SPACs and Voting

A speculative frenzy appears to have taken hold of markets, extending to everything from GameStop shares to sports cards and anything blockchain (again).  Caught up in the mania are SPACs – specifically the blank-check firms trading before an acquisition target has been identified.

The difficulty, as the Financial Times recently reported, is that retail shareholders caught up in the SPAC craze aren’t necessarily interested in voting their shares when it comes time to consummate a merger.  Worse, a large number of them may have sold their shares after the record date, leaving no one to actually cast the ballot.

Which is why Switchback Energy Acquisition Corporation recently issued the most extraordinary press release:

• Stockholders as of the Close of Business on December 16, 2020 Should Vote Their Shares Even if They No Longer Own Them

…

Switchback Energy Acquisition Corporation (NYSE: SBE) (“Switchback”) today announced that it convened and then adjourned, without conducting any other business, its virtual Special Meeting of Stockholders to February 25, 2021 at 10:00 a.m., Eastern time (the “Special Meeting”), to allow for more time for stockholders to vote their shares to reach the required quorum and approve the required proposals….

Switchback has received overwhelming support for the Business Combination. At the time the Special Meeting was convened, approximately 99.9% of the proxies received had been voted in favor of the transaction. However, since holders of approximately 45% of the outstanding shares submitted proxies to vote, the necessary quorum of a majority of the outstanding shares was not present. Switchback requests that any investor who held shares of stock in Switchback as of the close of business on December 16, 2020 and has not yet voted do so as soon as possible in order to avoid additional delays….

Can I still vote if I no longer own my shares?

Yes, if you owned shares as of the close of business on December 16, 2020, the record date for the Special Meeting, you can still vote your shares even if you no longer own them.

This is, I must say, quite remarkable.  I mean, there have long been concerns about “empty voting,” i.e., casting ballots for shares in which you have no economic interest, including casting ballots for shares that have since been sold.  See, e.g., Henry T.C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. Cal. L. Rev. 811, 835 (2006).  Here, everyone’s assuming that the vote was a mere formality and the reason the shares were not voted was that retail shareholders are indifferent, but what if some shareholders disfavored the merger?  Pushing the deal through with the ballots of former shareholders would hardly be fair to them.

Which gets to the legal question of whether this is even okay.  Delaware has vaguely suggested, you know, maybe not.  For example, in In re Appraisal of Dell, 2015 WL 4313206 (Del. Ch. July 13, 2015), VC Laster held:

even the right to control how shares vote transfers with the shares, notwithstanding the legal expedient of the record date, because the subsequent holder can compel the seller to issue him a proxy (assuming the seller can be identified)

In support, he cited Commonwealth Assocs. v. Providence Health Care, Inc., 641 A.2d 155 (Del. Ch. 1993), where Chancellor Allen expressed “doubt” that a contract for the sale of shares that allowed the seller to retain the right to vote would be “be a legal, valid and enforceable provision, unless the seller maintained an interest sufficient to support the granting of an irrevocable proxy with respect to the shares.”  See also In re Canal Construction Co., 182 A. 545 (Del. Ch. 1936) (“As between a transferror who has parted with all beneficial interest in stock and his transferee, the broad equities are all in favor of the latter in the matter of its voting.  While the transferee may not himself be qualified to vote because he had not caused the stock to be registered in his name …, it does not necessarily follow that the transferror may exercise the voting right in defiance of the transferee's wishes. So far have courts recognized the equity of the true owner of stock to control its voting power as against the registered holder, that the latter has been required to deliver a proxy to the former.”); In re Giant Portland Cement Co., 21 A.2d 697 (Del. Ch. 1941) (“A mere nominal owner naturally owes some duties to the real beneficial or equitable owner of the stock; and even if the right to demand a proxy is not exercised, if the vendor exercises his legal right to vote in such a manner as to materially and injuriously affect the rights of the vendee, he is, perhaps, answerable in damages in some cases.”)

Those cases were about disputes between the transferor and the transferee regarding the manner in which shares would be voted, but it should also be noted that in the context of “vote-buying” allegations, Delaware has suggested that it is illegitimate to divorce economic interest in shares from the voting rights attached to them.  See Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010).

Anyhoo, we can add this to the growing list of “concerns about SPACs,” which is why the SEC is reportedly taking a closer look.  Of course, if the world is finally opening up post-covid, speculative trading may also subside, and the problem may take care of itself.