The Court of Chancery recently denied a petition to appoint a custodian for a defunct Delaware corporation under 8 Del. C. § 226(a)(3) because the petitioner sought to use the company as a blank check company. In In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022), the Court concluded that a custodian appointed under § 226(a)(3) is limited to winding up the affairs of the corporation.
The Company, Forum Mobile, Inc., was incorporated in Delaware in 1995. Its public registration was terminated in 2008, and in 2014, the Delaware Secretary of State declared the Company void because it failed to file annual reports or pay annual franchise taxes. The Company was not operative; its only value was that its shares could be traded over the counter.
Petitioner, Synergy, wished to access that value by effecting a reverse merger with a new business, which would allow the new business to access the public market without the costly IPO process. In furtherance of this plan, Synergy petitioned the Court of Chancery to appoint Synergy’s president as the Company’s custodian under Section 226(a)(3).
Historically, Delaware courts have reasoned that public policy precluded entities from using a defunct Delaware corporation to circumvent the regulatory regime established by the federal securities laws. However, in this case, with the aid of amicus curiae who consulted with the SEC, the Court noted that the SEC is aware of, but has not prohibited, these transactions. Moreover, the federal government has introduced more flexibility into how entities could access the public markets.
The amicus curiae recommended that the petition should be conditionally granted.
Notwithstanding this recommendation, the Court determined that the plain meaning of Section 226 required the denial of the petition. Under Section 226(a)(3), the Court of Chancery may 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.” Section 226(b) provides 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.” (emphasis added). The Court interpreted the exception in Section 226(b) to provide that a custodian appointed under Section 226(a)(3) has the authority only to liquidate the corporation. Therefore, a custodian appointed under Section 226(a)(3) cannot revive an entity that has abandoned its business, and the petition was denied.