In re: Hawk Systems, Inc. a Delaware corporation ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE: HAWK SYSTEMS, INC., )
a Delaware corporation ) C.A. No. 2018-0288-JRS
)
MEMORANDUM OPINION
Date Submitted: June 18, 2019
Date Decided: September 4, 2019
Carl D. Neff, Esquire and Kasey H. DeSantis, Esquire of Fox Rothschild LLP,
Wilmington, Delaware and Manuel A. Mesa, Esquire and Matthew Carcano, Esquire
of Mesa & Pepin, LLC, Miami, Florida, Attorneys for Petitioner Mark J. Spanakos.
Neil R. Lapinski, Esquire and Phillip A. Giordano, Esquire of Gordon, Fournaris &
Mammarella, P.A., Wilmington, Delaware, Attorneys for Respondents Robert Pate,
John Pate, Mary Ellen Pate, Edward Sebastiano and Joseph Garofalo.
SLIGHTS, Vice Chancellor
Legend has it that if you ask a Mainer to give directions when he does not
know the way, he will reply, “You can’t get there from here.”1 Petitioner, Mark
Spanakos, asks this Court to declare that he is the majority stockholder, sole director
and chief executive officer of Hawk Systems, Inc. (“Hawk Systems” or the
“Company”). His request comes in the wake of allegations the Company’s former
managers engaged in rampant fraud and mismanagement at the expense of all other
stockholders, and Spanakos in particular, that caused the Company to default on its
obligations and ultimately go dark. In the midst of the chaos, the Company’s insiders
bought and sold stock for little or no consideration and with no regard for corporate
formalities. The Company’s stock ledger is a mess and its stock transfer agent has
resigned. This all has left a splintered trail of evidence regarding stock ownership
that, in its present form, cannot be reconstituted. Consequently, while Spanakos set
out in this litigation to reach Hawk Systems’ seat of control, given the current state
of the evidence, he “can’t get there from here.”
The question of Spanakos’ control over Hawk Systems has bubbled to the
surface in derivative litigation Spanakos initiated in Florida against several of the
alleged wrongdoers. Spanakos has sought to have the Company assume control of
the derivative claims and the defendants there have responded by challenging his
1
Athenians are known to reply the same. Berry, Buck, Mills, Stipe, You Can’t Get There
From Here (Universal Music Publ’g. Gp. 1985).
1
authority to act for the Company.2 The Florida court determined that only this Court
could adjudicate whether Spanakos’ claim that he controls Hawk Systems is valid,
so he initiated this action under 8 Del. C. § 225 to obtain that declaration.
Spanakos’ claims here hinge on two Orders issued by state courts in Florida
in resolution of direct claims he initiated against some of the alleged bad actors
within the Company. The Florida Orders, he alleges, make clear that, as a result of
defaulted debts and proven wrongdoing, Spanakos now owns a majority of Hawk
Systems’ issued and outstanding voting stock, or at least has the right to vote a
majority of the Company’s common shares. As explained below, the Orders do not
clearly say what Spanakos says they say, nor has Spanakos sought to clarify, enforce
(or execute upon) them in Florida in a manner that would allow this Court to declare
that he owns or controls the disputed shares. And, of course, the Company’s stock
ledger does not support his claim because that record has been neglected for years.
Spanakos has cause to be frustrated. He invested real money in Hawk Systems
and his investment has been squandered. His desire to assume control of the
Company and to seek accountability for what has happened to it is laudable. But he
can’t get there from here. The basic elements of the map to his desired destination
2
It appears the Florida derivative defendants are also challenging whether Spanakos has
properly asserted derivative claims for the Company, thereby making the question of
Spanakos’ authority to cause the Company to assert the claims directly all the more
consequential.
2
are missing. Those elements, if they exist, are in Florida. Specifically, the Florida
courts can clarify the Hawk Systems shares Spanakos has acquired through his
litigation efforts in Florida and can provide a facility to execute on those Orders.
Once that clarity has been given, he can return to this Court with a clearer path to
the relief he seeks. For now, I must enter judgment for Respondents.
I. BACKGROUND
The Court held a one-day trial during which it received 82 trial exhibits,
including 9 lodged depositions, and heard live testimony from two witnesses. I have
drawn the facts from the stipulations of fact entered in advance of trial, the testimony
and exhibits presented during trial and from reasonable inferences that flow from
that evidence.3 The following facts were proven by a preponderance of the evidence.
A. Parties and Relevant Non-Parties
Petitioner, Mark Spanakos, is a Florida resident and former director of Hawk
Systems.4 Nominal respondent, Hawk Systems, is a Delaware corporation based in
Palm Beach County, Florida. When it was operational, Hawk Systems designed
fingerprint authentication and identification technology for various applications.
3
Citations will be in the following format: “PTO ¶ __” shall refer to stipulated facts in the
pre-trial order; “Trial Tr. ([Name]) __” shall refer to witness testimony from the trial
transcript; “JX__” shall refer to trial exhibits using the JX-based page numbers generated
for trial; “[Name] Dep. __” shall refer to witness testimony from a deposition transcript
lodged with the Court for trial.
4
Trial Tr. (Spanakos) 5:13–17, 101:23–102:1.
