracts–as compared to it being viewed as a creature of the state. The latter view has implications about the exercise of one state’s power in relation to other states, especially when private ordering may be seen as private parties exercising state power by proxy.
    • By coincidence or otherwise, this decision was published the same week that a California court in another case refused to enforce a Delaware forum selection clause because the California court ruled that forcing a California resident to litigate in the Delaware Court of Chancery would deprive that resident of a constitutional right to a jury trial.
    • The foregoing hyperlink leads to an article in Delaware Business Court Insider of Aug. 7, 2020, that describes an apparent settlement to allow the case to proceed in Delaware Superior Court, a trial court of general jurisdiction with juries available. The counterpart suit in Delaware has its own procedural history. See William West v. Access Control Related Enterprises, LLC, et al., C.A. No. N17C-11-137-MMJ-CCLD, opinion (Del. Super. June 5, 2019).

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

In a recent ruling that clarified the scope of Delaware’s power to validate defective corporate actions, the Chancery Court denied Applied Energetics Inc.’s summary judgment motions on three of four claims in a dispute with a former officer and director it accused of overreaching for power and compensation in Applied Energetics Inc.  v. Farley, et al., No. 2018-0409 JTL, opinion issued (Del. Ch. Aug. 11, 2020).

Vice Chancellor J. Travis Laster’s Aug. 11 opinion granted the struggling company summary judgment on its claim that as the sole remaining member of a three-director board, George Farley clearly lacked board authority to issue himself twenty-five million shares and grant himself a $150,000 yearly salary.

But the vice chancellor declined Applied Energetics’ bid to dismiss Farley’s counterclaims that:

(1) under Section 205 of the Delaware General Corporation Law, the court has the power to validate defective corporate acts that were within the power of the corporation to take,

(2) the court could theoretically validate a decision to grant Farley a salary, and

(3) Farley is entitled to compensation under an unjust enrichment theory (i.e., that the company profited by getting his services for too little), because when the record is construed in Farley’s favor, there is evidence to support an award under a theory of quantum meruit.

History

Applied Energetics Inc., a Delaware-chartered company headquartered in Tucson, Ariz., began engineering and marketing products for the defense and securities industries in 2002 after the 9/11 attacks, but after enjoying some initial success, went into a steep decline in 2006, according to the court.

Farley was the sixth director when he joined the board, but by 2015 he was one of two remaining directors when he and the other director agreed that he should be the principal officer, who would be the official face of the firm, which had a share value of $0.0002 and had been delisted from NASDAQ.

After a group of insurgent shareholders mustered the support of 58 percent of the investors in March 2018 to remove Farley and fill the three director vacancies, Farley resigned his principal officer position, claiming that during his watch, the company’s share price rose 844% to $0.076 per share and that he received only $69,500 out of approximately $300,000 in salary he believes he was owed.

The litigation

The company filed this suit in July 2018 against Farley and AnneMarieCo. LLC, a stock repository for his children, asserting claims for breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, conversion, and fraudulent transfer and seeking cancellation of the defendants’ shares.  It claimed that while Farley said he was trying to re-launch and/or sell the foundering company, he misused his status as the sole officer and director to gain power and revenue he was not entitled to have.

Applied Energetics won a January 23, 2019, preliminary injunction from Justice Tamika Montgomery-Reeves, then a Vice Chancellor, to preclude what the company said was the threat that Farley would abscond with its dwindling resources.  Applied Energetics Inc.  v. Farley et al., No. 2018-0409 TMR, injunction decision issued (Del. Ch. Jan. 23, 2019).

The summary judgment ruling

The company then revised its complaint and sought summary judgement on its claim that none of the actions Farley took while principle executive and sole director, from February 10, 2016, until March 9, 2018 – including the $150,000 salary and stock grants – were valid.  It also sought summary judgment on the four counter-claims Farley filed in response to the amended complaint.

