Delaware legislature is considering proposed amendments to Section 242 of the Delaware General Corporation Law that would help address the challenges dual-share class companies have been facing in the wake of Garfield v. Boxed Inc. Specifically, the proposed amendments would lower the stockholder vote threshold required to authorize a charter amendment increasing the authorized shares of a class.

As many observers of Delaware corporate law are aware, in the months since the Delaware Court of Chancery’s December 2022 decision in Garfield v. Boxed Inc., dozens of mergers involving special purpose acquisition companies (SPACs) with dual-share class structures were thrown into disarray after their related charter amendments that increased the number of authorized shares were called into question.

The Boxed decision upended the previously held view that dual classes of common stock[1] could collectively approve a corporate charter amendment increasing the number of authorized shares for a given class. In response, the Court of Chancery was inundated with Section 205 petitions to validate those prior potentially defective shareholder votes, and the court had to create an assembly-line-like process to hear and decide these petitions in a timely manner to avoid the, in the Court of Chancery’s words, “untold chaos” of having to unwind these “de-SPAC” transactions (i.e., the business combination between the SPAC and private operating company).

Now, the Delaware legislature appears responsive to addressing the challenges that dual share class companies face following the Boxed decision by considering proposed amendments to Section 242 of the Delaware General Corporation Law (DGCL) that would reduce the minimum stockholder vote required to authorize a charter amendment increasing the authorized shares of a class.

As discussed in a prior LawFlash on the implications of the Boxed decision, the current version of Section 242(b) of the DGCL generally provides that an amendment to a corporation’s charter that would increase the amount of authorized shares in a class of securities must be approved by a majority of the holders of the outstanding shares of the class.

As part of the stockholder vote on the de-SPAC transaction, stockholders are typically asked to approve charter amendments that increase the number of authorized shares of common stock. Before Boxed, many corporate practitioners believed that Section 242(b) did not require a separate vote by Class A and Class B common stockholders because Class A and Class B common stock comprised different “series” of common stock, rather than “classes” of common stock.

In Boxed, however, the court found that the subject company’s “Class A” and “Class B” common stock (as those terms were used in the company’s charter) were, in fact, two separate classes of common stock requiring a separate class vote under Section 242(b). Many charter amendments increasing the number of authorized shares in de-SPAC transactions did not obtain the requisite separate class votes.

Adding to the uncertainty following the Boxed decision, stockholders challenged charter amendments (companies with dual-class structures adding officer exculpation clauses pursuant to Section 102(b)(7)) that were allegedly within Section 242(b)(2)’s scope. While those challenges were ultimately dismissed,[2] they demonstrated that the plaintiffs’ bar had taken notice of the Boxed decision and was seeking ways to apply Section 242(b)(2) outside the de-SPAC context.

THE TEMPORARY FIX OF SECTION 205 PETITIONS

In the wake of the Boxed decision, companies flooded the Delaware Court of Chancery with petitions under Section 205 of the DGCL, seeking to remedy potentially defective votes held in connection with de-SPAC transactions.

Vice Chancellor Lori Will issued a written opinion in In re Lordstown Motors Corp. that validated a de-SPAC transaction despite its technical noncompliance with Section 242(b) under Boxed, reasoning that the relevant factors under Section 205 supported relief.

Noting that the reasoning of Lordstown “should prove instructive to other companies seeking the court’s assistance to validate similar corporate acts,” Vice Chancellor Will approved numerous Section 205 petitions thereafter, incorporating the reasoning of Lordstown by reference. Nonetheless, practitioners remain concerned about the Boxed decision’s ongoing effect on dual class charter amendments.

PROPOSED AMENDMENTS TO SECTION 242

The Delaware legislature appears to be poised to respond to these concerns by considering a proposal to add new Section 242(d) governing the circumstances in which a vote of stockholders otherwise required by Section 242(b) may be eliminated or reduced.

In addition to other amendments to 242(d)(1) which would create additional categories of amendments (for example, forward stock splits) for which a stockholder vote is no longer required, new Section 242(d)(2) would, if adopted, reduce the threshold number of votes required for stockholders to approve an amendment increasing the number of shares of a class of stock under specified circumstances. While still mandating a stockholder vote, new 242(d)(2) would require only that the votes cast in favor of the amendment exceed the votes casts against the amendment, in lieu of the default need for a majority of all stockholders to approve the amendment.

Specifically, the proposed amendment provides that a corporation may amend its certificate of incorporation to increase the authorized shares of a class of stock if

• the shares of the class are listed on a national securities exchange immediately before the amendment becomes effective and the corporation also meets the listing requirement for the national securities exchange relating to the class immediately after the amendment becomes effective,
• the votes cast for the amendment exceed the votes cast against the amendment, and
• if the amendment increases or decreases the number of shares for a class of stock that has not expressly opted out of the class voting in the company’s charter, then the votes cast for the amendment by members of the class must also exceed the votes cast against the amendment by holders of the class.

Abstaining stockholders would not impact whether the requisite approval is obtained because Section 242(d)(2) would only require the majority of the votes cast for the approval of a charter amendment.

As proposed, these amendments appear to be a direct response to, and an effort to avoid, the procedural headaches associated with the onslaught of Section 205 petitions that the Court of Chancery received after the Boxed decision. These amendments, if implemented, should make it less cumbersome for companies to obtain a charter amendment to increase authorized stock related to the consummation of a de-SPAC transaction.

Furthermore, it may provide an attractive avenue for other publicly traded companies incorporated in Delaware that have not already opted out of Section 242(b) to obtain the necessary vote to increase authorized shares by reducing the default voting standard.

[1] Commonly referred to as “Class A” and “Class B” common stock.

[2] See, e.g., Electrical Workers Pension Fund v. Fox Corp., C.A. No. 2022-1007-JTL (Del. Ch. Mar. 29, 2023). Vice Chancellor Laster’s bench ruling entering summary judgment in favor of the company is currently subject to a pending appeal.

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