3
It is the product of a 2009 reverse merger between Hawk Acquisition Corp. (as a
subsidiary of Hawk System’s predecessor, Explorations Group, Inc. (“EXGI”)) and
non-party, Hawk Biometric Technologies, Inc. (“Hawk Biometric”).5 Respondents,
Robert Pate, John R. Pate, Edward Sebastiano, Mary Ellen Pate and Joseph Garofalo,
are purported stockholders of Hawk Systems.6
B. The Evolution of Spanakos’ Interests in Hawk Systems
In 2006 and 2007, Spanakos made a number of investments in Hawk
Biometrics of Canada, Inc. (“Hawk Canada”) in exchange for four million shares of
common stock.7 Eventually, Hawk Canada re-domiciled in the United States as
Hawk Biometric and Spanakos’ interest in Hawk Canada was converted in a 1:1
exchange to common stock in the U.S. company.8 In February 2009, Hawk
Biometric went public through a reverse merger with EXGI, a publicly traded
company that changed its name to Hawk Systems after the merger.9 As a result of
the merger, Hawk Biometric became a wholly owned subsidiary of Hawk Systems.10
5
JX 69.
6
D.I. 12–15.
7
PTO ¶ 1.
8
JX 70; Trial Tr. (Spanakos) 13:1–16.
9
JX 9; JX 49.
10
JX 9; JX 11.
4
Hawk Biometric Class A and B common stock was converted into shares of Hawk
Systems Series B Preferred Stock and then into shares of Hawk Systems common
stock.11 Spanakos’ four million shares of Hawk Biometric stock, therefore,
converted into eight million shares of Hawk Systems common stock.12
C. The Coriaty Note
Prior to the reverse merger, Spanakos loaned $1.5 million to David Coriaty,
the founder and majority stockholder of Hawk Canada, as evidenced by a promissory
note dated June 29, 2007 (the “Coriaty Note”).13 To secure the Coriaty Note, Coriaty
granted Spanakos a security interest in Coriaty’s 3,000,000 Class A “Preferred”
shares of Hawk Canada, and voting rights associated with all of Coriaty’s shares,
totaling 15,000,000 class A “Preferred” shares (the “Coriaty Security
Agreement”).14 Coriaty also agreed that “[f]urther collateral (Patents) will be
pledged in exchange for the above collateral once Hawk Biometrics of Canada is
domesticated into the US.”15 After receiving the funds, Coriaty loaned the $1.5
million to Hawk Canada, and the board of directors of Hawk Biometric committed
11
JX 9; JX 11.
12
PTO ¶ 6; JX 50.
13
PTO ¶ 7; JX 5; Trial Tr. (Spanakos) 10:14–15, 14:6–13.
14
PTO ¶ 8; JX 5.
15
JX 5.
5
to repay Spanakos on the Coriaty Note in a board resolution dated January 6, 2009
(the “Coriaty Resolution”).16 The Coriaty Resolution, however, does not purport to
transfer Coriaty’s pledged collateral to Hawk Biometric, nor does it commit the
Company to assist Spanakos in securing Coriaty’s pledged collateral in the event
Coriaty and the Company both default on the loan.
D. Hawk Systems Defaults on Obligations and Loses Its Charter
In 2009, the Company stopped making payments on Spanakos’ loan. 17 This
caused Spanakos to worry that all was not well within Hawk Systems. Specifically,
Spanakos began to suspect that Company directors were diverting Company funds
to pay personal expenses, a fact that was particularly troubling since the Company
had yet to produce a single product with its patented “biometric” technology. 18 Even
16
PTO ¶ 9; JX 7; JX 12. Specifically, the Coriaty Resolution states:
RESOLVED: The Company shall repay its $1.5 million debt to Mr. Coriaty
either with the proceeds of a bridge loan, profits made after going public, or
a combination of both. The Company acknowledges that Mark Spanakos is
the lender of the $1.5 million borrowed by Mr. Coriaty, and that said loan is
secured by Mr. Coriaty’s interest in the Hawk patents. The Company
contemplates securing a bridge loan in the amount of $3 million for the
purpose of repayment of the debt and for working capital. Therefore, it is,
FURTHER RESOLVED, that the Company shall payoff the $1.5 million
loan directly to Mr. Spanakos, and that said debt shall be paid before any
additional bonuses, compensation or other shareholder distributions are
made. It will look to bridge loan proceeds first before Company profits in
order to repay the debt. (JX 5).
17
Trial Tr. (Spanakos) 190:11–13.
18
Trial Tr. (Spanakos) 22:4–20; JX 28 at ¶¶ 9.l, 10.a.
6
though the Company had no marketable product, its insiders continued to tout its
prospects in what Spanakos now alleges was a “pump and dump” scheme whereby
Hawk Systems’ insiders pumped the stock price with false information and then
dumped their holdings.19 At the end of the scheme, the insiders allegedly raised
millions of dollars in investor funding, reported sales of $5,575 and booked expenses
and losses of approximately $22 million.20 All the while, members of the Hawk
Systems board of directors allegedly issued shares of Company stock to insiders for
little or no consideration and with no regard for corporate formalities.21 Eventually
the Company defaulted on its obligations to Delaware and its charter was declared
void.22
E. Spanakos Attempts to Revive the Company and Assert Control
Between 2010 and 2012, Spanakos filed several actions against Hawk
Systems and its directors. On October 28, 2011, Spankos initiated a direct action
against Hawk Systems and Coriaty in the Florida 15th Judicial Circuit Court for Palm
Beach County to enforce the Coriaty Note and foreclose on the Coriaty Security
19
JX 28 ¶ 10.a.
