November 05, 2012In this memorandum opinion, the Delaware Court of Chancery denied a corporation’s request for a partial final judgment or certification for interlocutory appeal of the Court’s prior ruling that the corporation must hold its annual meeting despite a potential conflict with SEC proxy rules.
The underlying dispute involved an action filed in July 2010 by a stockholder of Fuqi International, Inc. (“Fuqi” or the “Company”) to compel a meeting of stockholders pursuant to 8 Del. C. § 211(c). Fuqi had delayed holding its annual meeting pending release of corrected financial statements for fiscal year 2009 after certain accounting errors had been discovered in March 2010. Conceding that it had not held an annual meeting in over 13 months, the Company argued it was unable to do so without violating SEC Regulations 14A and 14C that prohibit a company from holding an annual meeting without providing audited financial statements for the prior year. The parties agreed in August 2010 to extend Fuqi’s deadline for responding to the complaint while it sought to obtain audited financial statements for 2009, but after the process dragged into 2012, plaintiff filed for summary judgment and asked the Court for an order compelling Fuqi to hold its annual meeting.
The Court granted plaintiff’s motion in a June 1, 2012 order, and required that Fuqi hold its annual meeting on September 19, 2012, with proxy materials to be distributed 30 days prior. The Court also advised Fuqi to apply to the SEC for an exemption from the federal securities laws requiring the provision of audited financial statements to stockholders in advance of an annual meeting. The order was by its terms subject to modification and therefore was not final, and the Court further instructed Fuqi that it could seek relief from the Court in the event the SEC formally denied its request. The SEC subsequently indicated through informal communications with the Company that it would deny the request, and Fuqi sought an extension of the Court’s order, arguing it was “physically impossible” to comply with both the Court’s order and the SEC’s proxy rules. In an October 10 order, the Court extended the meeting deadline to December 17, without ruling on Fuqi’s impossibility argument, as the SEC had not ruled definitively on Fuqi’s request for an exemption. As its November 17 deadline for issuing proxy materials approached, and with no formal rejection from the SEC or 2009 audited financial statements in hand, the Company filed the immediate action, asking the Court for either a partial final judgment or certification of the impossibility issue for interlocutory appeal to the Delaware Supreme Court.
The Court denied the Company’s request for relief and further explained the rationale for its earlier orders compelling a meeting. With respect to Fuqi’s request for a partial final judgment under Court of Chancery Rule 54(b), the Court held such relief was unavailable because its October 10 order was not a final decision. The Court also emphasized its prior instruction to Fuqi that it could seek relief from the Court if the SEC formally denied its application for an exemption. Regarding the Company’s alternative request for interlocutory review, the Court held that Fuqi failed to establish any of the special criteria for an interlocutory appeal under Delaware Supreme Court Rule 42.
First, the Court’s October 10 order did not raise a legal issue of first impression or an area of unsettled Delaware law. The Company’s purported “impossibility” in complying with both Delaware and federal law in this area had been previously resolved by the Court in Newcastle Partners v. Vesta Insurance Group, Inc., 887 A.2d 975 (Del. Ch. 2005), where the Court required an annual meeting after the SEC had issued only an informal warning that holding a meeting without first providing audited financial statements would violate federal proxy law. Additionally, the Court adopted the logic of Newcastle that Section 211 and the SEC Regulations at issue each sought to protect the stockholder franchise, and “a rule meant to reinforce management accountability to stockholders could not be used as a tool to indefinitely deprive stockholders of the franchise.” Following Newcastle, the SEC issued a release outlining the procedure for applying for an exemption, and that release supported, rather than distinguished, the Court’s earlier holding.
Second, the Court held that the interests of justice did not weigh in favor of interlocutory review, as “any uncertainty over [Fuqi’s] position vis-à-vis the SEC [was] self-inflicted.” The Court ruled that the Company must bear sole responsibility for both the errors in its financial statements and its strategic decision to withdraw an earlier exemption application that may have been resolved prior to the Court’s meeting deadline. In contrast, the stockholders have a right to an annual meeting, and that right is “especially strong when financial management is so questionable as to delay the provision of audited financial statements for three full years.”
The full opinion is available here.