Just a few weeks ago, I wrote about the Garfield v. Boxed, Inc. case in Delaware questioning whether Class A and Class B common stock in a SPAC structure were different series of a same class or different classes of stock requiring separate class voting in certain circumstances (see HERE). The Delaware Chancery court in Garfield v. Boxed, found that in that particular case, the Class A and Class B were separate classes requiring a separate class vote to increase the total outstanding common stock as required by the Delaware General Corporate Law (DGCL) Section 242(b)(2).
Following the Garfield decision, there has been a run on the Chancery Court by post-business-combination SPACs seeking to ratify shareholder approvals obtained during the de-SPAC process, in reliance on DGCL Section 205. Although the wording has varied, in essence each of the companies have asked the Chancery court to (i) validate and declare effective the company’s current certificate of incorporation including the filing and effectiveness thereof and (ii) validate and declare effective the shares of the company’s Class A common stock, and other securities issued in reliance on the validity of the current certificate of incorporation.
Although the court rulings have varied slightly, most have (i) declared the company’s current certificate of incorporation including the filing and effectiveness thereof, as validated and effective retroactive to the date of its filing with the Office of the Secretary of State of the State of Delaware and all amendments effected thereby and (ii) ordering that the company’s securities (and the issuance of the securities) described in the Petition and any other securities issued in reliance on the validity of the current certificate of incorporation are validated and declared “effective, each as of the original issuance dates…”
Despite the positive result, the Garfield case brought the issue of class voting on amendments to charter documents to the forefront. As discussed in the prior blog, DGCL Section 242 governs amendments to certificates of incorporation. DGCL 242(a) sets forth the general right to amend a certificate of incorporation, and includes a list of allowable amendments, including increases and decreases to capital stock, splits, recapitalizations, creations of Classes of preferred stock, etc. Section 242(b) sets forth the manner in which such amendments may be effectuated.
Section 242(b)(2) specifically provides a Class vote on five types of charter amendments affecting that Class. In particular, Section 242(b)(2) states that “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.”
The Section continues to require a series vote if any three of the listed certificate amendments uniquely affect that series. That is, “[I]f any proposed amendment would alter or change the powers, preferences, or special rights of 1 or more series of any Class so as to affect them adversely, but shall not so affect the entire Class, then only the shares of the series so affected by the amendment shall be considered a separate Class for the purposes of this paragraph.”
The prior blog opted out of any discussion on the myriad of cases, articles, and opinions as to when a class’s “powers, preferences, or special rights” are adversely affected, but the can of worms is definitely opened.
Officer Exculpation and Class Voting
On March 29, 2023, the Chancery Court issued an oral ruling holding that two companies with multiple classes of stock did not have to hold a separate class vote on officer exculpation charter amendments. In each of the two cases, the companies had amended their charters to include provisions in their charter documents eliminating or limiting officers’ personal liability for monetary damages arising from a breach of fiduciary duty.
The companies had taken advantage of recent amendments to Section 102(b)(7) of the DGCL which previously had limited exculpation provisions to directors (see here for my blog on the amendments – HERE).
As a side note, the amendment includes some exceptions including liability arising from a breach of the duty of loyalty, acts or omissions not in good faith, acts of intentional misconduct or knowing violations of law, and circumstances in which the officer derives an improper personal benefit. Furthermore, the new provision is limited to direct claims or class actions by stockholders whereas a director is also protected from derivative claims. Covered senior officers include the president, chief executive officer, chief financial officer, chief operating officer, chief legal officer, controller, treasurer, chief accounting officer, any named executive officer in SEC filings and other executive officers who agree to consent to service of process in Delaware.
Like the Garfield case, these companies had two classes of common stock, one voting and one non-voting. The charter amendments were approved by the majority of the voting common stock. The plaintiffs argued that the right to sue is a “power” of stock and that the defendants’ charter amendments adversely affected that power of the non-voting stock, such that a separate class vote of such stock was required. The court rejected the argument.
The court found that adding class approval requirements under these circumstances, where no legislation or precedence required same, would cause upheaval for practitioners and the marketplace. In general, case law interprets “powers, preferences, or special rights” of a class to refer to the particular rights of that class and not all stockholders as a group. The right to sue and seek monetary damages against officers is not a peculiar power or special right of any given class, but is instead a generalized right of all stockholders that exists under common law.
The ruling, together with the numerous Section 205 cases, is providing confidence to multi-class (and multi-series) entities that are still feeling on shaky ground following Garfield.
Laura Anthony, Esq.
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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