On November 5, 2012, the Delaware Chancery Court issued an opinion in Rich v. Fuqi International, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012) reaffirming the requirement under Section 211 of the Delaware General Corporation Law for Delaware corporations to hold an annual meeting of stockholders for the election of directors, regardless of arguably conflicting provisions of the federal securities laws.
Fuqi International is a Delaware corporation with its operations in China. Prior to its delisting, it was publicly traded on NASDAQ. In March 2010, Fuqi announced that it had identified certain historical accounting errors affecting its 2009 quarterly reports and that it would have to restate the financial statements contained in those reports and delay the filing of its audited financial statements for the 2009 fiscal year. In July 2012, Rich commenced an action in the Delaware Chancery Court seeking to compel Fuqi International to hold an annual meeting of stockholders to elect directors. Fuqi International argued that it could not hold the stockholders meeting because it was unable to provide audited financial statements for fiscal 2009 and later years as required by SEC rules.
Rule 14a-3(b) under the Securities Exchange Act of 1934, as amended (Exchange Act), provides that if a stockholders meeting is an annual or special meeting at which directors are to be elected, the company’s proxy statement must be accompanied or preceded by an annual report to the stockholders. The annual report is required to contain, among other things, audited financial statements. Fuqi International asked the SEC for an exemption from the relevant proxy rules in order for it to be able to hold its annual meeting, as required by Delaware law, but later withdrew that request after informal indications from the SEC staff that the request would be denied. If the company cannot provide the required financial statements, it is caught between a rock (the Delaware state law requirement to hold an annual meeting to elect directors) and a hard place (the SEC requirement that audited financial statements be provided in connection with any such meeting). In Fuqi International, the Delaware Chancery Court followed Delaware precedent, most notably Newcastle Partners, L.P. v. Vesta Insurance Group Ltd., 887 A.2d 975 (Del. Ch. 2005, aff’d, Vesta Ins. Group, Inc. v. Newcastle P’rs, L.P., 906 A.2d 807 (Del. 2005), and found that, notwithstanding Fuqi International’s purported inability to produce audited financial statements, it was obligated to hold an annual meeting to elect directors. In reaching its decision, the Court noted that Fuqi International was not seeking “a brief continuance of the time for the annual meeting, pending production of the audited financial statements…or a delay, long or short, of the meeting until a date certain, by which point the financial statements will have been produced.” The Court explained that, instead, Fuqi International was seeking “an indefinite suspension of the requirement that the stockholders be allowed to exercise their franchise, with no end in sight.”
The Fuqi International decision affirms that a Delaware corporation will not be able to avoid indefinitely the requirement to hold an annual meeting of stockholders to elect directors when it does not have the audited financial statements the company is required to provide under SEC rules. However, it does leave open the possibility that the Delaware Courts could find that an annual meeting of stockholders does not have to be held where the SEC actually denies a company’s request for an exemption from the proxy rules.