20
JX 28 ¶ 9.k.
21
Id. See also John Pate Dep. 14:10–13 (testifying that his father, Respondent, Robert
Pate, was given 100,000 shares of stock for no consideration, and then gave his children
John and Martine Pate 25,000 shares each).
22
Trial Tr. (Spanakos) 61:11–12; JX 46.
7
Interest (the “Coriaty Action”).23 On December 23, 2014, the Florida court entered
a Partial Final Judgment in favor of Spanakos and against Hawk Systems and Hawk
Biometric (the “Partial Final Judgment”).24 While the order states that “execution”
on the “Final Judgment of foreclosure” shall “issue,” there is no evidence that any
further steps to execute the judgment have been taken.25
Spanakos also commenced a direct action against former Hawk Systems
director, Edward Sebastiano, again in the Florida 15th Judicial Circuit Court for Palm
23
PTO ¶ 12 (Spanakos v. Hawk Sys., Inc. et al., Case No. 50 2011 CA 16775 XXXX
MB AE); Trial Tr. (Spanakos) 41:20–42:3; JX 37.
24
PTO ¶ 13; JX 38. Spanakos maintains in his post-trial brief that he obtained a judgment
against Coriaty as well. Pet’r Post-Trial Op. Br. at 14. But that is not what the Order says.
See JX 38. The Partial Final Judgment states:
Final Judgment is hereby entered against Defendants Hawk Systems, Inc.
and Hawk Biometric Technologies, Inc. (collectively “Defendants”) and in
favor of Plaintiff Mark Spanakos (“Plaintiff”), in the amount of
$3,096,782.00, for which sums let execution issue. Final Judgment of
foreclosure of the security interests held by Plaintiff, as of the date of default,
November 1, 2008, in 6,000,000 Class A “Preferred” shares of stock in
Defendant Hawk Systems, Inc., and in voting rights over 30,000,000 Class A
“Preferred” shares of stock in Defendant Hawk Systems, Inc. (including all
stock acquired in any fashion thereafter) is Granted in favor of Plaintiff, for
which amounts let execution issue. U.S. Patent 6,927,668 and Pending U.S.
Patent Application SN 11/622,428, are hereby vested in Plaintiff to U.S.
Patent 6,927,668 and Pending U.S. Patent Application SN 11/622,428.
Re: Patent 6,927,668 and Pending U.S. Patent Application SN 11/622,428,
these defendants’ claims, interests are hereby expressly extinguished. JX 38.
25
It is clear from the Order, including the handwritten notes of the judge who entered it,
that Spanakos proposed the Order, the presiding judge modified it and then entered it.
JX 38.
8
Beach County (the “Sebastiano Action”).26 On June 1, 2017, Spanakos obtained a
Writ of Execution against Sebastiano and levied upon his goods and chattels,
including three stock certificates totaling 8,162,283 shares of Hawk Systems
common stock.27
On July 13, 2010, Spanakos brought a direct and derivative action in the
Florida 15th Judicial Circuit Court against several alleged Hawk Systems insiders,
alleging, among other things, unjust enrichment and fraud, and seeking judgment
against the defendants for compensatory damages (the “Derivative Action”).28
On December 15, 2016, the Florida court entered summary judgment against
22 individuals and entities with respect to Spanakos’ claims of unjust enrichment
(the “Summary Judgment Order”).29 The implementing orders for each defendant
make clear that summary judgement was entered “as to liability only.”30 Indeed,
“[t]he Court reserve[d] entering a final judgment against defendant(s) . . . on
26
PTO ¶ 14 (Case No. 50-2013-CA-017439-XXXX-MB).
27
PTO ¶ 15; JX 25; JX 53.
28
PTO ¶ 10 (Spanakos v. Hawk Sys., Inc. et al., Case No. 50 2010 CA 017971 XXXX MB);
JX 33 at 81, 89–92. The parties have called this action the Derivative Action (PTO ¶ 10),
but it appears Spanakos asserted both direct and derivative claims.
29
JX 45. As best I can tell, Spanakos obtained partial summary judgment on direct
(not derivative) claims against the individual defendants named in the judgments.
30
JX 45.
9
damages subject to an appropriate motion regarding the same.”31 To date, Spanakos
has not brought the “appropriate motion” to obtain final judgments as directed by
the Florida court.
As for Spanakos’ derivative claims (the “Derivative Claims”), it appears the
defendants challenged his standing to bring those claims, raising, among other
issues, his failure to plead demand futility.32 In response, Spanakos moved to realign
the parties on May 26, 2015.33 After several hearings, the Florida court determined
a Delaware Court should decide the number of Hawk Systems shares controlled by
Spanakos and whether Spanakos is a validly elected director and officer of Hawk
Systems.34 The Florida court entered an order to that effect on March 14, 2018.35
As he prosecuted his claims against various Company insiders in court,
Spanakos purported to take several steps outside of court to assert control over the
Company as majority stockholder and sole director. In March 2015, he executed a
31
JX 45.
32
PTO ¶ 25.
33
PTO ¶ 23. That same day, Spanakos executed two resolutions (the “2015 Corporate
Resolutions”) purporting to (i) realign the parties to name Hawk Systems as a plaintiff,
(ii) authorize the Company to assert the Derivative Claims as direct claims, and
(iii) demand that all books and records of the Company and of the Company’s stock
transfer agent, Olde Monmouth Stock Transfer Company, relating to the Company be
turned over to his counsel. PTO ¶¶ 19–20.
