Delaware Court Of Chancery Validates SPAC Charter Amendment Called Into Question By A Recent Decision
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  • Delaware Court Of Chancery Validates SPAC Charter Amendment Called Into Question By A Recent Decision

    On February 21, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted the petition of Lordstown Motors Corporation (the “Company”) under Section 205 of the Delaware General Corporation Law (“DGCL”) to validate and declare effective the Company’s certificate of incorporation as amended in connection with a “de-SPAC” merger more than two years ago.  In Re Lordstown Motors Corp., C.A. 2023-0083-LWW (Del. Ch. Feb. 21, 2023).  In advance of the merger, the Company—then a special purpose acquisition company (“SPAC”)—adopted the amendment to increase the number of authorized Class A common shares, which were subsequently issued in connection with the merger.  The Company requested validation from the Court after the approval of the amendment—by a majority of Class A and Class B shares voting together rather than a vote exclusively by the Class A stock—was called into question by a recent decision related to another SPAC.  Because a “significant number of SPACs” had similar provisions and followed a similar process, that decision, Garfield v. Boxed, Inc., No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022)—discussed in a prior post—resulted in “pervasive uncertainty” regarding their capital structures and the validity of their stock.  Granting the petition, the Court concluded that validation of the charter amendment would be “just and equitable.”  The Court added that its decision “should prove instructive to other companies seeking the court’s assistance to validate similar corporate acts.”

    Section 242(b) of the DGCL provides that “[t]he holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment … if the amendment would increase or decrease the aggregate number of authorized shares of such class.”  The Court in Boxed determined that the Class A and Class B common stock of the SPAC at issue in that case were two “classes” rather than merely two “series” of the same class.  Accordingly, an amendment to increase the shares of authorized Class A common stock required a vote of Class A shares voting as a class; and a combined vote of Class A and Class B stock would have been insufficient.

    The Company had a similar charter with Class A and Class B common stock.  In adopting the amendment for an increase in authorized Class A stock, the Company conducted a vote of the Class A and Class B stock together; and a majority of such shares were voted in favor.  But the amendment was not approved by a majority of the Class A shares.

    After the Boxed decision, the Company filed a petition for relief under Section 205.  Dozens of other companies followed with similar petitions.  As the Court explained, Section 205 was designed to provide an “adaptable, practical framework for correcting blemished corporate acts without disproportionately disruptive consequences.”  The provision enumerates several factors that a court “may consider when determining whether to validate a corporate act” but also allows assessment of “[a]ny other factors or considerations the Court deems just and equitable.”

    The Court concluded that each factor supported validation of the charter amendment.  First, the Company had “approved and effectuated” the amendment with the “good faith belief” that it complied with Delaware law and the Company’s charter.  Second, the Company had since consistently treated the amendment and share issuance as valid and effective.  The Court noted that third parties have also relied on the validity of the amendment, including among others the participants in the de-SPAC merger and related transactions.  Third, the Court could not “conceive of any legitimate harm that would result from validating” the amendment.  To the contrary, “[i]t would also restore settled expectations of the Company and its stockholders with respect to the Company’s certificate of incorporation and capitalization.”  Fourth, absent validation, “a number of parties would face widespread harm.”  For instance, the uncertainty would call into question stockholder votes, might lead to stock exchange delisting, and might preclude financing.  Finally, the Court concluded that additional considerations warranted validation and that “[r]elief under Section 205 is the most efficient and conclusive—and perhaps the only—recourse available to the Company.”

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