The Court of Chancery recently granted a motion to appoint a trustee for a defunct Delaware corporation pursuant to 8 Del. C. Section 226(a)(3) denied because applicant attempted to use the corporation as a blank check corporation. With respect to Forum Mobile, Inc., CA No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022), the Court concluded that a trustee appointed pursuant to Section 226(a)(3) of the Liquidation is limited to the affairs of the company.
The company, Forum Mobile, Inc., was founded in Delaware in 1995. Its public registration was terminated in 2008, and in 2014 the Delaware Secretary of State voided the company for failing to file annual reports or pay annual franchise taxes. The company was non-operative; Their only value was that their shares could be traded over-the-counter.
The petitioner Synergy wanted to access this value by performing a reverse merger with a new company, which would allow the new company to enter the public market without the costly IPO process. In furtherance of this plan, Synergy applied to the Court of Chancery to appoint the President of Synergy as a Section 226(a)(3) Trustee of the Company.
In the past, Delaware courts have argued that public policy prevented corporations from using a defunct Delaware corporation to circumvent the regulatory requirements established by the federal securities laws. In this case, however, the court, with the help of amicus curiae who had consulted with the SEC, found that the SEC was aware of these transactions but did not prohibit them. In addition, the federal government has introduced more flexibility in companies’ access to public markets.
The amicus curiae recommended that the application be granted subject to conditions.
Notwithstanding this recommendation, the court ruled that the simple meaning of Section 226 required the motion to be denied. Pursuant to Section 226(a)(3), the Court of Chancery may appoint an administrator if “[t]The company has gone out of business and has failed to take within a reasonable time steps for the winding up, liquidation or distribution of its assets.” Section 226(b) provides that “the power of the Custodian is to continue the affairs of the company and not to liquidate its affairs or distribute its assets except as otherwise directed by the court and except in cases arising under paragraph (a)(3) of this section or section 352(a)(2) of this title .” (emphasis added). The Court interpreted the exception in Section 226(b) to mean that a custodian appointed under Section 226(a)(3) has power only to liquidate the Company. Therefore, a trustee appointed under Section 226(a)(3) cannot revive a company that has gone out of business and the application was denied.
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