34
PTO ¶ 26.
35
Id.
10
“Written Consent of Majority Stockholder in Lieu of an Annual Meeting Pursuant
to Sections 228(e), 211(b), and Other Provisions of the General Corporation Law of
the State of Delaware” (the “2015 Written Consent”).36 Through the 2015 Written
Consent, Spanakos purportedly reduced the Hawk Systems board of directors to one
member and then appointed himself as the sole director, chairman of the board and
CEO of the Company.37
On February 1, 2017, Spanakos caused to be filed a certificate of revival of
Hawk Systems’ charter, which, as noted, had become void in March 2013 for failure
to pay taxes and fees.38 In April 2018, Spanakos ostensibly amended the Company’s
bylaws to reduce the Hawk Systems board of directors to one and to ratify his actions
with respect to the Derivative Claims (the “2018 Stockholder Consent”).39 Spanakos
then purported to elect himself as chairman of the board, CEO, treasurer and
secretary and then purported to ratify all of his prior actions (the “2018 Director
36
PTO ¶ 18; JX 39.
37
JX 39.
38
JX 46.
39
PTO ¶ 27; JX 63.
11
Consent”).40 On April 20, 2018, as the alleged sole director, Spanakos purported to
nullify 20,811,000 shares of Company common stock.41
As of August 22, 2018, Spanakos had acquired an additional 6,443,909 shares
of Hawk Systems stock and voting rights in 1,271,713 shares through purchases on
the open market and a transfer from his sister, Athena Carlone.42 In total, including
shares he allegedly secured through litigation, Spanakos claims to own 22,606,192
shares and to control voting rights in 46,115,140 shares,43 as reflected in the chart
below:
Remainder of page intentionally left blank
40
JX 63.
41
PTO ¶ 30.
42
JX 40; JX 48; JX 65.
43
PTO ¶ 13.
12
Source of Shares Amount of Date Shares Evidence Reflecting the Shares
Shares Acquired
Initial Investment 8,000,000 2006 Stock Certificate of Mark Spanakos
(JX 50)
Physically Controlled by
Additional 2,015,554 October 1, 2015 Account statement of Gary Goldberg
Purchased Financial Services, dated May 2017
(JX 40)
Spanakos
Sebastiano Action 8,162,283 August 17, Writ of Execution and Bill of Sheriff’s
2017 Sale (JX 53);
Sebastiano’s Stock Certificates (JX 25)
Transferred from 4,428,355 February 2017 Account statement from Scottrade, dated
Athena Carlone February 24, 2017 (JX 48)
TOTAL 22,606,192
Coriaty Action – 36,000,000 December 23, Coriaty Note and Security Agreement
Partial Final 2014 (JX 5)
Judgment
Voting Rights Controlled
Partial Final Judgment (JX 38)
Additional Coriaty 8,843,427 December 23, Partial Final Judgment (JX 38)
Shares 2014 7/7/2010 Letter from M. Diamant to Olde
by Spanakos
Monmouth stock Transfer Inc. (JX 23)
Olde Monmouth Stock Transfer
Transaction Journal, dated Oct. 21, 2015
(JX 21)
Voting Rights to 1,271,713 August 22, Spanakos Aff., ¶ 12; Shareholder Proxy
Shares of Athena 2018 (JX 65)
Carlone
TOTAL 46,115,140 [Collective Total of 68,721,332]
F. The Stock Ledger
The Company’s most recent stock ledger shows Spanakos as record holder of
approximately 8 million shares of Hawk Systems stock.44 This equates to roughly
8.4% of Hawk Systems’ outstanding shares.45 But the stock ledger is not accurate,46
44
JX 49. Beyond a reference to “Restricted,” it is not clear from the stock ledger what
class of securities Spanakos holds.
45
JX 49; JX 51; JX 54 (Deposition, Jeffrey English) 116:12–15.
46
Trial Tr. (Spanakos) 34:7–14; Trial Tr. (Kennedy) 220:1–23; Pate Dep. 14:10–13; JX 12;
JX 13; JX 16. Petitioner presented expert testimony from Kara Kennedy on issues relating
to stock ledgers and the role of stock transfer agents. I found her testimony on these
13
and the Company’s stock transfer agent, Olde Monmouth Stock Transfer Company
(“Olde Monmouth”), has resigned.47
G. Procedural History
Petitioner filed this action on April 17, 2018, seeking declarations that he
controlled Hawk Systems and had taken appropriate steps to secure and exercise that
control upon acquiring majority ownership of the Company’s outstanding voting
stock. Alternatively, he sought to compel an election of directors.
On May 30, 2018, Neil R. Lapinski, Esq. entered his appearance and filed a
letter with the Court in which he explained that he represented several clients not
named in the action who, nevertheless, opposed the relief Spanakos was seeking
(the “Letter”).48 A number of shareholders and non-shareholders then contacted the
Court to join in the Letter and asked to be heard.49 Spanakos moved to strike the
subjects credible. She also provided opinions regarding the scope, meaning and validity
of Spanakos’ various actions taken as purported majority owner of Hawk Systems,
e.g., Trial Tr. (Kennedy) 255:22–256:1, and the steps the Court may take under the DGCL
to fill the holes in Spanakos’ claim of majority ownership, e.g., Trial Tr. (Kennedy) 239:5–
20. As to these subjects, and others, Ms. Kennedy opined well beyond her expertise and
beyond the bounds of permissible expert testimony.
