April 6, 2021

Blank Check Reverse Mergers: Del. Chancery Hits Pause On Reviving Zombie Corp.

I’ve been aware of the somewhat sketchy practice of using public shells as vehicles for going public via reverse mergers for a long time, but I guess I’ve never focused on the fact that a lot of those companies are defunct Delaware corporations that are reincarnated by promoters to serve as public shells. In In re Forum Mobile, (Del. Ch.; 3/21), Vice Chancellor Laster encountered a petition by a reverse merger promoter, Synergy Management Group, to effectively reinstate a defunct Delaware entity in order to facilitate such a transaction. As this excerpt from Steve Quinlivan’s recent blog on the case, the Vice Chancellor’s response was “not so fast”:

The Court noted Delaware authorities addressing efforts to revive defunct entities for use as blank check companies reflect a consistent Delaware public policy against allowing capital-markets entrepreneurs to deploy Delaware law to bypass the federal securities laws that govern stock offerings. That policy is based on the Court of Chancery’s understanding of the federal securities laws and the SEC’s priorities.

The Court stated it would be helpful to have input from the SEC and the benefit of adversarial briefing on the petition. That was particularly true because Synergy and another firm have filed a raft of these petitions. Having input from the SEC also would provide a direct answer to the question of whether Delaware’s concern about creating a state-law bypass around the federal securities laws governing stock offerings has become stale, as Synergy argues.

The Court further stated it would benefit from the appointment of an amicus curiae who can consult with the SEC regarding the petition. Informed by a consultation with the SEC, the amicus curiae will provide an independent view regarding whether the petition should be granted.

John Jenkins