On February 14, we reported that a number of Delaware corporations, mostly those resulting from deSPAC transactions, have petitioned the Court of Chancery to validate their increases in authorized shares and other corporate actions due to their failure to seek, and in many cases to obtain, the class vote that the Court of Chancery held in Garfield v. Boxed, Inc.[1] was required by DGCL section 242(b)(2).
We can now report that, as anticipated, the Court of Chancery has granted under DGCL section 205, which relates to proceedings to validate defective corporate actions and stock issuances, the first batch of orders validating the corporate actions (e.g., In re EVgo Inc.) and issued an explanatory opinion in In re Lordstown Motor Corp. 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.
As we noted in our February 14 post, companies with more than one class of stock should review their prior corporate actions to see if there are concerns regarding the approvals that were obtained. If there are, they should consider what remedial steps to take, specifically whether to seek validation under DGCL section 205.
[1] 2022 WL 17959766 (Del. Ch. Dec. 27, 2022).