47
JX 54 (English Dep.) 162:20–25.
48
D.I. 6.
49
Non-shareholders seeking to be heard included Liebman, Goldberg & Hymowitz LLP,
Elliot Goldberg, and Michael Diamant. D.I. 5.
14
Letter.50 Eventually, Spanakos agreed to withdraw his motion to strike in exchange
for the non-parties’ agreement not to intervene in the litigation.51 Mr. Lapinski then
entered his appearance for Respondents, Robert Pate, John Pate, Edward Sebastiano,
Mary Ellen Pate and Joseph Garofalo, all of whom purport to be Hawk Systems
stockholders.52 The Court held a one-day trial on September 17, 2018.53
II. ANALYSIS
Spanakos seeks declarations under 8 Del. C. § 225(a) that he controls a
majority of the voting shares of Hawk Systems—specifically, 68.7 million of
approximately 75 million issued shares—and that he is the validly elected, sole
director and officer of Hawk Systems. To obtain these declarations, Spanakos “bears
the burden of proving by a preponderance of the evidence that [he] is entitled to
relief.”54 Section 225 contemplates summary proceedings that “should be limited in
50
D.I. 10.
51
D.I. 26, 40, 42.
52
D.I. 30. From the docket, it does not appear that Respondents ever actually “responded”
to the Petition.
53
On February 26, 2019, Petitioner filed, and the Court granted, a Motion to Supplement
the Record with testimony from stockholder John Pate. D.I. 64.
54
Hockessin Cmty. Ctr., Inc. v. Swift, 59 A.3d 437, 453 (Del. Ch. 2012) (noting that in a
Section 225 action, “the Court exercises jurisdiction only for the limited purpose of
determining the corporations de jure directors and officers” and emphasizing that the
plaintiff bears the burden of proof) (quotation omitted).
15
scope to determine ‘those issues that pertain to the validity of the acts [taken to
secure plaintiff’s position on the board].’”55
As an alternative to his requested relief under Section 225, Spanakos seeks an
order compelling the Company to hold an annual election of directors under
8 Del. C. § 223(a). Section 223(a) provides, in part:
If at any time, by reason of death or resignation or other cause, a
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of
stockholders in accordance with the certificate of incorporation or the
bylaws, or may apply to the Court of Chancery for a decree summarily
ordering an election as provided in § 211 or § 215 of this title.56
Apparently recognizing that an election held in accordance with the Company’s
current stock ledger likely would not go well for him, Spanakos has advanced a
request for relief not stated in his Petition that essentially would have the Court
appoint a custodian to reconstitute the Company’s stock ledger and then oversee the
election to ensure that the Company’s stock is voted in accordance with the newly
revised ledger.57
55
Boris v. Schaheen, 2013 WL 6331287, at *12 (Del. Ch. Dec. 2, 2013) (quoting Genger
v. TR Inv’r, LLC, 26 A.3d 180, 199 (Del. 2011)).
56
8 Del. C. § 223.
57
PTO, Pet’r Statement of Relief Sought, ¶¶ iv, v.
16
Regardless of whether the Court proceeds under Section 225 or Section 223,
the Court is empowered “to determine the right and power of persons claiming to
own stock and . . . to vote at any meeting of stockholders or members.”58
In exercising that power, “the court may determine any legal or factual issue, the
resolution of which could affect the outcome of a corporate election or of any other
stockholder vote. That includes deciding beneficial ownership.”59
A. Petitioner Has Not Proven He Is the Majority Stockholder or Sole
Director of Hawk Systems
Spanakos maintains he has acquired a majority of Hawk Systems’ shares of
voting stock through a variety of means. There appears to be no controversy that
Spanakos’ initial investment in Hawk Canada resulted in his ownership of 8 million
common shares of Hawk Systems.60 He then acquired an additional 2,015,554
shares on the open market,61 8,162,283 shares through a writ of execution following
his success in the Sebastiano Action,62 and 4,428,355 shares through a transfer from
58
8 Del. C. § 227.
59
Zohar II 2005-1, Ltd. v. FSAR Hldgs., Inc., 2017 WL 5956877, at *25 (Del. Ch. Nov. 30,
2017) (internal quotations omitted).
60
JX 50.
61
JX 40.
62
JX 25.
17
his sister, Athena Carlone.63 All told this amounts to 22,606,192 shares, which the
parties agree is less than a majority of the outstanding voting shares.
1. The Partial Final Judgment
To reach controlling stockholder status, Spanakos must rely on the Partial
Final Judgment in the Coriaty Action and the Summary Judgment Order entered in
the Derivative Action. The Partial Final Judgment awarded Petitioner $3,096,782.00
in damages, certain Hawk Systems patents and pending patents, and:
Final Judgment of foreclosure of the security interests held by
[Spanakos], as of the date of default, November 1, 2008, in 6,000,000
Class A “Preferred” shares of stock in Defendant Hawk Systems, Inc.,
and in voting rights over 30,000,000 Class A “Preferred” shares of
stock in Defendant Hawk Systems, Inc. (including all stock acquired in
any fashion thereafter) . . . .64
According to Spanakos, the Summary Judgment Order in the Derivative Action
(discussed below) voided 20 million shares of the Company’s stock.65 Thus, when
the stock he has acquired through litigation is added to the stock he has acquired
through other means, Spanakos maintains he controls over 68,721,332 of the
Company’s less than 75 million outstanding shares, a number that brings him well
63
JX 48.
