January 24, 2023

Del. Chancery Decision Sheds Light on Statutory Class Voting Requirements

A motion for attorneys’ fees may seem like an odd place to address the provisions of Section 242 of the DGCL that require separate class votes to approve certain matters submitted to stockholders of a Delaware corporation, but Vice Chancellor Zurn’s opinion in Garfield v. Boxed, Inc., (Del. Ch.; 12/22), did just that.

The case arose out of a de-SPAC transaction. The SPAC had Class A & Class B common stockholders and proposed amendments to the certificate of incorporation in connection with the de-SPAC that would have increased the authorized number of Class A shares & changed the stockholder vote required to authorize further change the number of shares. The SPAC planned to have all common stockholders vote on the de-SPAC merger and the charter amendments, as a single class.  The plaintiff objected, claiming that a class vote was required under Section 242(b) of the DGCL, and the SPAC changed the structure of the transaction to provide for a class vote.

The plaintiff subsequently moved for an award of legal fees, arguing that by ensuring the transaction was approved in the manner required under the DGCL, his actions conferred a significant benefit upon the SPAC.  The SPAC opposed that motion, arguing that the separate class vote wasn’t required under Section 242(b) because the Class A and Class B shares were simply different series of the same class of stock.

Section 242(b) provides that “The 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, increase or decrease the par value of the 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.”

Vice Chanellor Zurn rejected the SPAC’s contention that the shares were merely different series of the same class, and held that a separate class vote was required.  As this excerpt from Shearman’s blog on the decision explains, the Vice Chancellor’s decision focused squarely on the language of the SPAC’s certificate of incorporation:

Explaining that Delaware courts “apply the general rules of contract interpretation to disputes over the meaning of charter provisions,” the Court held that the Class A and Class B shares were two classes of common stock rather than merely two series of the same class.  The Court highlighted that the charter used the word “class”—and not the word “series”—to describe these shares.  The Court also noted that DGCL Section 102(a)(4) prescribes that “[i]f the corporation will have authority to issue more than one class of shares, then the certificate must set forth the number of shares of all classes and of each class and whether the shares are par or no-par.”

The Court found that the charter’s listing of the number of authorized shares for each of the Class A and Class B common stock, along with their par value, appeared “designed to authorize … statutorily compliant ‘classes’.”  The Court added that, by contrast, the charter expressly provided authority to the board to issue “one or more series of Preferred Stock.”  Therefore, the Court concluded, “[r]ead as a whole and together with the DGCL,” the charter “granted the [SPAC] authority to issue … only classes of common stock—not series.”

Accordingly, Vice Chancellor Zurn concluded that the plaintiff conferred a meaningful benefit on the SPAC by ensuring that the transaction was validly approved, and awarded the plaintiff $850,000 in attorneys’ fees.

John Jenkins