In re Forum Mobile, C.A. No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022) (Laster, V.C.)
In this decision, the Court of Chancery denied a petition to appoint a custodian under 8 Del. C. § 226(a)(3) for a defunct Delaware corporation where the petitioner sought to revive the company to use it as a blank check company. The Court concluded that the plain meaning of Section 226(b) limits a custodian appointed under Section 226(a)(3) to winding up the affairs of the corporation.
The company at issue was incorporated in 1995 and has operated under several names and has had several distinct corporate identities. In 2008, the company terminated its public registration for failure to maintain at least 300 stockholders of record. In 2014, the Delaware Secretary of State declared the company void for failure to file annual reports or pay annual franchise taxes. The company has no operating business and its only current value is that its shares “continue to have a CUSIP number that allows them to trade over the counter.” Petitioner, Synergy, sought to utilize that value by effecting a reverse merger of the company with a new business, thereby allowing the new business to access the public market without the expense and process of an IPO. To facilitate this plan, petitioner asked the Court to appoint its president to serve as custodian for the company under Section 226(a)(3).
Noting the conflict between prior Court of Chancery caselaw evidencing a policy against allowing a defunct Delaware corporation to evade the “regulatory regime established by federal securities law” simply because the Delaware corporation retains a public listing and more recent federal regulations that allow greater flexibility for companies to access the public markets, the Court previously appointed an amicus curiae to consult the SEC and “provide an independent view regarding the merits of the petition and whether any relief should be granted.” The amicus curiae reported that the SEC took no position on whether the petition should be granted and “did not give any indication that it wanted this court to act as a first line of defense against potential violations of the securities laws by rejecting the Petition.” The amicus curiae, therefore, recommended conditional approval of the petition.
The Court concluded, however, that the plain meaning of the statute required denying the petition. The petitioner sought appointment of a custodian under 8 Del. C. § 226(a)(3), which allows the Court of Chancery to appoint a custodian when “[t]he corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate, or distribute its assets.” The powers of a custodian appointed under Section 226 are set forth in Section 226(b), which states that, “the authority of the custodian is to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the court shall otherwise order and except in cases arising under paragraph (a)(3) of this section or § 352(a)(2) of this title.” The Court interpreted this language to create two exceptions to the rule that a custodian appointed under Section 226 shall continue the business of the corporation: the first is “when the court shall otherwise order,” and the second is “in cases arising under paragraph (a)(3) of this section or § 352(a)(2) of this title.” Therefore, the Court held, under the plain meaning of the statute, a custodian appointed under Section 226(a)(3) does not have authority to continue the business of the corporation. Instead, the custodian has only the limited authority to liquidate the affairs of the abandoned corporation and distribute its assets. Because Section 226 does not authorize the appointment of a custodian to revive an entity that has abandoned its business, the petition was denied.