Court of Chancery Validates Putative Shares Issued in and After de-SPAC Mergers
On February 21, 2023, Vice Chancellor Will of the Delaware Court of Chancery issued an opinion in the In re Lordstown Motors Corp. case explaining the court’s grant of Lordstown Motor Corporation’s (Lordstown) petition under 8 Del. C. § 205 validating an amendment to the Lordstown certificate of incorporation that increased the corporation’s authorized share count as well as the shares issued pursuant to that amended certificate of incorporation. In six sequential hearings the day before the opinion was issued, the court granted from the bench the Lordstown petition and petitions filed by five other companies that had merged with special purpose acquisition companies (SPACs) using a transaction structure for so-called “de-SPAC mergers” (through which the SPAC acquires a target) that has been widely used over the past few years.
These cases — and nearly 30 others filed in the past month — stem from that transaction structure under which the holders of the SPAC’s “Class A common stock” and “Class B common stock” voted as a single class to approve an amendment to the SPAC’s certificate of incorporation, eliminating the Class B shares and increasing the SPAC’s authorized share count, in connection with a de-SPAC merger. New shares of common stock (in excess of the number of shares authorized before the amendment to the certificate of incorporation) were then issued as consideration for the merger, in consideration for a third-party private investment in a public company (PIPE) that directly preceded the merger, or both. Participants in many of these transactions did not believe that a separate class vote of the Class A shares was required to increase the authorized share count because the Class A and Class B shares were series of a single class of common stock rather than separate classes of stock.
On December 27, 2022, the Court of Chancery issued an opinion in Garfield v. Boxed, which held in the context of a corporate benefit analysis that Class A and Class B common stock under a similarly structured SPAC certificate of incorporation are two classes of stock rather than two series of the same class. As a result, a class vote would have been required to increase the number of authorized shares of Class A common stock, calling into question whether the shares issued in similarly structured transactions are authorized if no separate class vote was held.
Following the Boxed opinion, over 30 Delaware corporations have filed similar petitions under Section 205 seeking the validation of the authorized share counts in their certificates of incorporation and of the shares issued pursuant thereto. The Court of Chancery has acted promptly in these cases, granting motions to expedite and setting the cases for merits hearings on each of the next several Mondays.
In the Lordstown opinion, recognizing the uncertainty following the Boxed decision, the court held that uncertainty is sufficient to invoke the court’s power to validate defective corporate acts under Section 205, and the court did not address the question of whether the authorized share counts at issue actually were the result of a failure of authorization. Without analyzing whether the petitioners’ shares actually were authorized and properly issued, the court held that the factors set forth in Section 205(d) favored granting the petition and validating the shares.
The court noted that, as is likely the case for most companies affected by this issue, the Lordstown board and management had adopted the amended certificate of incorporation based on the good faith belief that it was validly approved. They had treated it as valid and acted in reliance on it by issuing shares and disclosing the shares as issued. And the court recognized that, without the relief sought in the petition, financing plans, employee relationships, commercial agreements, and prior stockholder votes and disclosures to the market could all be called into question. Moreover, the court found that no party would be harmed by the relief requested.
Any company that has merged with a SPAC should consider whether new shares authorized in connection with the de-SPAC merger were approved with a separate class vote of each class of stock and, if not, should consider whether filing a Section 205 petition to eliminate any uncertainty as to the validity of its capital stock would be appropriate.