February 27, 2023

Del Chancery Validates Defective Charter Amendments – But SEC Hasn’t Signed Off

A couple of weeks ago, I blogged about how Vice Chancellor Will’s decision in Garfield v. Boxed, (Del. Ch.; 1/23), prompted a number of SPACs to file actions seeking to validate defective charter amendments under the procedure established in Section 205 of the DGCL.  Last week, Vice Chancellor Will issued several orders validating those amendments and issued an explanatory opinion in In re Lordstown Motors, (Del. Ch.; 2/23).  This Locke Lord blog summarizes the Vice Chancellor’s reasoning and explains the implications of her orders for the affected companies and for those not eligible for relief under Section 205:

The court ruled in Lordstown that the validations were justified under the standards of section 205(d), including in the situations where the corporate action might not have been legally defective because the class vote was in fact obtained even though not sought, finding that the uncertainty as to validity was sufficient to invoke section 205.

As we previously noted, the uncertainty resulting from the Boxed decision has caused auditors to raise concerns about the effect of that uncertainty on a company’s financial statements and, in some cases, to seek comfort from the company’s counsel. Where section 205 validation has been obtained, there should be no concern. Where that is not the case, the extent to which comfort can be provided without section 205 validation will depend upon the particular facts and circumstances.

For example, if the corporation had opted out of the need for a class vote by a provision in its certificate of incorporation, as permitted by DGCL section 242(b)(2), counsel may, if requested by the auditor, be able to provide an opinion on the validity of the stockholder approval of the amendment. Such an opinion would be akin to a typical third‑party opinion and not governed by the ABA Statement on audit responses regarding loss contingencies.

Late last week, we learned of a potential fly in the ointment. Apparently, the auditors for these companies approached the Staff of the SEC’s Division of Corporation Finance and were told that the Section 205 orders were insufficient, and that they needed legal opinions that the shares whose validity had been called into question were valid when issued.

A highly respected practitioner shared his view with me that the Staff may not have fully appreciated the nature and effect of the Section 205 orders. He believes that the Staff’s position is unjustified because the Court’s orders contain language providing that, consistent with Section 205(b)(8), the defective corporate actions are validated as of the time of they were taken. Since the orders are clear on their face, a legal opinion should not be necessary. Efforts are apparently being made to bring this to the attention of the auditors and the SEC.

Update: One of our members clarified that the auditors aren’t requiring formal legal “opinions”; they are requiring a memorandum from outside counsel explaining the legal basis for the company’s good-faith belief that the SPAC’s charter amendment was validly approved at the time of the deSPAC merger vote.

John Jenkins