Delaware Supreme Court Affirms Decision Declining to Order Stockholder Meeting Under Section 211 of the DGCL
Spanakos v. Pate, C.A. No. 532, 2019 (Del. July 31, 2020)
The Court of Chancery may summarily order a stockholder meeting to be held to elect directors of a Delaware corporation, if one has not been held for more than thirteen months. 8 Del. C. § 211. The rule’s purpose is to ameliorate situations in which a Delaware corporation’s normal democratic functions are impaired, for example, if “by reason of death or resignation or other cause, a corporation should have no directors in office ….” 8 Del. C. § 223. The stockholder meeting to elect directors is a cornerstone of Delaware corporate law, and “stockholders’ entitlement to such a meeting is paramount.” Newcastle P’rs, L.P. v. Vesta Ins. Gp., Inc., 887 A.2d 975, 979 (Del. Ch. 2005).
To obtain relief, a stockholder in a Delaware corporation must make out a prima facie case for a court-ordered election. That requires the stockholder to show “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.” Saxon Indus., Inc. v. NKFW P’rs, 488 A.2d 1298, 1301 (Del. 1984). A prima facie showing, however, does not guarantee relief. Rather, the statute provides that the Court of Chancery “may” enter such an order, empowering the Court to exercise discretion when equity so requires. The Court should exercise its discretion to deny the application for the stockholders’ meeting only when “a powerful equity” supports denying the relief.
In Spanakos v. Pate, the Delaware Supreme Court held that the equities supported the Court of Chancery denying an application under Section 211. The appellant in the action and petitioner in the Court of Chancery action (“Petitioner”) was a stockholder and former director of a void Delaware corporation (the “Company”). Under the direction of its former board of directors, the Company had defaulted on its tax obligations to the State of Delaware and was declared void pursuant to 8 Del. C. § 510. The Company also defaulted on a secured promissory note held by Petitioner. Petitioner brought several actions in Florida, the jurisdiction in which the Company was headquartered, alleging, inter alia, that corporate executives defrauded investors and embezzled company funds. Petitioner successfully secured judgments against the Company and its former directors for, among other things, defaulting on the promissory note obligations. Petitioner thereafter exercised his rights to foreclose on the Company’s stock held as a security interest under the promissory note. Petitioner also obtained judgments and exercised a Writ of Execution against certain individual directors whereby he seized a substantial amount of the Company’s common stock. As a result, Petitioner contended that he was thereafter the majority stockholder of the corporation, though the most recent stock ledger showed him owning only 8.4% of the Company. After purporting to appoint himself as sole director and seeking to take certain judicial actions on the Company’s behalf, however, a Florida court instructed Petitioner to obtain declaratory judgment from a competent Delaware court that he was authorized to take such action as a majority stockholder.
Petitioner then filed an application in the Court of Chancery, seeking a declaration under 8 Del. C. § 225 that he was a validly elected director and that he controlled a majority interest in the Company. Petitioner alternatively sought an order, under Section 211, compelling the Company to hold an annual meeting of stockholders for the election of directors. Petitioner made the required prima facie showing for relief under both sections. But, after reviewing the merits, the Court of Chancery denied both requests. Apparent typographical errors in a Florida judgment left open the question as to the amount of stock Petitioner actually owned. A separate Florida judgment was also unclear as to whether the final order had effectively voided 20,000,000 shares of the corporation held by another entity. Each of those orders dramatically impacted the proportion of the Company held by Petitioner. After receiving the Court of Chancery’s order for clarification on those Florida judgments, Petitioner appealed to the Delaware Supreme Court, arguing that the trial court abused its discretion in denying the application. Petitioner argued that the virtually-absolute right of stockholders to have a meeting for the election of directors under Section 211 should trump these technical concerns.
The Delaware Supreme Court acknowledged that “the Court of Chancery has ordered meetings where the stock ledger was less than perfect.” The Supreme Court affirmed the Court of Chancery’s ruling, however, finding that while the preference is to compel a meeting of stockholders when the prima facie elements are met, the trial court did not abuse its discretion under this action’s unique circumstances. It reasoned that the “path laid out by the Court of Chancery allows the Florida courts to clarify their own orders rather than asking Delaware courts or a special master to rewrite the orders; it does not cause too much delay because [Petitioner] has already won on the merits; and it eliminates the profound uncertainty concerning [the Company’s] majority ownership.”