Electric Vehicle Makers Eye SPAC Stock Fixes in Delaware Hearing

Marathon hearings begin Monday in a Delaware court where more than 20 businesses seek retroactive validation for common stock issued as part of a blank-check merger with a shell entity.

Most of the companies say they may have issued millions of shares without stockholder authorization—in some cases hundreds of millions—after misreading, or getting bad legal advice about, an obscure statutory provision. Now they face uncertainty about their capital structure, with potentially chaotic consequences for the status of their stock and shareholders.

There’s no way to determine which shares are valid, given the way the companies trade openly on the New York Stock Exchange and the NASDAQ, according to their petitions. They also say many of their shareholders are small “retail” investors who are difficult to track down.

Six companies, including five electric vehicle makers, will appear Monday in Delaware’s Chancery Court. Given the similarity of their petitions, “it is most efficient to hear them on a single day,” Vice Chancellor Lori Will said in letters scheduling back-to-back hearings.

A flood of 21 petitions followed a December ruling in an unrelated case that suggested just one single class of shareholders could vote on increasing the number of company shares.

The fallout could include “market disruption,” major problems between the companies and their business partners, stockholder litigation, capitalization declines, and delisting by stock exchanges, the petitions say.

One petitioner, Vivint Smart Home Inc., said its planned $2.8 billion sale could be vulnerable—although the company stressed that it expects to correct the problem and move forward with the transaction.

SPAC Surge

All the companies claim they believed they were following Delaware corporate laws when they held a combined vote of class A and class B stockholders on proposals to raise the number of shares they could issue in connection with their SPAC mergers.

A special purpose acquisition company, or SPAC, is a type of publicly traded shell entity raising money on the promise of a merger with a private business.

Such proposals must be approved by each class of investors, voting separately. The companies say they had a good faith legal basis for thinking their class A and class B shares counted as separate “series” of the same “class"—common stock—despite the terminology they used.

The slew of similar petitions since Lordstown Motors Corp. filed the first one on Jan. 26 reflects the high volume of SPAC deals in recent years, and that some were completed “without the same level of attention to detail that you might see in other mergers,” said Nathaniel Kritzer, a partner at Steptoe & Johnson LLP, which isn’t representing any of the companies filing the petitions.

“It’s hard to see this causing any form of corporate Armageddon because you don’t have any real wrongdoer and you don’t have any real victims. It’s just a technical issue,” he said.

If the court doesn’t resolve the apparent conflict, Delaware lawmakers will, because “the last thing that they would want to see is some relatively harmless error lead to some really bad outcome because of some form of issue with their laws,” Kritzer said.

Delaware judges have discretionary authority to retroactively validate defective corporate acts if they were done in good faith. The relevant factors include the extent to which company stakeholders have relied on the mistake and whether fixing it would do any harm.

The five electric vehicle makers—Lordstown, Lucid Group Inc., ChargePoint Holdings Inc., Fisker Inc., and EVgo Inc.—and Bark Inc., which makes pet products, are scheduled to appear in court Monday.

Will also has scheduled back-to-back hearings over the following two weeks for over a dozen other petitions so far.

The first petition filed is In re Lordstown Motors Corp., Del. Ch., No. 2023-0083.