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.4
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.6
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.”
Analysis
Under Delaware law, a stockholder makes out a prima facie case for a court-ordered election under Section 211 when he shows “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.”14
The Delaware high court observed Plaintiff demonstrated the prima facie elements under Section 211 because Plaintiff established at trial that Hawk Systems did not have any active directors, Plaintiff is a stockholder of Hawk Systems, and the Company had not held a stockholders’ meeting in several years.15
Notwithstanding this prima facie showing by Plaintiff, the Court of Chancery exercised its discretion to deny an order compelling a stockholders’ meeting because the dispute between Plaintiff and the former directors began in Florida and the litigation on the merits was close to a determination of whether Plaintiff owns large blocks of stock.16 The Delaware Supreme Court affirmed that decision by stating: “[t]he 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 [Plaintiff] to return to the Court of Chancery with finalized Florida judgments.”17 Thus, Plaintiff is not left without any recourse for a stockholders’ meeting; however, in this unique situation, the Court of Chancery requires more certainty regarding Plaintiff’s ownership in the Company (and a potential resolution of the action pending in Florida) prior to entering such an order.
Takeaway
The elements for an order by the Court of Chancery to compel a meeting of a company’s stockholders are (i) the plaintiff is a stockholder of the corporation, and (ii) a meeting was not held within 30 days of its designated date, or (iii) that a stockholders’ meeting to elect directors has not been held for over thirteen months. However, in rare cases, a stockholder’s demonstration of these elements may not be enough because the Court of Chancery has discretion to deny those meetings when a “powerful equity” supports such a decision.
- 2020 WL 4430773 (Del. July 31, 2020).
- Id. at *4.
- Spanakos, 2020 WL 4430773, at *1 (Del. July 31, 2020).
- Id.
- Spanakos, 2020 WL 4430773, at *2 (Del. July 31, 2020). Plaintiff also alleges that the other directors and officers used Company funds to finance personal loans to themselves and family members, purchase and lease expensive automobiles and jets, and purchase luxury homes and vacations. Id.
- Id.
- Spanakos, 2020 WL 4430773, at *2 (Del. July 31, 2020).
- Id.
- Id.
- Spanakos, 2020 WL 4430773, at *3 (Del. July 31, 2020).
- Id.
- Id.
- Id.
- Spanakos, 2020 WL 4430773, at *3 (Del. July 31, 2020); see also Saxon Indus., Inc. v. NKFW P’rs, 488 A.2d 1298, 1301 (Del. 1984).
- Spanakos, 2020 WL 4430773, at *4 (Del. July 31, 2020).
- Spanakos, 2020 WL 4430773, at *5 (Del. July 31, 2020).
- Id.
Client Alert 2020-506