64
JX 38.
65
Trial Tr. (Spanakos) 34:15–35:3, 80:6–18; JX 45; JX 64.
18
into majority shareholder status.66 As discussed below, there are several problems
with Spanakos’ math.
First, to count the shares pledged by Coriaty as security towards Spanakos’
majority holdings, I must rewrite the Florida court’s Partial Final Judgment. That
Order, apparently submitted by Spanakos for the Florida court’s approval, expressly
references “6,000,000 Class A ‘Preferred’ shares of stock in Defendant Hawk
Systems, Inc., and [] voting rights over 30,000,000 Class A ‘Preferred’ shares of
stock in Defendant Hawk Systems, Inc..”67 But there are no “Class A Preferred
shares of stock in [] Hawk Systems, Inc.” with voting rights. 68 Recognizing this,
Spanakos would have me amend the Florida court’s Partial Final Judgment to
substitute “common shares” for “Class A Preferred shares” to account for the fact
that the reverse merger between Hawk Biometric and EXGI converted “Class A
Preferred” stock into common stock of Hawk Systems.69 Of course, Spanakos has
made no effort to have the Florida court amend its own Order to reflect that change
66
Pet’r Opening Post-Trial Br. 37.
67
JX 38. As noted, the Order, as entered, contains several handwritten edits from the
presiding judge, suggesting he was not the original scrivener.
68
JX 59 (Certificate of Designation for Explorations Group, Inc.) § 1.7 (“The Preferred
Stock shall have no voting rights.”).
69
Id.
19
(if justified). That alone, in my view, is fatal to Spanakos’ claim here. This court
does not monkey with orders from other courts.70
Second, there is no evidence in this record that Spanakos has taken steps in
Florida to execute on the Partial Final Judgment.71 And it is not clear what that
process would yield by way of recovery should Spanakos initiate it. For instance,
the Partial Final Judgment was entered against Hawk Systems and Hawk Biometrics,
not Coriaty. While the Company promised to pay the Coriaty debt, it did not purport
to take control of the collateral Coriaty pledged as security for the debt or to secure
it in the event of default.72 Thus, it would appear Spanakos must take steps against
Coriaty personally to expand the scope of the Partial Final Judgment and then to
execute, or “foreclos[e],” on the pledged stock before he can call it his own.73 During
70
At best, Spanakos is asking the Court to interpret a foreign court’s order with no context;
at worst, he is asking the Court to rewrite the order to suit his goals in this litigation. Either
way, he has provided an insufficient evidentiary record from which I could even begin to
engage in the blue-penciling he would have me do here (assuming I was inclined even to
try, which I am not). The Derivative Action and the Coriaty Action are both still pending,
and yet Spanakos has provided no explanation of why he has not pursued either
clarification or enforcement of the Orders in question in those courts.
71
PTO ¶ 15; JX 25; JX 53.
72
That Spanakos has not attempted to execute on the Partial Final Judgment is perplexing
given that he pursued that process to secure Sebastiano’s Hawk Systems stock in
connection with the judgment entered in the Sebastiano Action. PTO ¶ 15; JX 25; JX 53.
73
See Fla. R. Civ. P. 1.550–1.1.590. Of course, I can only surmise what Spanakos’ next
steps would be with respect to the Partial Final Judgment. The Order itself is not explicit
on the point, and I am by no means an expert on Florida law with respect to the execution
of judgments.
20
the course of this process, one would expect that discovery in aid of execution will
uncover precisely what shares Coriaty holds and whether he or the Company have
engaged in fraudulent transfers of stock to avoid their obligations to Spanakos.74
Finally, the record suggests that at least some of the shares to which Spanakos
claims he is entitled are now in the possession of shareholders other than Coriaty.75
Thus, in order to provide the definitive declarations Spanakos seeks here, the Court
would have to unwind transactions whereby potentially bona fide purchasers, with
74
JX 23; Trial Tr. (Spanakos) 95:18–96:5 (testifying that Hawk Systems issued Coriaty
another 8.8 million shares). Spanakos has suggested this Court should declare that any
transfers of Hawk Systems stock made by Coriaty or the Company after the Company
entered into the Coriaty Security Agreement were fraudulent transfers. Pet’r Post-Trial
Reply Br. 7. Spanakos has not explained, however, how the Court could adjudicate that
claim when he has not asserted it in his Petition and has not named Coriaty as a party in
this litigation. Spanakos also asks that I impose a constructive trust to hold the shares that
are the subject of the Partial Final Judgment. Even if I were inclined to rewrite the Partial
Final Judgment, as Spanakos requests, to convert the nature of the securities that are
addressed in that Order, Spanakos’ prayer for a constructive trust would still fail because
he has not named Coriaty as a party to this action. See Teachers Ret. Sys. of Louisiana v.
Aidinoff, 900 A.2d 654, 670 (Del. Ch. 2006) (“[T]his court cannot impose the remedy of a
constructive trust against a party unless that party is properly subject to an order of relief
under a recognized cause of action.”).
