Feb 4, 2023 - Economy

Delaware ruling may create SPAC havoc

Photo collage of a gavel and a dollar bill.

Illustration: Shoshana Gordon/Axios

A Dec. 27 opinion by a Delaware Chancery Court judge may cause trouble for some companies that went public by merging a special purpose acquisition company (SPAC) with a dual-class share structure.

Driving the news: Over the last couple of weeks, a number of such companies filed requests in court, essentially asking for a defect in their corporate structure to be blessed so that it doesn't cause further issues.

Details: In an opinion for a lawsuit against online retailer Boxed — regarding legal fees — Vice Chancellor Morgan Zurn concluded that Class A and Class B are two separate common stock classes, not series.

  • Therefore, holders of the two categories of stock should get to vote separately. This, in turn, can invalidate previous and future votes if not done separately.

Between the lines: "It's long been observed that a lot of SPACs went public in a rushed and sloppy manner," Tulane University law professor Ann Lipton tells Axios via email. "And this is yet another mistake they made, resulting in a technical violation of Delaware law."

  • "Normally, companies should try to ratify defective corporate acts that would have required a shareholder vote initially with a new shareholder vote, but I think it's likely the court will agree that it is impractical now to seek a belated shareholder vote," Lipton adds.

Of note: It's unclear right now how many SPACs were formed with the same structure, but it's likely there are more than the few already filing ratification requests in court.

Yes, but: "I don't think this has implications beyond SPACs because it really was a technical mistake; it could have been fixed with slightly different wording in the original charter," adds Lipton.

  • In other words, she expects that the court will approve such requests, as long as the circumstances were similar and it's clear they were honest mistakes.

The bottom line: "It's indicative of the speed and lack of care that went into the SPAC frenzy," says Lipton.

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