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Lordstown Motors: Applying Section 205 of the Delaware General Corporation Law, the Delaware Court of Chancery Validates Shares Issued Without a Separate Class Vote

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May 11, 2023
By K. Tyler O'Connell
Business Law Today

Adopted in 2013, 8 Del. C. § 205 permits a corporation to petition the Delaware Court of Chancery to validate corporate actions that are defective for lack of authorization when ratification is not feasible or when a ratification attempt is subject to challenge. Section 205 was enacted to address challenges to the validity of stock issuances, among other problems. In the recent case of In re Lordstown Motors Corp., 2023 WL 2155651 (Del. Ch. Feb. 21, 2023), Vice Chancellor Lori W. Will approved Lordstown Motors’ petition to declare valid shares of stock issued pursuant to an amendment of the certificate of incorporation increasing the number of Class A common shares, which had been adopted without a separate class vote. 

In late-2022, the Court of Chancery interpreted a similar certificate of incorporation with Class A and Class B common shares as having separate “classes” rather than “series” of stock, with the result that a separate vote of Class A stockholders was required by 8 Del. C. § 242(b)(2) to increase the authorized number of Class A shares. See Garfield v. Boxed, Inc., 2022 WL 17959766 (Del. Ch. Dec. 27, 2022). Following that decision, Lordstown Motors sought relief under Section 205. The Court of Chancery scheduled an expedited hearing at which any objectors could be heard, and required the company to provide notice through its public filings. 

Following the hearing, at which no objectors appeared, the Court issued its opinion validating the stock issuance under Section 205(a)(4), which authorizes the Court to the “[d]etermine the validity of any corporate act or transaction and any stock, rights or options to acquire stock[.]” The Court applied certain equitable factors set forth under Section 205(d), reasoning inter alia that (i) any mistake was apparently made in good faith; (ii) validation was appropriate to prevent harm to the corporation and its stockholders, who had relied upon the validity of the shares issued; (iii) no legitimate interests would be harmed by validating the shares; and (iii) ratification under 8 Del. C. § 204 was not feasible due to Class A shares being traded among public stockholders in the intervening years. Accordingly, the Court declared the stock valid, providing certainty as to the corporation’s capital structure.

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