Reed Smith Client Alerts

In Spanakos v. Pate, the Delaware Supreme Court recently affirmed the Court of Chancery’s denial of a stockholder’s bid to compel an annual stockholder meeting under the Delaware General Corporation Law, even though the stockholder was able to meet the requirements of 8 Del. C. section 211 (Section 211).1 The Delaware high court affirmed the Court of Chancery denial of a meeting of the stockholders notwithstanding Delaware’s fundamental policy in favor of ordering stockholder meetings when the elements of Section 211 are met.2 

Authors: Brian M. Rostocki Justin M. Forcier

Background

This appeal arose as the latest chapter in a series of lawsuits filed by plaintiff Mark Spanakos (Plaintiff) involving Hawk Systems, Inc. (Hawk Systems or the Company) and its former officers and directors.3 Plaintiff is a stockholder and former officer of Hawk Systems.

In 2009, Plaintiff began to suspect the directors of Hawk Systems were defrauding the Company’s stockholders by engaging in a “pump-and-dump” scheme whereby the directors artificially inflated Hawk Systems’ stock price with false information so those directors could sell their stock at an inflated price.5 At the end of the alleged scheme, Hawk Systems insiders raised millions of dollars in investor funds, reported $5,575 in sales, and booked expenses and losses of approximately $22 million.

 Plaintiff filed multiple lawsuits, both direct and derivative, in Florida and sought to take control over Hawk Systems by becoming its majority stockholder and sole director.7 On May 26, 2015, Plaintiff sought to realign the parties in the Florida derivative action by converting it to a direct action in which Hawk Systems would be the plaintiff.8 However, there was a question about whether Plaintiff had the authority to authorize the conversion, and the Florida court stayed the action and instructed Plaintiff to obtain a Delaware judgment establishing the number of shares Plaintiff owns and whether he was a validly elected director.9

On April 17, 2018, Plaintiff filed a Verified Petition in the Delaware Court of Chancery seeking declarations under 8 Del. C. Section 225(a) that he controlled a majority of Hawk Systems’ voting shares and that he was the validly elected, sole director and officer of Hawk Systems.10 As an alternative to Section 225 relief, Plaintiff sought an order compelling the Company to hold an annual meeting of stockholders for the election of directors under 8 Del. C. Sections 211(c) and 223(a).11  The Court of Chancery held the record did not support Plaintiff’s claims that he is the majority stockholder and sole director of Hawk Systems.12 Further, the Court of Chancery denied Plaintiff’s request for a court-ordered election on the basis that, until the Florida litigation was resolved, such an election would be “unworkable.”13

On appeal, Plaintiff did not challenge the Court of Chancery’s holding that he is not a majority stockholder of Hawk Systems. Instead, Plaintiff argued that the Court of Chancery abused its discretion when it denied his request for an annual stockholders’ meeting for the election of directors Section 211. Plaintiff contended that, since he satisfied the statutory elements for relief under Section 211, he was “entitled to an order compelling an annual meeting of Hawk Systems for an election of directors.”