In recent weeks, the Delaware Court of Chancery has issued two noteworthy opinions in the special purpose acquisition company (SPAC) context—one related to fiduciary duties and one related to the technical question of when a class or series of stock is entitled to its own separate vote on a charter amendment. These opinions provide valuable insight into how the courts may view common elements of de-SPAC transactions and also have broader implications for practice. A summary of the court’s key holdings is below.
These recent opinions build on the Delaware Court of Chancery’s holdings from In re MultiPlan Corp. Stockholders Litigation (MultiPlan)—decided in January 2022—which was the first opinion issued in Delaware related to fiduciary duties in the SPAC context. In MultiPlan, the court applied what it described as “well-worn fiduciary principles” under Delaware law to “the novel issues presented” and permitted claims against a SPAC’s sponsor and its directors to proceed. In so doing, the court determined that the entire fairness standard of review governed its analysis of the plaintiff’s claims, because 1) the SPAC’s financial structure (which resembled that of a typical SPAC) allowed the SPAC’s organizers to receive unique benefits from the transaction not shared by the SPAC’s public stockholders and 2) the SPAC’s directors were conflicted because of the material benefits that they stood to receive from the transaction, including through equity holdings at the sponsor level. Applying the entire fairness standard, the court found that it was reasonably conceivable that the defendants purposely provided materially misleading disclosures that impaired the public stockholders’ right to redeem their SPAC shares prior to the de-SPAC closing.
In the recent decision related to fiduciary duties—Delman v. GigAcquisitions3, LLC, issued on January 4, 2023—the Delaware Court of Chancery again held that it was reasonably conceivable that a SPAC’s directors and its sponsor breached their fiduciary duties by withholding material information from SPAC public stockholders in a proxy statement and interfering with their right to redeem their SPAC stock. As in MultiPlan, the court applied the entire fairness standard of review to the transaction, finding that the SPAC’s sponsor was a controlling stockholder (despite holding only a minority interest in the SPAC) with divergent interests from the public stockholders. Because the sponsor held nonredeemable “founder shares,” which it purchased for nominal consideration, the court found that the sponsor’s interests were misaligned with the public stockholders in the choice between a bad deal and a liquidation (because the nonredeemable founder shares would be worthless if the SPAC were liquidated). Answering a question left open in MultiPlan, the court held that even if the stockholder vote on the transaction were fully informed (which the court found was not the case here because of inadequate disclosures in the merger proxy), the transaction would not be subject to business judgment review under the Delaware Supreme Court’s ruling in Corwin v. KKR Financial Holdings LLC. According to the court, because the SPAC’s public stockholders had the ability to both vote in favor of the de-SPAC and to redeem their shares, the stockholders’ voting interests were decoupled from their economic interests, and the public stockholders’ vote thus did not reflect the stockholders’ “collective economic preferences.”
In addition to finding that the proxy issued in connection with the de-SPAC was misleading with respect to the value of new money being invested into the SPAC at the time of the de-SPAC transaction and the operating company’s projections, the court noted several other indicators of an unfair process, including that the sponsor’s controller dominated the negotiations with the SPAC’s target, the board did not receive a fairness opinion and the SPAC’s financial advisers held private placement shares that would be worthless if the de-SPAC transaction did not close.
In Garfield v. Boxed, Inc., issued on December 27, 2022, a SPAC with two types of common stock—Class A Common Stock held by public stockholders and Class B Common Stock held by insiders—sought to amend its charter in connection with a de-SPAC transaction to increase the number of authorized shares of its Class A Common Stock so that it could issue that stock to the target’s stockholders in the acquisition. The SPAC did not plan to obtain a separate vote of the Class A Common Stock in connection with the charter amendment but instead sought only a vote of holders of a majority of the outstanding voting power from the Class A Common Stock and Class B Common Stock on a combined basis. Before the SPAC’s stockholder meeting occurred, a SPAC stockholder submitted a private demand letter to the SPAC asserting that a class vote of the Class A Common Stock was required under the Delaware statute. The SPAC amended its disclosures and obtained the separate Class A Common Stock vote. The plaintiff then filed suit in the Delaware Court of Chancery, seeking an award of attorneys’ fees for conferring a “corporate benefit.”
In that posture, the court evaluated whether the underlying claim was meritorious and could have survived a motion to dismiss, determining that the claim at hand met that test. The crux of the issue before the court was whether the Class A Common Stock was actually a class of stock or a series of stock—because classes of stock are, absent a waiver in a charter, entitled to a class vote on increases or decreases in the authorized number of shares of a class but series are not. The SPAC contended that the Class A Common Stock was a series because the SPAC’s charter provided that the SPAC had Common Stock and Preferred Stock, and the Common Stock “included” Class A Common Stock and Class B Common Stock within it. The plaintiff disagreed, citing the nomenclature of the Class A Common Stock and other drafting features of the charter. The court, based on the posture of the case, agreed with the plaintiff and awarded $850,000 in fees. The case will likely prove important for future transactions.