In his Aug. 11 opinion, Vice Chancellor Laster said the actions Farley took on behalf of the three-member board while it was without a quorum were invalid and could not be validated under Section 205 because Section 141 of the DGCL requires a majority of the board for any vote or written consent and a single director cannot remedy that defect by decree.

“Because Farley lacked authority as the sole remaining director to amend the bylaws, the stockholders were the only intra-corporate actor with the power to amend the bylaws between February 10, 2016, until March 9, 2018,” the vice chancellor said.  “The precedents on implicit bylaw amendments consistently apply the doctrine to favor stockholder rights, not to favor incumbent director rights.”

He said the shares Farley purportedly transferred to AnneMarieCo. are invalid because, “under Delaware law, invalid shares in the hands of innocent third parties remain invalid.”

As to Farley’s counterclaim that the court has the power under Section 205 to validate his grant of shares or salary to himself, the vice chancellor said only after a trial can the court determine whether it can or will do that, so that motion must be denied at this juncture.

He explained that the Delaware General Assembly enacted Sections 204 and 205 of the DGCL to create the ability “to overrule the existing precedents requiring that defective stock and acts be found void.” He said the “keystone” provision is Section 204(a) which states that “no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified.”

The section hinges on the distinction between “power” and “authorization,” he said.  “Properly understood, the concept of corporate power refers to whether the entity has been granted the ability to engage in a given act,” but “the concept of authorization refers to whether the proper intra-corporate actors or combination of actors, such as the corporation’s officers, directors, or stockholders, have taken the steps necessary to cause the corporation to take the given act.”

Applied Energetics had the power to take the challenged actions, the vice chancellor said; the question was whether Farley was authorized to employ that power, and the court has to decide whether he could have properly obtained that authorization.

Farley’s inability to satisfy those authorization requirements was just that—a “failure of authorization that can be validated under Section 205, not an absence of corporate power that cannot,” he said in denying summary judgment on Farley’s counterclaims other than the unjust enrichment claim.

The vice chancellor denied the company summary judgment on that claim because Farley had no contract and, “in the absence of a valid contract, principles of quantum meruit come into play and can support a recovery under a theory of unjust enrichment.”

A recent Delaware Court of Chancery decision deserves a passing reference for its analysis of the statutorily-granted equitable jurisdiction to enforce the Delaware Stormwater Management Act. The opinion in Nieves v. Insight Building Co., LLC, C.A. No. 2019-0464-SG (Del. Ch. Aug. 4, 2020), begins with an entertaining history lesson about the Nanticoke Indians in southern Delaware and their participation in the Methodist Church during the 1800s. The introduction also features a reference to the book of Exodus and that biblical description of the seven plagues as resembling in some ways the allegations in the amended complaint of the infestation of homes with various insects due to water-related problems experienced at new homes in a housing development.

Three bullet points will, I hope, suffice for a high-level identification of the substantive legal issues addressed by the court in the event readers would find an opinion that analyzes these issues in a scholarly manner to be useful:

  • The Delaware General Assembly, by statute, gave the Court of Chancery jurisdiction to grant injunctive relief when warranted to enforce the Delaware Stormwater Management Act.
  • The Court delves into the doctrinal underpinning of fiduciary relationships and why they are not typically found between parties to commercial contracts. The Court explains why it did not impose those heightened duties on the developer of a housing community based on the facts presented.
  • The often insurmountable threshold that must be overcome to successfully pierce the corporate veil in Delaware was explained in this decision, along with the reasons why the facts alleged did not satisfy the exacting requirements for such a claim. Those interested in this last issue should consider reading the book Professor Bainbridge, a friend of the blog and a nationally-recognized corporate law expert, co-authored on this topic.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Supreme Court recently affirmed a ruling that unique circumstances justified the denial of a dissident investor’s bid to compel a shareholder meeting and director election at Hawk Systems Inc. — even though he met the requirements of Section 211 of the Delaware General Corporation Law, in Spanakos v. Pate, et al., No. 532, 2019, opinion issued (Del. July 31, 2020).

