Delaware's Latest Ruling Emphasizes Class Voting Requirements for Multi-Class Stock Companies in Charter Amendments

2024-09-24 10:38:42

A recent ruling by the Delaware Court of Chancery serves as a reminder to multi-class stock companies that a simple majority vote may not be sufficient for certain amendments to the corporate charter. In Garfield v. Boxed, Inc., the court rejected the long-standing consensus that multiple classes of common stock, such as Class A and Class B common stock, are merely different series of stock rather than distinct classes. The court ruled that a charter amendment adding a class of stock and altering voting thresholds required separate votes from both classes of shareholders, regardless of whether the class had voting rights.

Section 242 of the Delaware General Corporation Law (DGCL) governs shareholders' voting rights on corporate charter amendments. Typically, amendments to the charter require a simple majority vote. However, Section 242(b)(2) stipulates that if an amendment adversely affects a class of stock, a separate class vote by that class of shareholders is required. This includes changes to the authorized number of shares, par value, or the powers, preferences, or special rights of the shares. Similarly, if the amendment affects one or more series within any class, the affected series must vote separately. Notably, amendments that increase or decrease the authorized number of shares or par value are not included in the list of changes requiring a series vote. Therefore, if a company has different series within a single class of stock, it can amend the authorized number of shares for that class with a simple majority vote. Previously, companies and legal practitioners believed that Class A and Class B common stock were different series within the same class—common stock—and thus did not require separate class votes. However, in Garfield, the court determined, based on the plain language, that "Class A" and "Class B" were distinct classes of stock, and the company (Boxed Inc.) violated Section 242 of the DGCL by not conducting separate class votes.

Following the Garfield decision, many companies rushed to file petitions under Section 205 of the DGCL, seeking court validation of defective shareholder votes and charter amendments. Two months later, in its written opinion in Lordstown, the court provided relief for the validity of many companies' defective charter amendments. The court found that these companies and their boards had acted in good faith in approving such amendments and had consistently treated the amended charters as valid. In the court's view, a contrary ruling would lead to unknown and unnecessary chaos.

If your company has a multi-class stock structure, you should promptly review its historical and current capital structure and contact us to assess whether further action is needed.