Delaware Court of Chancery Denies Plaintiff's Request for Declaration of Status as Majority Stockholders, Sole Director, and Chief Executive Officer
In In Re Hawk Systems, Inc., C.A. No. 2018-0288-JRS (Del. Ch. Sept. 4, 2019), the Delaware Court of Chancery (the “Court”) denied a plaintiff’s request for a declaration that he was the majority stockholder, sole director, and chief executive officer of a company.
Mark Spanakos (the “Plaintiff”) was a stockholder and former director of Hawk Systems, Inc. (“Hawk” or the “Company”). In prior direct and derivative litigation in Florida state court, the Plaintiff alleged that the Company’s former managers engaged in fraud, unjust enrichment, and mismanagement at the expense of other stockholders, which caused the Company to default on its obligations, featured the Company’s insiders buying and selling stock for little or no consideration and with no regard for corporate formalities, created confusion as to the Company’s stock ownership structure, and led to the revocation of Hawk’s corporate charter. The Florida state court issued two orders (the “Florida Orders”) that, among other things, determined that a Delaware court should decide the number of Company shares controlled by the Plaintiff and whether the Plaintiff was a validly elected director and officer of the Company. As a follow-on to that litigation, the Plaintiff initiated a lawsuit under Section 225(a) of the Delaware General Corporation Law (“DGCL”), seeking the Court’s declaration that he was indeed the Company’s majority stockholder, sole director, and chief executive officer.
The Court declined to find that the Plaintiff was the majority stockholder of the Company. With respect to the interpretation and enforcement of the Florida Orders, the Court noted that the Plaintiff had “made no effort to have the Florida court amend its own order to reflect” the Plaintiff’s purported stock ownership percentage and had failed to take appropriate steps to execute on the Florida Orders. In dismissing the Plaintiff’s claim as to majority stock ownership of the Company (as well as his purported status as sole director and chief executive officer), the Court concluded that granting such request would require the Court to “modify the order of another court or determine the bona fides of stock ownership in a manner that would affect the interests of [Company] stockholders who are not before the Court.” In the Court’s view, only the applicable Florida state court could clarify and provide a forum for execution on the shares the Plaintiff had acquired through his litigation efforts in Florida.
In the alternative, the Plaintiff had also sought, pursuant to Section 223(a) of the DGCL, for the Court to compel an annual election of directors. In declining to grant this request, the Court noted that “the Company’s stock ledger is in shambles, effectively preventing the Court from exercising its discretion to resolve by any logical or lawful means the answers to important election issues.”
The Court concluded that the Plaintiff would be permitted to return to seek appropriate relief under Section 225(a) or Section 223(a) of the DGCL only if the Plaintiff were first to obtain “clarification from the Florida courts regarding the meaning and scope of the [Florida Orders]” and properly execute on such orders.