[co-author: Hannah Odenthal]
In In re Forum Mobile, Inc., C.A. 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 authorize the court to appoint a custodian to revive an abandoned business. The court outlined the decades-long public policy against allowing entrepreneurs in the capital markets to use sections of the DGCL to revive defunct entities for use as vehicles to access the public markets, but acknowledged intervening changes in the federal securities laws that might impact that policy. After considering input 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, an abandoned business.
Synergy Management Group LLC (Synergy) seeks out defunct entities with surviving public listings to make these entities available to those who want 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 deregistered and all operations ended, its shares continued to have a CUSIP number.
Synergy sought an order from the Delaware Court of Chancery appointing Synergy’s president as a custodian on May 8, 2020. Synergy planned to use Forum as a blank check company, which, through a reverse merger, would allow another company to enter the public market without the time and costs associated with an IPO. Synergy’s petition asked the court to appoint Synergy’s president as a custodian to pay certain of Forum Mobile’s outstanding fees due to the state, to allow the company to continue as a going concern for stockholders, and to permit 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 custodian for very limited purposes, which did not include the revival of a defunct business. Before turning to the plain language, however, the court engaged in a public policy analysis. The court noted that other entrepreneurs had tried to use the DGCL in similar ways, but that the Delaware courts maintained a policy since 2002 against facilitating this shortcut, and instead encouraged use of the formal IPO process to go public. After acknowledging recent changes to federal laws that might require a change in that public policy, the court appointed an amicus curiae to independently review the petition and consult with the SEC. The SEC did not take a position about whether the petition should be granted under Delaware law, but reiterated that granting the petition would not enable Synergy to circumvent federal securities laws governing disclosure. The amicus curiae recommended granting the petition but with appropriate safeguards to prevent abuse.
The court found, based on the SEC’s input, that the previously followed public policy alone did not warrant denial of the petition, but concluded that the plain language of Section 226(a)(3) did not provide authority for a court-appointed custodian to revive a corporation that has been abandoned. The plain language of the statute permits a custodian to be appointed when a corporation has “abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.” Prior cases established that, in general, the authority of a company’s custodian is to continue the business and not liquidate its affairs and distribute its assets, with a specific exception for custodians appointed under Section 226(a)(3). Custodians appointed under this exception thus have the power only to liquidate the corporation’s affairs and distribute its assets.
As evidenced by the rise in SPAC transactions, market participants recently have been looking for ways to participate in the public markets without the time and expense of an initial public offering. In this opinion, the Delaware Court of Chancery made clear that Section 226(a)(3) would not be an option for those seeking to do so.
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