Delaware to Consider Public Policy of Assisting Shell Company Mergers

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In re Forum Mobile, Inc. considers petitioner Synergy Management Group LLC’s request for the appointment of its President to be custodian of Forum Mobile, Inc. under Section 226(a)(3) of the Delaware General Corporation Law, or DGCL. The respondent in the action technically is Forum, but according to the Court, Forum is a defunct entity whose only value lies in the fact that its shares continue to have a CUSIP number that allows them to trade over the counter.  Synergy seeks to revive Forum to use as a blank check company. Through a reverse merger with Forum, a new business could access the public markets.

The court notes that in addition to not complying with the federal securities laws, Forum has failed to comply with Delaware law. It does not maintain a registered agent within the State of Delaware, has not filed annual reports with the Delaware Secretary of State, and has not held an annual meeting of stockholders. The Delaware Secretary of State’s website lists Forum’s status as void for failing to pay its franchise taxes. Forum appears to have abandoned its business

Affidavits filed with the Court indicate Synergy has attempted to locate Forum’s officers and directors to demand that they cause Forum to comply with its legal obligations.  Synergy has received no response.

Despite Forum’s status as a defunct entity, the fact that its shares have a CUSIP number and trade over the counter gives the company value. Recognizing this fact, Synergy acquired 494,530 shares of its stock

Through the instant litigation in the Court of Chancery, Synergy seeks to have its president appointed as a custodian. The order appointing the custodian would provide the custodian the power to call a meeting of stockholders, and authorize the meeting to proceed under a special quorum requirement so that the stockholders who attend the meeting can elect a new board of directors. Synergy’s CEO then will revive Forum for use as a blank check entity. In particular the court indicated he intends to “identify private companies that may be interested in a reverse merger” with Forum.

Synergy’s petition is one of six virtually identical petitions that Synergy has filed. Synergy’s counsel also represents Universal Management Association, which has filed four virtually identical petitions seeking to have its president appointed as a custodian for other defunct Delaware corporations.

The Court noted Synergy’s petition implicates important questions of public policy, including the State of Delaware’s interest in preventing the use of Delaware entities to circumvent the federal securities laws.

The Court noted Synergy’s request is the latest instance of a recurring phenomenon. The Court of Chancery periodically confronts efforts by capital-markets entrepreneurs to revive otherwise defunct entities to use as blank check companies.

In reviewing precedents, the Court noted the odd fact that directors of company like Forum should have In the usual course of business filed a certificate of dissolution terminating its corporate existence and a deregistration statement terminating its status as a reporting company. Had the directors taken these responsible actions it would be impossible to revive a defunct entity as a blank check company.

The Court rejected Synergy’s arguments that the SEC does not prohibit reverse mergers as controlling precedent for this matter.

The Court noted Delaware authorities addressing efforts to revive defunct entities for use as blank check companies reflect a consistent Delaware public policy against allowing capital-markets entrepreneurs to deploy Delaware law to bypass the federal securities laws that govern stock offerings. That policy is based on the Court of Chancery’s understanding of the federal securities laws and the SEC’s priorities.

The Court stated it would be helpful to have input from the SEC and the benefit of adversarial briefing on the petition. That was particularly true because Synergy and another firm have filed a raft of these petitions. Having input from the SEC also would provide a direct answer to the question of whether Delaware’s concern about creating a state-law bypass around the federal securities laws governing stock offerings has become stale, as Synergy argues.

The Court further stated it would benefit from the appointment of an amicus curiae who can consult with the SEC regarding the petition. Informed by a consultation with the SEC, the amicus curiae will provide an independent view regarding whether the petition should be granted.

Accordingly, the Court appointed a Delaware attorney as amicus curiae.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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