Hoschett v. TSI International Software, Ltd.
1996 Del. Ch. LEXIS 93, 683 A.2d 43 (1996)
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Rule of Law:
The mandatory requirement for a corporation to hold an annual meeting for the election of directors under Delaware General Corporation Law (DGCL) § 211 is not satisfied by shareholder action taken by written consent under DGCL § 228. While written consent may be used to elect directors to fill vacancies, their term only lasts until the next required annual meeting, which the corporation remains obligated to hold.
Facts:
- TSI International Software, Ltd. is a privately-held Delaware corporation.
- Fred G. Hoschett is the registered owner of 1,200 shares of common stock in TSI.
- Since its formation in 1993, TSI has never held an annual meeting for the election of directors.
- Pursuant to its certificate of incorporation, holders of TSI’s common and preferred stock vote together on all matters.
- After Hoschett filed suit to compel an annual meeting, TSI received a written consent from a majority of the voting shareholders purporting to elect five individuals to the board of directors.
Procedural Posture:
- On October 5, 1995, Fred G. Hoschett (plaintiff) sued TSI International Software, Ltd. (defendant) in the Delaware Court of Chancery, a court of first instance for corporate law.
- Hoschett sought an order to compel TSI to hold an annual meeting of stockholders.
- After the suit was filed, a majority of TSI shareholders executed a written consent electing directors.
- Hoschett moved for summary judgment, arguing he was entitled to judgment as a matter of law.
- TSI filed a cross-motion for summary judgment, arguing the consent action mooted the lawsuit.
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Issue:
Does the election of directors by a written consent of a majority of shareholders, pursuant to DGCL § 228, satisfy a corporation's mandatory statutory obligation to hold an annual meeting for the election of directors under DGCL § 211?
Opinions:
Majority - Chancellor Allen
No. The election of directors by written consent under § 228 does not satisfy the mandatory obligation to hold an annual meeting under § 211. The court reasoned that the annual meeting is one of the few mandatory features of Delaware corporate law and serves critical functions beyond the mere election of directors. These functions include providing all shareholders an opportunity for discourse with management, a forum for other shareholder business, and a mechanism for corporate accountability. To harmonize the two statutes, the court held that while § 228 consent can be used to remove holdover directors and fill the resulting vacancies, the directors so elected serve only until the next annual meeting, which the corporation is still obligated to convene.
Analysis:
This decision firmly establishes the annual shareholder meeting as a non-waivable, fundamental requirement of Delaware corporate law that is distinct from the power to act by written consent. It clarifies that the efficiency of written consent cannot be used by a majority to eliminate the forum and accountability mechanisms that an annual meeting provides for all shareholders, including minorities. This precedent ensures that even in closely-held corporations, management and majority shareholders cannot indefinitely avoid the discipline and shareholder interaction inherent in a regularly scheduled annual meeting.
