Williams v. Calypso Wireless, Inc., C.A. No. 7140-VCL (Del. Ch. Feb. 8, 2012).
Whether it was appropriate to appoint a receiver to dissolve Calypso Wireless, Inc.?
The Court of Chancery appointed a receiver to dissolve Calypso and wind up its affairs in light of Calypso’s failure to comply with an order of the Court requiring it to hold an annual shareholders’ meeting, Calypso’s continual violation of federal securities law, and the lack of any apparent ability to obey the Court order or become compliant with federal law.
Another Chancery decision this month also involved the appointment of a receiver, in a case summarized here, involving the failure to comply with an Order granting a demand for books and records.
This summary was prepared by Tara Lattomus of Eckert Seamans.
This suit was commenced by David Williams, a former director of Calypso, challenging his removal as a director. However, this issue was rendered moot by the appointment of a receiver to dissolve the company.
Calypso came into existence in 2002 after the merger with a now defunct but publicly listed Delaware corporation. Since the merger, Calypso never held an annual meeting of shareholders and had not filed a 10K or a 10Q in nearly four years. Although Calypso maintains a website that describes the company in favorable terms, the website contains no information about the company’s finances or governance. However, as of January 31, 2012, Calypso had a market capitalization of approximately $4 million. Most of the publicly available information about Calypso appears on an online stock message board commonly referred to as iHub. Calypso’s directors, including Williams, frequently placed anonymous posts on iHub spreading false information about themselves and the company. Although ascertaining Calypso’s current financial position was difficult, it was clear that it had no income and never generated any revenues. The only significant asset held by Calypso was a U.S. patent which related to the ability of a mobile device to switch between cell towers and Wi-Fi networks. The value of the patent was uncertain however, because although Calypso sued T-Mobile for patent infringement, Calypso assigned away its right to receive 28% of the gross recovery as part of a settlement of matter.
In March 2008, Williams petitioned the Court for an order compelling Calypso to hold an annual meeting. An order was entered on November 5, 2008, requiring Calypso to hold an annual meeting within 45 days of the entry of the order.
Williams attempted to compel Calypso to hold an annual meeting, but was unsuccessful. The company first responded by stating that it could not hold an annual meeting unless it provided stockholders with audited financial statements. Although, at the time, the SEC had adopted a mechanism for a corporation to hold an annual meeting without audited financial statements, the company made no effort to pursue an exception. Williams then attempted to collect the company’s books and records so that the financial statements could be prepared. In the meantime, Williams’ relationship with two other directors, Cristian Turrini and Kyle Pierce, began to deteriorate when he identified unexplained wire transfer and withdrawals and discovered that Pierce’s spouse was disclosing confidential information on iHub and not maintaining his anonymity. Williams had no problem with the posts, just that they weren’t anonymous. Turrini and Pierce demanded the return of the corporate records, but Williams refused. They then sought to remove Williams from the board and called a special meeting on December 15, 2011. Despite misleading statements in the proxy card, the affirmative vote fell short of the majority of the shares entitled to vote on the issue. However, Turrini and Pierce claimed that Williams had been validly removed and appointed someone else to take his position on the board. When Williams challenged his removal, Pierce informed Williams that they had been advised by Delaware counsel that Williams’ removal was valid. Nobody was ever able to identify this Delaware lawyer.
Summary of Court’s Reasoning
The Court of Chancery began by pointing out that Calypso was required to hold an annual shareholders’ meeting on or before December 22, 2008, over three years ago. Calypso never asked the Court to modify its order or took any steps to receive the discretionary exception offered by the SEC to hold a meeting without audited financial statements. Section 322 of the Delaware General Corporation Law (“DGCL”) provides that if a corporation fails to obey an order of the Court there is sufficient grounds for appointment of a receiver.
After recognizing the scope of a receiver’s powers under DGCL Sections 323 and 291, the Court stated that the case called for a receiver with a broad charge. The Court recognized that Calypso lacked the resources to hold an annual meeting and had no realistic ability to become compliant with federal securities laws, but what the Court found most troubling was Calypso’s website and its glowing treatment of the company as well as the false statements on iHub. The Court stated that the online information presented a significant risk of harm to innocent investors.
Recognizing that Delaware has a powerful interest in preventing its corporations from being used as vehicles for fraud, the Court found it appropriate to appoint a receiver to dissolve Calypso and wind up it affairs. The responsibilities of the receiver included marshalling the company’s assets, including the patent, and through an appropriate sale process, delivering the value of the patent to Calypso for the benefit of its creditors.