In the recent decision of In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022), the Delaware Court of Chancery denied a petition to appoint a custodian under 8 Del. C. § 226(a)(3) where petitioner sought to take a defunct corporation whose shares are traded over the counter to use as a blank check company through a reverse merger.
We previously discussed here on this blog custodianship proceedings under Section 226 of the Delaware General Corporation Law ("DGCL").
Vice Chancellor Laster preliminarily noted that "Delaware decisions have enforced a public policy against permitting capital markets entrepreneurs to use sections of the DGCL to revive defunct Delaware entities with still extant listings and use them as vehicles to access the public markets." Slip op. at 1.
The Court then analyzed the text of Section 226 itself. Petitioner sought appointment of a custodian over Forum 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."
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."
The Court held that a custodian appointed under Section 226(a)(3) does not have authority to continue the business of the corporation, under the express terms of Section 226(b). That is what the petitioner sought to do so in this action. Rather, a custodian appointed under Section 226(a)(3) may only liquidate the affairs of the abandoned corporation and distribute its assets.
Key Takeaway: The Forum Mobile decision makes clear that a petitioner may not rely upon Section 226(a)(3) of the DGCL to revive a defunct, publicly registered shell company as a blank check company.
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