Saturday, September 10, 2022

So I’m watching this Buzzfeed case

It’s pending in Delaware Chancery, C.A. 2022-0357-MTZ; VC Zurn heard oral arguments July 26, and presumably a decision will soon be forthcoming.

Buzzfeed was a private company that was taken public via SPAC.  Many of its employees were paid in stock and stock options, but – as was widely reported – on the first day of trading after the merger, they found themselves unable to place sell orders.  By the time it was all straightened out, Buzzfeed’s stock price had dropped significantly, and now those employees are suing Buzzfeed, its managers, and transfer agent.  They sought to bring their claims in a mass arbitration as required by their employment agreements, but Buzzfeed filed a declaratory judgment action in Delaware Chancery, arguing that because the employees’ claims are tied to their status as Buzzfeed stockholders, they are bound by the forum selection provision that was inserted into Buzzfeed’s charter when it went public, requiring that all such actions be brought in Delaware courts.

It's actually a complex case, in part because the publicly traded entity – the one with the forum selection provision – is not the entity that employed the plaintiffs.  The employing entity was merged into a shell corporation and is now a subsidiary of the publicly traded entity, and in the merger, the employees’ private company stock was converted into the stock of the public parent.

And things get even more complex than that – there are issues regarding the exact nature of the claims that the employees have (are they suing as employees, or as stockholders?), which Buzzfeed managers – of which entity – are responsible for any problems, and so forth, but for now, I actually want to point out one specific aspect of the dispute, and that’s why the employees were unable to trade their shares in the first instance.

As alleged in the pleadings, as a private company, Buzzfeed had multiple classes of stock (this is why Carta was created: to help private companies manage their cap tables, because the different classes of stock can get very complex).  And many of its employees received as compensation the same class of stock that the founder received, namely Class B stock.  When Buzzfeed decided to go public, it was also decided that Class B stock would carry 50 votes per share (to maintain founder control).  Of course, Class B stock would not publicly trade, so in the merger, only Class A stock was actually registered with the SEC.  The employees were not, allegedly, made aware of the distinction.  As a result, when employees holding Class B stock tried to sell their shares, they couldn’t – those shares were not registered!  Instead, they first had to convert their shares to Class A stock, which was doable, but time consuming, and that delay was critical. 

So the real question, here, is how did this happen?  I.e., how did ordinary line employees end up with stock carrying 50 votes per share?  I don’t know, of course, but the best I can figure is that this is a fairly dramatic example of the well, sloppiness, that has characterized some SPAC deals, which John Coates talks about here.  As he explains, a lot of the problems with SPACs – such as misaccounting for warrants – did not arise out of new issues, but simply arose out of shoddy work, and once people took a closer look at what had been done, they finally caught the errors.  Buzzfeed may present a particularly egregious example of the problem.

Ann Lipton | Permalink


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