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SPAC Activity Subject to Contractual Restrictive Covenant

By Steve Hecht on September 23, 2021
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In a federal court ruling from earlier this year, Vogel v. Boris, the New York federal court refused to toss out a claim by an LLC member, Vogel, against his two other business partners, alleging that they violated a restrictive covenant in the LLC’s operating agreement prohibiting any member from forming a new SPAC aside from the existing SPAC they had explicitly agreed to be working for: their violation consisted of forming a sponsor for a second SPAC and closing a $250 million IPO, all while squeezing Vogel out of the new SPAC.  The court ruled that the allegations sufficiently stated a legal claim to allow the case to proceed further, without deciding the substance of those claims.

First off, in the course of its analysis the court provided a succinct summary of the SPAC process:

The first step of the typical SPAC process, according to Vogel, is for those managing the SPAC to create a company to control it, usually a limited liability company, referred to as the “sponsor.” The sponsor receives a percentage of the shares raised in the IPO as a fee and puts the shares aside in escrow or trust pending consummation of a potential merger. Once a successful merger has occurred, the sponsor will distribute the shares to the SPAC’s managers and/or members based on certain contractual triggers such as, for example, termination of a lockout period or the reaching of a particular share price.

Second, however unusual this set of facts may be, it makes the point that some of the background activity underlying a SPAC transaction is often a creature of contract.  Here in Vogel, that contract was an LLC operating agreement, while in other situations, the operative contract may be a subscription agreement underlying a PIPE transaction relating to the SPAC deal.  In all events, investors considering their rights in connection with a SPAC transaction should be sure to consider any contractual remedies in addition to any federal securities fraud or state fiduciary duty and common law claims.

Photo of Steve Hecht Steve Hecht

Steve Hecht is a go-to trial lawyer for hedge funds, institutional investors, family offices, university endowments, venture funds and other investors interested in utilizing the legal process to create value for their own investors. Whether by activist litigation, fiduciary duty claims, or appraisal…

Steve Hecht is a go-to trial lawyer for hedge funds, institutional investors, family offices, university endowments, venture funds and other investors interested in utilizing the legal process to create value for their own investors. Whether by activist litigation, fiduciary duty claims, or appraisal and other valuation strategies, Steve has extensive experience across the gamut of options for shareholders.  He regularly tries cases in Delaware Chancery Court and around the country for clients seeking outsized returns. Steve is a partner of Rolnick Kramer Sadighi LLP.

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  • Posted in:
    Corporate & Commercial
  • Blog:
    Valuation Litigation & Shareholder Rights Blog
  • Organization:
    Rolnick Kramer Sadighi LLP
  • Article: View Original Source

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