Delaware Court Ruling Regarding Stockholder Class Vote Creates New Obstacle for Former SPACs (And What Companies Are Doing About It)
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In a case filed simply to determine whether a plaintiff was entitled to attorneys' fees and expenses for conferring a benefit on a corporation, the Delaware Court of Chancery held that the planned stockholder vote by the corporation would have been insufficient under Delaware law to authorize amendments to the corporation's certificate of incorporation in connection with a de-SPAC merger transaction. Garfield v. Boxed, Inc., No. 2022-0132-MTZ, 2022 WL 17959766 (Del. Ch. Dec. 27, 2022).
Since many special purpose acquisition companies (SPACs) with dual-class common stock utilized the same or a similar certificate of incorporation as the one at issue in Boxed, Inc., this ruling has thrown into question the validity of publicly traded shares of such companies. These companies are now rushing to the Delaware Court of Chancery with petitions for relief to avoid having their shares be deemed invalidly issued. Specifically, companies are seeking retroactive ratification of amendments to their certificates of incorporation (adopted in connection with their de-SPAC transactions) pursuant to Section 205 of the General Corporation Law of the State of Delaware (DGCL). Considering the wide-ranging consequences that the ruling in Boxed, Inc. can have, companies that went public by merging with a SPAC incorporated in Delaware should act quickly to assess whether their pre-de-SPAC certificate of incorporation has the same or similar language as the one at issue in Boxed, Inc. and determine whether they need to obtain relief in the form of court-approved ratification.
CASE FACTS AND HOLDING
Seven Oaks Acquisition Corp. (Seven Oaks), a Delaware corporation formed as a SPAC, had a certificate of incorporation (Charter) that authorized common stock, including Class A Common Stock and Class B Common Stock, and preferred stock. Seven Oaks was preparing to enter into a de-SPAC transaction via a merger with Boxed, Inc. To effectuate the merger, Seven Oaks needed to amend its Charter to increase the number of authorized shares of its Class A Common Stock and change the vote required to increase or decrease the number of authorized shares going forward. In order to amend the Charter, Seven Oaks sought a vote of the holders of Class A Common Stock and Class B Common Stock, voting together as a single class.
Prior to the vote, the plaintiff (a stockholder) sent a pre-suit demand to Seven Oaks' board of directors (Board) insisting that the Board have the holders of Class A Common Stock vote on the amendments as a separate class from the holders of Class B Common Stock. The plaintiff contended that a separate class vote was required under the Charter and Section 242(b)(2) of the DGCL, which states that "[t]he holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class . . . or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely." After receiving this pre-suit demand, Seven Oaks sought and obtained a separate class vote of the holders of Class A Common Stock.
The plaintiff then filed suit seeking attorneys' fees and expenses for the corporate benefit he conferred on Seven Oaks. Seven Oaks argued that the plaintiff was not entitled to attorneys' fees and expenses because a separate class vote was not necessary under the Charter or the DGCL since the Class A Common Stock was a series of the common stock, not a separate class of stock.
On motions for summary judgment, the principal issue before the Delaware Court of Chancery was whether the Class A Common Stock was a class of stock or a series of a class of stock because, absent a class vote opt-out in the Charter (pursuant to Section 242(b)(2) of the DGCL), a class of stock is entitled to vote on amendments that increase or decrease the number of authorized shares of such class of stock.
The Delaware Court of Chancery interpreted the Charter as creating the Class A Common Stock as a class of stock rather than a series of the common stock class. The Court concluded this because the Charter (1) used the word "class," instead of "series," to describe the authorized common shares; (2) listed the total number of shares of all classes of stock and then the number and par value of shares of each class of stock, in accordance with Section 102(a)(4) of the DGCL, but also separately listed the number and par value of shares of each of the Class A Common Stock and Class B Common Stock, which the Court viewed as evidence that the Charter was designed to authorize statutorily compliant classes; and (3) authorized the Board to create one or more series of preferred stock and establish the number of shares to be included in each series of preferred stock by resolution of the Board but did not vest the Board with the same authority to fix or grant series of the common stock. Based on this, the Court awarded the attorneys' fees and expenses for the plaintiff, holding that the plaintiff conferred a meaningful corporate benefit on Seven Oaks and its stockholders by causing the Board to seek and obtain a separate class vote of the Class A Common Stock, without which the additional authorized shares of Class A Common Stock would have been invalidly issued.
The holding in Boxed, Inc. has caused publicly traded companies that previously merged with a SPAC incorporated in Delaware that had a certificate of incorporation with the same or a similar dual-class common stock structure as the Charter of Seven Oaks to question the validity of their publicly traded shares, which could have both significant direct and indirect adverse consequences, including relating to public company reporting obligations.
Fortunately, the DGCL affords corporations a path to retroactively fix defective corporate acts, such as an invalid stock issuance, either pursuant to the self-help ratification process authorized by Section 204 of the DGCL or the court-approved ratification process authorized by Section 205 of the DGCL. Some companies impacted by Boxed, Inc. have opted for the court-approved ratification process—by petitioning the Delaware Court of Chancery for relief—because of the speed and certainty afforded by this process. When determining whether to validate a defective corporate act, the court may consider factors it deems just and equitable, including whether any person will be harmed by the failure to ratify or validate the defective corporate act.
- Any company that merged with a SPAC incorporated in Delaware should review its pre-de-SPAC certificate of incorporation to determine whether it was similar to the one at issue in Boxed, Inc.
- If similar, the company should then determine whether it sought and obtained a separate class vote to increase the number of authorized shares of common stock in connection with the de-SPAC transaction.
- Even if a separate class vote was not sought, the company should determine whether a separate class vote was actually obtained as a result of having a sufficient number of shares of each class voting in favor of the amendment to the certificate of incorporation, notwithstanding not holding a separate vote or disclosing that such a separate class vote was being sought.
- If the separate class vote was actually obtained, the company should consult with its legal counsel to determine if further action must be taken to determine if the publicly traded shares were validly issued.
- If uncertainty remains as to the validity of the company's issued shares, the company should consult with its legal counsel to determine if ratification is warranted, either by the self-help ratification process or the court-approved ratification process.
Should you have any questions regarding the impact of this holding, please contact one of the authors of this article or your regular McDermott lawyer.
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