75
Trial Tr. (Spanakos) 58:3–4 (“But they recognized millions and millions of shares of
people where they were gifted stock.”); 64:21–24 (“They don’t want me to see and the
investors to see what the discussions were made on how you can justify giving away
millions and millions of shares of stock when a collateralized note is on it . . . .”); JX 17
(list of series B preferred holders that received Hawk Systems common stock after reverse
merger); JX 21 (stock transaction list); Trial Tr. (Spanakos) 92:19–93:9 (testifying that
Coriaty swapped with Sebastiano millions of shares of stock); 94:11–13; 94:23–95:8
(testifying that Coriaty gave or sold shares of stock from his account to friends, family or
to Burt Rhodes who sold them on the side); JX 24 (letter to Olde Monmouth issuing opinion
letters for Coriaty to sell restricted shares).
21
no knowledge of Coriaty’s debt obligations, acquired shares that were subject to the
Partial Final Judgment. Setting aside the due process concerns that flow from the
absence of affected parties, there is no credible evidence in the trial record that would
allow the Court even to begin that process.
2. The Summary Judgment Order
As with Partial Final Judgment, the Summary Judgment Order provides no
pathway for Spanakos to reach majority stockholder status. According to Spanakos,
the Summary Judgment voids over 20 million shares the Company improperly
issued for little or no consideration, thereby reducing outstanding and issued Hawk
Systems stock from 95 million to 75 million shares. But the Summary Judgment
Order speaks only to liability on the unjust enrichment claim and explicitly reserves
entry of final judgment on damages (or other remedies) until the court decides a
motion for the entry of final judgment.76 Spanakos has failed to present any
competent evidence to support his contention that the Florida court intended to void
the Company’s issuance of 20 million shares, much less evidence of exactly which
20 million shares were voided. In the absence of evidence that these issues were
actually adjudicated in Florida, Spanakos’ claim here, once again, would require this
76
JX 45. Even if the Florida court were to enter a final judgment on damages, it appears
that judgment would be limited to Spanakos’ request for compensatory damages, not for
cancellation or rescission of the allegedly improperly issued stock. JX 33 at 81, 89.
22
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 Hawk Systems stockholders
who are not before the Court.
**********
Because I cannot conclude on this record that Spanakos is the majority
stockholder of Hawk Systems, I cannot conclude the actions he took through the
2015 Written Consent, the 2018 Stockholder Consent or the 2018 Director Consent
were valid corporate acts. Consequently, I cannot declare that Spanakos is Hawk
Systems’ lone director or its CEO.
B. Petitioner Has Not Provided Sufficient Guidance to Allow the Court to
Compel an Election
As an alternative to declaring him majority stockholder and validly elected
sole director and CEO, Spanakos asks the Court to compel an election of a new
board. Section 223(a) of the Delaware General Corporation Law provides that when
a corporation has no directors in office, the Court may compel an election in
accordance with Section 211.77 Section 211(c), in turn, authorizes the Court to
summarily order a meeting [to elect directors] upon the application of
any stockholder . . . . The shares of stock represented at such meeting,
either in person or by proxy, and entitled to vote thereat, shall constitute
a quorum for the purpose of such meeting, notwithstanding any
provision of the certificate of incorporation or bylaws to the contrary.
The Court of Chancery may issue such orders as may be appropriate,
77
8 Del. C. § 223(a).
23
including . . . orders designating the time and place of such meeting, the
record date or dates for determination of stockholders entitled to notice
of the meeting and to vote thereat, and the form of notice of such
meeting.78
Thus, the statutes together permit Spanakos, as a stockholder (whether majority or
minority), to call for an election, and both statutes authorize the Court to compel
one. And, if the Court decides to compel an election, it may, in its discretion, specify
the details and logistics, including the date, time and location of the election, the
record date for the meeting and who may vote.79
The problem here, as Spanakos recognizes, is 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: Who
will send notice? To whom will the notice go? Who will count the votes?80 The
78
8 Del. C. § 211(c).
79
Byrne v. Lord, 1995 WL 684868, at *8 (Del. Ch. Nov. 9, 1995) (citing 8 Del. C. § 227)
(“[T]he court may designate the time, place and record date for the meeting, as well as
determine the rights and powers of individuals who claim to be stockholders.”); Tweedy,
Browne & Knapp v. Cambridge Fund, Inc., 318 A.2d 635, 637 (Del. Ch. 1974) (“[T]he
Court has a duty to make sure that such a meeting and election take place as promptly as
possible, and normally this can only be guaranteed by the entry of an order fixing a definite
date for the event to take place.”); Savin Bus. Machines Corp. v. Rapifax Corp., 375 A.2d
469, 472 (Del. Ch. 1977) (“Thus, while the right of a shareholder to compel an annual
meeting under § 211 may be virtually absolute, he has no similar right to insist that it be
held at any particular time. This latter is a decision for the Court.”).
