February 16, 2023

SPACs Seek Relief for Defective DeSPAC Charter Amendments

Last month, I blogged about the Chancery Court’s decision in Garfield v. Boxed, (Del. Ch.; 1/23), which indicated that a separate class vote was required to authorize a charter amendment increasing the number of outstanding shares of Class A Common Stock in a company with a dual class structure. This Locke Lord blog says that the decision has prompted many companies to pursue validation actions under Section 205 of the DGCL.

The blog says that those petitions are pending and the first hearing on some of them will be held next week. It also points out that the defective charter amendments fall into one of two categories:

There are two different situations to consider: (i) a majority vote of both Class A and Class B shares voting together and of Class A shares voting separately was obtained, although no separate Class A vote was held or its need disclosed; and (ii) a majority of Class A shares A and Class B shares voting together was obtained but not a majority of Class A shares.

It might be possible to conclude that the stockholder approval in the first situation was legally sufficient despite the failure to hold a separate Class A vote and disclose to stockholders the need for that separate vote, as well as to conclude that the increase in Class A shares and their issuance in the deSPAC transactions and otherwise are unlikely to be invalidated on equitable grounds in the absence of evidence of any real prejudice resulting from the deficient actions. However, that has not been judicially decided. Consequently, many companies, to avoid uncertainty, are pursuing validation under DGCL section 205, which is anticipated to be obtained in short order.

In the second situation, the alternative of concluding that the vote was legally sufficient is unavailable and therefore companies in that situation also are filing for relief under section 205. There is optimism that the Court of Chancery will use its broad authority under section 205 to validate those actions in that situation.

The blog notes that public companies that are seeking validation of these charter amendments are filing Form 8-Ks disclosing the issue and have suspended the use of outstanding registration statements until the matters are resolved. It also points out that the separate class vote issue isn’t limited to charter amendments increasing the number of shares, and has been raised in litigation challenging charter amendments authorizing exculpation of corporate officers as well.

John Jenkins