[co-author: Hannah Odenthal]
In In re Forum Mobile, Inc., CA No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022), the Delaware Chancery Court held that Section 226(a)(3) of the Delaware General Corporation Law (DGCL) does not allow the court to appoint a trustee to revive a discontinued business. The court described the decades-long public policy against allowing capital markets entrepreneurs to use sections of the DGCL to revive defunct entities for use as vehicles to access public markets, but acknowledged changes in federal securities laws that may affect this policy. . After reviewing comments from the SEC through a court-appointed amicus curiae, the court concluded that the plain language of the statute allows the court to appoint a custodian under section 226(a) (3) to liquidate, but not revive, a discontinued business.
Synergy Management Group LLC (Synergy) searches for defunct entities with surviving public listings to make these entities available to those wishing to enter the public markets without the time and expense of an IPO. Synergy identified Forum Mobile, Inc., a company declared void by the Delaware Secretary of State on March 14, 2014. Although the company was debarred and all operations ended, its stock continued to have a number CUSIP.
Synergy sought an order from the Delaware Court of Chancery appointing the Chairman of Synergy as Custodian on May 8, 2020. Synergy planned to use Forum as a blank check corporation, which, through a reverse merger, would allow another company to enter the public market without the time and cost associated with an IPO. Synergy’s motion asked the court to appoint Synergy’s chairman as trustee to pay some of Forum Mobile’s unpaid fees owed to the state, to allow the company to continue as a going concern for shareholders. and to allow certain measures to facilitate a special meeting to elect a new board of directors.
The court denied the petition, finding that the plain language of section 226(a)(3) permitted the appointment of a trustee for very limited purposes, which did not include reviving a defunct business. Before turning to plain language, however, the court engaged in a public policy analysis. The court noted that other contractors had attempted to use the DGCL in a similar fashion, but that the Delaware courts had maintained a policy since 2002 against facilitating this shortcut and instead encouraged the use of the formal process of introduction in scholarship to go public. After acknowledging recent changes to federal laws that may necessitate a change to this public policy, the court appointed a amicus curiae independently review the petition and consult with the SEC. The SEC did not take a position on whether the petition should be granted under Delaware law, but reiterated that granting the petition would not allow Synergy to circumvent federal securities laws. securities governing disclosure. the amicus curiae recommended granting the request, but with appropriate safeguards to prevent abuse.
The court concluded, based on the comments of the SEC, that the public policy previously followed did not alone justify the dismissal of the petition, but concluded that the plain language of section 226(a)(3) did not confer authority on a court-appointed guardian. revive a company that has been abandoned. The plain language of the law allows for a custodian to be appointed when a company has “discontinued its business and failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets”. Previous cases have established that, in general, the authority of a company’s depositary is to carry on business and not to wind up its affairs and distribute its assets, with the specific exception of depositaries appointed under the Section 226(a)(3). Custodians appointed under this exception therefore only have the power to liquidate the affairs of the company and distribute its assets.
As evidenced by the increase in SPAC transactions, market participants have recently been looking for ways to participate in public markets without the time and expense of an initial public offering. In that opinion, the Delaware Court of Chancery made it clear that Section 226(a)(3) would not be an option for those seeking to do so.