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Class Voting and Duly Authorized Opinions

Stanley Keller

Class Voting and Duly Authorized Opinions

In a recent decision, Garfield v. Boxed, Inc., 2022 WL 17959766 (Del. Ch. Dec. 27, 2022), the Delaware Court of Chancery addressed the requirement for a separate class vote under section 242(b)(2) of the Delaware General Corporation Law (DGCL) when the corporation, which had common stock designated in its certificate of incorporation as “Class A” and “Class B,” increased the number of authorized shares of Class A common stock. Section 242(b)(2) provides for a separate class vote when the number of shares of a class is increased (absent a provision in the certificate of incorporation negating the need for a class vote). The separate vote requirement of section 242(b)(2) does not apply to an increase in the number of shares of a series. Section 242(b)(2) also provides for separate class or series votes on other types of amendments, such as when the rights of a class or series are altered so as to “affect them adversely.”

The Boxed case did not involve the validity of the corporate action because the corporation amended its proxy material to add a class vote before the stockholder vote was taken in response to a Class A stockholder raising the issue. Instead, the case involved whether the stockholder added substantial benefit by raising the issue, so that its attorney was entitled to a fee award. The court found that a class vote was required and that therefore the stockholder added substantial benefit. In particular, the court ruled, based primarily on the statute and contract interpretation principles, that the designation of the common shares as classes in the certificate of incorporation resulted in there being classes, not series, under the DGCL, entitling the Class A stockholders to a class vote on the increase.

The Boxed decision caused other Delaware corporations, especially former special purpose acquisition companies (SPACs) like Boxed that had completed deSPAC transactions, to review their prior corporate actions in approving similar amendments. Many found that they only sought an approving vote of a majority of the outstanding common stock, without seeking a separate class vote. Some of these found that they in fact obtained the approving vote of a majority of the outstanding shares of the class, but without having sought that separate class vote, while others found that they did not obtain that class approving vote. As a result of the actual or potential invalidity of their corporate actions and subsequent stock issuances, many companies have filed petitions with the Delaware Court of Chancery under section 205 of the DGCL to validate their corporate actions and stock issuances. The Court of Chancery has heard a number of these petitions and granted section 205 validation orders, issuing an explanatory opinion in In re Lordstown Motor Corp., 2023 WL 2155651 (Del. Ch. Feb. 21, 2023), and orders referencing the Lordstown opinion in others (see, e.g., In re EVgo Inc., C.A. No. 2023-0132-LWW (Del. Ch. Feb. 21, 2023)). The court ruled that validation was justified, including in situations in which the corporate action might not have been legally defective because the separate class vote, even though not sought, was obtained, finding that the uncertainty as to the validity was sufficient to invoke section 205 validation.

The invalidity of the amendments because of the failure to seek and obtain the requisite separate class vote means that opinions given that the amendments were duly adopted or that the shares created by the increase in authorized capital and subsequently issued were duly authorized and validly issued could be incorrect in the absence of validation under section 205. Affected opinions would include Exhibit 5 opinions included in registration statements filed with the SEC for offerings and sales of those shares. Normally, lawyers who discover that an opinion was incorrect when given would consider whether they need to take further action, such as advising the recipient of the  issue  or  withdrawing  the  opinion.

Fortunately, as noted above, the DGCL has validation provisions and the Delaware Court of Chancery, sensitive to the difficulties faced by affected corporations, has shown a willingness to validate the defective and potentially defective corporate actions and share issuances retroactively as permitted by section 205. Those section 205 validation orders eliminate this problem with the opinions that were given, and the willingness of the Court of Chancery to promptly grant validation orders in these situations has allowed opinion givers to wait before taking further action in anticipation of a 205 order being granted. Should a 205 order not be obtained, opinion givers would have to consider what action to take with respect to their potentially incorrect opinions.

The uncertainties created by the Boxed situation highlight the need for care in addressing the corporate action required to authorize charter amendments and to take other corporate actions. The issue can be especially acute for non-Delaware lawyers dealing with Delaware corporations. In some situations in which the separate class vote was not sought or obtained, non-Delaware counsel may have gotten informal advice of Delaware counsel that no separate class vote was needed. The common practice of non-Delaware lawyers giving opinions with respect to Delaware entities raises a number of questions worth considering:

  • When should non-Delaware counsel consult Delaware counsel? The traditional answer has been when the opinion is non-routine, but when is that and how can non-Delaware counsel be sensitive to when consultation is needed?
  • What level of formality should that consultation take, ranging from oral advice (which may or may not be memorialized by non-Delaware counsel), to written advice (which might be a casual email or a more formal response), to an actual written opinion?
  • Should reliance on that advice be expressly stated in the non-Delaware lawyer’s opinion letter?
  • What is the non-Delaware lawyer’s exposure if that reliance is not expressly stated?
  • Alternatively, should Delaware counsel be asked to give the opinion directly?
  • If advice (in whatever form) is received from Delaware counsel, to what extent should it be relied upon in subsequent transactions without being refreshed?

These questions are worth consideration and discussion among opinion practitioners.

This article was prepared by the Business Law Section's Legal Opinions Committee.