A three-justice panel’s July 31 opinion found Vice Chancellor Joseph Slights did not abuse his discretion by denying the meeting order despite Delaware’s “fundamental policy favoring” such meetings if needed.  The justices endorsed his decision to instead send plaintiff Mark Spanakos back to Florida where he had won judgments that may enable him to return to Delaware’s Chancery Court to demand a director election as a majority shareholder.

Election requests clarified

The novel high court opinion acknowledged that Spanakos met the requirements of DCGL 8 Del. C. §§ 223(a) and 211(c) because Hawk Systems apparently had not held an election in more than a year and had no valid directors, but it agreed with the lower court that a Florida judge could more easily determine whether Spanakos now held a majority share as a result of that litigation.

Section 211 says a Delaware judge may compel an election meeting, but where a simpler alternative solution presented itself, Vice Chancellor Slights did not abuse his discretion by having a Florida court determine Spanakos’ post-judgment holdings rather than having a Chancery Court special master investigate and calculate the result, the panel said.

History

The appeal sprang from the latest of a series of lawsuits Spanakos filed against Hawk and its officers, directors and insiders in the past decade in Florida and Delaware state courts over the control and management of what began as Hawk Biometrics of Canada, Inc., a fingerprint authorization specialist that moved to Palm Beach, Florida, and incorporated in Delaware after a merger.

After winning judgments in two Florida suits over who controlled the company, Spanakos filed a third action which was stayed by a judge who said the plaintiff’s amount of interest in Hawk was crucial, and directed Spanakos to file this Delaware action to determine how many shares of Hawk he owned and whether he was a validly elected director.

He filed suit seeking a declaration under Section 225(a) that he was a validly elected director and the majority shareholder of Hawk Systems; alternately, under DCGL 8 Del. C. §§ 223(a) and 211(c), he sought an order compelling the company to hold an annual shareholder meeting for the election of directors.

Vice Chancellor Slights’ Sept. 19, 2019 memorandum opinion denied both petitions, finding insufficient records of Spanakos’ stock holdings and ruling that until the Florida litigation concerning stock ownership was resolved, an election would be “unworkable.”  Spanakos v. Pate, et al. C.A. No. 2018-0288-JRS, memorandum opinion (Del. Ch. Sept. 19, 2019).

Two appeal questions

Spanakos’ appeal raised two questions:

(1) Whether Spanakos met the statutory prerequisites that would entitle him to a stockholders’ meeting.

(2) Assuming that Spanakos met those prerequisites, whether the court should have granted the relief Spanakos sought.

Writing for the panel, Justice Tamika Montgomery-Reeves, reasoned under Saxon Indus., Inc. v. NKFW P’rs, 488 A.2d 1298, 1301 (Del. 1984), a stockholder makes a prima facie case for an order compelling a director election by showing:

(1) that he is a stockholder of the corporation,

(2) that a meeting was not held within 30 days of its designated date, or

(3) that a stockholders’ meeting to elect directors has not been held for over thirteen months.

A powerful equity

If the plaintiff shareholder meets those criteria the court may only reject a petition for a stockholders’ meeting when “a powerful equity” supports denying relief, the panel said, quoting In re TransPerfect Glob., Inc., 2017 WL 3499921, at *5 (Del. Ch. Aug. 4, 2017).

“Accordingly, courts only rarely deny proper requests for a stockholders’ meeting, and only for exceptional reasons,” but this is such a case, Justice Montgomery-Reeves explained, noting that the dispute began in Florida and the litigation on the merits is well along toward an award that would determine whether Spanakos owns large blocks of stock.

If the Florida courts clarify their orders and make those awards of stock the case can be resolved quickly, she wrote.  “The Court of Chancery did not abuse its discretion under the specific and unique circumstances in this case when it denied relief at this time and, instead, provided a clear path for Spanakos to return to the Court of Chancery with finalized Florida judgments.”