Delaware Court Of Chancery Grants Plaintiff Attorneys’ Fees Award Under Corporate Benefit Doctrine For Demand To SPAC Board Leading To Adjusted Voting Structure In Connection With Merger
On December 27, 2022, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery substantially granted plaintiff’s motion for summary judgment in an action seeking attorneys’ fees. Garfield v. Boxed, Inc., No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022). Plaintiff, a stockholder of defendant Seven Oaks Acquisition Corp., a special purpose acquisition company (the “SPAC”), made a demand on the board challenging the structure of stockholder votes on proposed charter amendments regarding the issuance of shares in connection with a merger. The SPAC made the change demanded by plaintiff and consummated the deal. However, defendant opposed the attorneys’ fees award, contending that the previously contemplated voting structure had already been legally compliant. The Court held that plaintiff had correctly determined that the contemplated voting structure would have been inconsistent with Delaware law. The Court thus awarded attorneys’ fees because “[b]y taking the [SPAC] off a path that violated [Delaware law] and the stockholder franchise, [p]laintiff conferred a substantial benefit.”
The SPAC had Class A common stockholders and Class B common stockholders. In connection with an anticipated merger, the SPAC proposed charter amendments that would have increased the number of Class A authorized shares and altered the vote required to change the number of shares in the future. The SPAC planned to have all common stockholders vote on the transaction, as well as on the proposed charter amendments and other proposals.
Prior to the votes, plaintiff sent a pre-suit demand letter to the SPAC’s board contending that the contemplated vote would violate Section 242(b) of the Delaware General Corporation Law (“DGCL”). That statute provides that “[t]he holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment … if the amendment would increase or decrease the aggregate number of authorized shares of such class … or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.” Plaintiff demanded a vote for the Class A stockholders as a “standalone class, instead of with the [C]lass B common stockholders.”
In response, the SPAC amended the merger agreement to implement the voting adjustments demanded by plaintiff and the transaction closed. Defendant nevertheless opposed the fee request, arguing that standalone votes were not necessary under Section 242(b) because the “Class A” and “Class B” common stock issued under the SPAC’s original certificate of incorporation were part of one class of common stock with two series.
Explaining that Delaware courts “apply the general rules of contract interpretation to disputes over the meaning of charter provisions,” the Court held that the Class A and Class B shares were two classes of common stock rather than merely two series of the same class. The Court highlighted that the charter used the word “class”—and not the word “series”—to describe these shares. The Court also noted that DGCL Section 102(a)(4) prescribes that “[i]f the corporation will have authority to issue more than one class of shares, then the certificate must set forth the number of shares of all classes and of each class and whether the shares are par or no-par.” The Court found that the charter’s listing of the number of authorized shares for each of the Class A and Class B common stock, along with their par value, appeared “designed to authorize … statutorily compliant ‘classes’.” The Court added that, by contrast, the charter expressly provided authority to the board to issue “one or more series of Preferred Stock.” Therefore, the Court concluded, “[r]ead as a whole and together with the DGCL,” the charter “granted the [SPAC] authority to issue … only classes of common stock—not series.”
Accordingly, the Court determined that the demand “conferred a meaningful benefit on the [SPAC] and its stockholders by addressing the statutory problems with the proposed voting structure for the [c]hallenged [a]mendments.” The Court explained that, if the share increase amendment vote had proceeded without correction, the new shares “would have been invalidly issued,” and because the transaction was conditioned on the charter amendments, “the merger itself would have been on shaky ground.” In turn, that “could have called into question subsequent acts by the surviving corporation.” The Court concluded that avoiding these consequences were all “material benefits.” The Court added that “preventive action is as beneficial as corrective action, if not more,” as “diffusing a ticking time bomb can be more valuable than cleaning up shrapnel.”
The Court, therefore, awarded plaintiff attorneys’ fees of $850,000 under the corporate benefit doctrine. In reaching that conclusion, the Court held that the most important factor is the benefit conferred, noting that it gave “no weight” to the hours expended.
The Court, however, declined to award a premium. Plaintiff had sought such a premium, asserting that this case was “the first of several identical but unrelated actions.” The Court explained, “[w]ith corporate benefit as my north star, and cognizant of pattern and practice before this Court, I see no principled reason to saddle the unlucky first company to have its fee award set by the Court with fees that exceed the benefit that company received.”