80
Respondents argue Spanakos and the Court are stuck with the stock ledger as the
definitive word on Hawk Systems’ capital structure and stock ownership. Resp’t Post-
Trial Answering Br. 1 (arguing the Company’s stock ledger “is controlling”). That is not
so, as a matter of law, when the Court is satisfied the stock ledger is inaccurate. See Boris
24
statutes provide no guidance on these issues in circumstances like this. And, for his
part, Spanakos has failed to provide feasible solutions. His only suggestion,
articulated for the first time in post-trial argument, is that I appoint an election
custodian who would: (1) require stockholders to come forward and prove their bona
fide stock ownership so the custodian can correct the stock ledger; and then (2) allow
only those stockholders who have carried that burden to cast a vote. 81 Spanakos
acknowledges there is no authority for this process in the DGCL or in our common
law and also agrees, if I impose these conditions, I would sanction a scenario
whereby a bona fide Hawk Systems stockholder who chose not to participate in the
court-ordered election would likely lose her shares.82 He also acknowledges that the
Court would be ceding to a non-judicial officer the responsibility of reconstituting
the Company’s stock ledger.83 As noted, I appreciate and understand Spanakos’
frustration. But that is no reason to foist his ill-conceived plan for a court-ordered
election on Hawk Systems and its innocent stockholders.
v. Schaheen, 2013 WL 6331287, at *3 (Del. Ch. Dec. 2, 2013). With that said, Respondents
are correct that Spanakos bears the burden of proving the correct state of stock ownership
to the extent he challenges the accuracy of the Company’s stock ledger. Id. at *13.
81
Pet’r Post-Trial Opening Br. 26; Pet’r Post-Trial Reply Br. 14–19; Tr. Post-Trial
Arg. 5:2–24:8.
82
Id.
83
But see Boris, 2013 WL 6331287, at *3 (“Whether the [stock ledger] is otherwise
inaccurate and incomplete . . . is a question the Court must answer.”) (emphasis added).
25
Given that an orderly election cannot be held until the Company’s stock ledger
is sorted out, and that cannot occur until, at the least, the Partial Final Judgment and
Summary Judgment Order are clarified and enforced, Spanakos’ request that the
Court compel an election of directors is unworkable.
C. The Company Was Not Properly Revived
Spanakos purports to have revived the Company from void status by paying
its delinquent franchise taxes and obtaining a certificate for revival of the Company’s
charter from the State of Delaware under 8 Del. C. § 312. Unfortunately, under the
circumstances, Spanakos lacked authority to take that action on behalf of the
Company.
Under Section 312(c), a certificate of revival “may be procured as authorized
by the board of directors or members of the governing body of the corporation in
accordance with subsection (h) . . . .”84 Subsection (h), in turn, clarifies that
subsection (c) . . . shall be satisfied if a majority of the directors or
members of the governing body then in office, even though less than a
quorum, or the sole director or member of the governing body then in
office, authorizes the revival of the certificate of incorporation of the
corporation and the filing of the certificate required by subsection (c)
of this section.85
84
8 Del. C. § 312(c).
85
8 Del. C. § 312(h).
26
In other words, a majority of the board of Hawk Systems, as it existed on the date of
delinquency, or the sole director in office as of that date, could have authorized the
revival of Hawk Systems. But neither circumstance was satisfied here. Spanakos
acted alone, so there is no dispute that a majority of the Hawk Systems board did not
authorize the revival. And Spanakos was not the sole director then in office at the
time of the delinquency, so his lone act on behalf of the Company as purported board
member likewise was ineffective.86
By the terms of the statute, a stockholder qua stockholder cannot revive a
company by his own direct action, regardless of his status as a minority or majority
holder.87 Nevertheless, where, as here, no directors are available to revive the
company, Section 312 authorizes stockholders to hold a meeting to elect a full board
of directors that may then authorize the revival.88 In that regard, a stockholder may
call a meeting upon notice given in accordance with Section 222,89 or he may seek
86
Trial Tr. (Spanakos) 101:23–24; JX 30.
87
See Clabault v. Caribbean Select, Inc., 805 A.2d 913, 914 (Del. Ch. 2002), aff’d, 846
A.2d 237 (Del. 2003) (noting plaintiff was not able to revive company as stockholder
(as opposed to as director) at the time the certificate of incorporation expired).
88
8 Del. C. § 312(h).
89
Id.
27
the authority of the Court to call a meeting of stockholders under Section 211.90
That, then, brings us full circle to Spanakos’ dilemma, unresolved on this trial
record. The stock ledger is not reliable, he has not demonstrated how to fix it and
he has not proven that Orders from the Florida courts have given him majority
control of the Company. Consequently, the Company has not been, and on this
record cannot be, revived.
III. CONCLUSION
For the foregoing reasons, judgment is entered for Respondents. If Petitioner
obtains clarification from the Florida courts regarding the meaning and scope of the
Partial Final Judgment and/or the Summary Judgment Order, and properly executes
on those Orders, he may return to this Court to obtain appropriate relief under
Section 225 or Section 223.91 On the present trial record, however, he has not carried
his burden of proof to obtain that relief. The parties shall confer and submit a
proposed final judgment within ten (10) days.
90
Clabault v. Caribbean Select, Inc., 805 A.2d 913, 914 (Del. Ch. 2002), aff’d, 846 A.2d
237 (Del. 2003).
91
In this regard, I note there has been no final adjudication with respect to the scope,
meaning and effect of the Partial Final Judgment or the Summary Judgment Order because
I am not yet in a position to make those determinations without further guidance from, or
proceedings before, the Florida courts. Thus, res judicata does not apply. See Dover
Historical Soc’y, Inc. v. City of Dover Planning Comm’n, 902 A.2d 1084, 1092 (Del. 2006)
(stating the elements of res judicata including that the claim be finally adjudicated);
LaPoint v. AmerisourceBergen Corp., 970 A.2d 185, 192 (Del. 2009) (same).
28