One for the Lawyers: Forward Split in Delaware Requires Shareholder Approval

For those of you working with shells or other clients incorporated in Delaware, the most popular state to incorporate (over half the Fortune 500 are there), an uncertainty has been resolved.

If one reads the Delaware General Corporation Law trying to determine if shareholder approval is required for a reverse or forward stock split, it is not easy to find the answer, since it is not directly addressed. However, all have generally interpreted the law to require reverse stock splits, where outstanding shares are combined to a smaller number, require such approval. If you are public and SEC reporting, this means a full proxy or information statement which is subject to SEC review, delay and cost, but usually is pretty straightforward.

Forward splits were not clear and I've heard lawyers interpret the law both to permit a split with shareholder approval and not. This is important because in some shell mergers the number of outstanding shares needs to be increased before the combination. Section 242 of the DGCL says you may amend your certificate of incorporation to reflect splits, which has been the source of the confusion. Now a new case in Delaware, Blades v. Wisehart, et al., C.A. No. 5317-VCS (Del.Ch. Nov. 17, 2010) (Vice Chancellor Strine) clarifies all this regarding forward splits.

Without saying so, it appears the court interprets the word "may" above to "must" and says that forward splits require one to go through the charter amendment procedure in Section 242. Be advised! Check it out yourself - there is no legal advice in this post!!

For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog  by David N. Feldman, Esq., Partner of Richardson & Patel LLP.

For more information about LexisNexis products and solutions connect with us through our corporate site.