In this post-trial memorandum opinion, the Court of Chancery ordered the appointment of a receiver for defendant Calypso Wireless, Inc.—a publicly registered but essentially non-operating company—to dissolve the corporation and wind up its affairs under the authority of Section 322 of the General Corporation Law of the State of Delaware (the “DGCL”).
Plaintiff David Williams initiated the action under Section 225 of the DGCL, seeking to challenge his removal as a director of Calypso. Previously, in 2008, Williams petitioned the Court for an order compelling Calypso to hold an annual meeting of stockholders, something the company had not done since at least 2002 when, as a defunct but still publicly listed Delaware corporation named Kleer-Vu Industries, Inc., it was acquired by a privately held developmental-stage company seeking to access the public securities market. Williams’ prior action resulted in an order requiring the company to hold an annual meeting within 45 days. In the three years that followed, the company never complied.
Williams’ efforts to compel Calypso to hold its annual meeting did, however, prompt a board shake-up that resulted in his appointment as a director in early 2009. Once seated on the board, Williams continued to push for an annual meeting but was advised by the company’s counsel that Calypso could not do so under the federal securities laws without first providing stockholders with audited financial statements, which the company was in no position to do. It had not filed an annual report on Form 10-K or a quarterly report on Form 10-Q in nearly four years and only sporadically disclosed information through reports filed on Form 8-K. Aware of a then-recently adopted exception under the federal rules that allows corporations to hold court-ordered meetings without disseminating audited financial statements, provided SEC permission is first obtained, Williams continued to push for an annual meeting, but the company took no actions. Over the next two years, Williams’ relationship with Calypso’s other directors deteriorated, culminating with the board’s calling a special meeting of stockholders in December 2011—notwithstanding its professed inability to hold stockholder meetings given the company’s longstanding federal reporting deficiencies—to remove Williams as a director.
The attempted removal of Williams spurred the present litigation, with Williams asserting that the removal was ineffective because only a majority of stockholders voting at the meeting, and not stockholders holding a majority of all outstanding stock, had approved it. Shortly after initiating suit, Williams also sought appointment of a receiver, presumably to take charge of the company’s books and records in efforts to comply with its reporting obligations and to conduct a meeting of stockholders and seat a newly elected board.
The Court concluded that the facts of the case called for a receiver with a much broader charge. Citing Calypso’s protracted failure to comply with the 2008 meeting order, its “glaring violations” of federal securities law, the absence of any plan to bring the company into compliance with either its federal reporting obligations or Delaware law, and its general lack of operations or revenue, the Court ordered the company’s dissolution. In so doing, the Court noted Delaware’s general disapproval of companies attempting to access the public markets through acquisitions of defunct but publicly listed Delaware corporations: “Although not at issue in this case, using a defunct Delaware corporation that happens to retain a public listing to evade the regulatory regime established by the federal securities law is contrary to Delaware public policy.” Justifying the extreme result of dissolution, the Court found that Calypso had no realistic prospect of complying with the meeting order or, given its financial situation and the state of its records, fixing its disclosure problems. Most troubling to the Court, however, were the public disclosures Calypso had made through its website and through anonymous internet postings by officers and directors, including the plaintiff, on sites such as InvestorsHub.com. Those disclosures and postings described the company in glowing terms and sought to generate trading activity through false or misleading information. Relying on its “equitable power to address fraudulent and illegal conduct by Delaware corporations,” the Court ordered a receiver be appointed to dissolve Calypso and wind up its affairs, as well as to determine whether steps should be taken to halt public trading of its stock.
The full opinion is available here.