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.
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.”