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Delaware’s Recent Decision Emphasizes the Class Vote Requirement for Corporate Charter Amendment of Multi-Share Class Corporations​

May 15, 2023

A recent decision by the Delaware Court of Chancery serves as a reminder to multi-share class corporations that a general majority vote may not be sufficient to undertake certain amendments to a corporate charter. In the case of Garfield v. Boxed, Inc., the Court rejected the long-standing presumption that multi-class common stock, such as Class A and Class B common stock, are only different series of stock rather than different classes and determined that an amendment to the charter that increases one class of stock and alters the voting threshold requires a class vote of shareholders from both classes, regardless of their voting powers.
Section 242 of the Delaware General Corporation Law (DGCL) outlines the shareholder’s power to vote on a corporation’s charter. While a majority vote of outstanding stock is typically required for charter amendments, Section 242(b)(2) mandates a separate class vote if the amendment would adversely affect the class, irrespective of the voting power of such class. This includes amendments that change the aggregate number of authorized shares, par value of shares, or alter the powers, preferences, or special rights of the shares. Similarly, if an amendment affects only one or more series of any class, the affected series will vote as a separate class. However, increasing or decreasing the authorized number of shares or par value is noticeably absent from the list requiring a series vote. Therefore, corporations can amend their charters to increase authorized shares of a class through a general majority vote, despite having different series. Previously, practitioners believed that Class A and Class B common stock were two different series of one class, i.e., common stock, and did not require separate class votes. In the Garfield case, however, the Court, based its decision on the plain language, determined that “Class A” and “Class B” are two classes of stock and that the company (Boxed, Inc.) breached Section 242 of the DGCL by not having separate class votes.
Following the Garfield decision, many companies rushed to the court and filed petitions under Section 205 of the DGCL, requesting the court to validate the potentially defective votes cast for any charter amendment. Two months later, the court issued a written opinion in the case of Lordstown, upholding the validation of many companies’ defective amendments to their charters. The court determined that these companies and their boards acted in good faith and consistently regarded the amended charters as valid and effective. A contrary ruling, in the court’s opinion would create chaos.
Companies with a multi-share class stock structure should promptly review their historical and current capital structure and consult with legal experts to evaluate whether any further action is necessary.

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