The Delaware Court of Chancery recently determined that the appropriate remedy for a corporation’s failure to comply with court orders to hold a long overdue stockholders’ meeting was to appoint a receiver with authority to ensure that a meeting occurred.
The court had twice previously ordered Defendant Fuqi International Inc. (Fuqi) to hold an annual stockholders’ meeting. After Fuqi failed to comply, plaintiff moved to hold Fuqi in contempt of court, seeking monetary sanctions or appointment of a receiver to liquidate the corporation. Fuqi argued that it could not hold a stockholders’ meeting without violating Regulations 14A and 14C promulgated by the Securities Exchange Commission because the company had not filed audited financial statements.
The court disagreed with Fuqi’s argument, noting Fuqi’s failure to explain why it had not filed audited financial statements for several years, and the lack of any indication of when it might do so. The court also determined that the plaintiff’s suggested remedy of a significant daily fine would only further damage stockholders, and that the appointment of a receiver to liquidate the corporation would be “draconian.”
Instead, the court decided to appoint a temporary receiver consistent with its decision in Judy v. Preferred Communication Systems, Inc., C.A. No. 4662-CC, at 50-54 (Del. Ch. Dec. 4, 2009). The court determined that the receiver should “(1) evaluate whether audited financials sufficient to comply with SEC regulations can be filed; (2) if not, evaluate whether an exemption should be sought from the SEC; and (3) explore any other considerations to a holding of the stockholders’ meeting.” The court ordered that a stockholders’ meeting be held within 90 days, but allowed the receiver to seek modification of the timetable if necessary.
Rich v. Fuqi International Inc., C.A. No. 5653-VCG (Del. Ch. June 12, 2013).