Trending Liability Theories in Delaware SPAC-Related Litigation

MultiPlan Suits: Allegations of Disclosure Violations That Impair a SPAC Stockholder’s Decision to Hold or Redeem Shares Pre-Closing

In Multiplan, decided in January this year, the Delaware Court of Chancery addressed for the first time whether a SPAC sponsor’s and directors’ fiduciary duties would be subject to “entire fairness” scrutiny in litigation challenging a de-SPAC transaction. The MultiPlan plaintiffs asserted that defendants failed to disclose that the de-SPAC target was likely to lose one of its largest customers, impairing stockholders’ decision to redeem their shares instead of participating in the de-SPAC transaction.² The Court found the theory of harm and the alleged omission were both adequately pleaded. It then applied entire fairness review and denied the motion to dismiss on the basis that (i) defendants’ founder shares and certain other alleged conflicts provided a “unique benefit” to entering the transaction not shared by other stockholders, and (ii) the stockholders’ redemption rights did not provide sufficient protection to avoid entire fairness review due to misleading disclosures that prevented stockholders from making an informed redemption decision.³ However, the Multiplan court explicitly left open the question of whether “entire fairness” would apply to a de-SPAC transaction with similar conflicts of interest but no viable disclosure claim.

There are now several suits pending in the Delaware Court of Chancery asserting Multiplan-style claims. Like Multiplan, these claims commonly allege the SPAC’s disclosures for the de-SPAC transaction misstated or omitted material information relating to the target company.⁴ Others allege that the SPAC omitted information relating to potential dilutive effects of the SPAC’s fundraising efforts.⁵ All assert that the injury took the form of an impairment to stockholders’ redemption decisions in advance of the de-SPAC transaction. Since MultiPlan, no motion to dismiss has been ruled on in these cases, and how the law will develop therefore remains to be seen. In any event, the Multiplan plaintiffs’ success in overcoming a motion to dismiss has made the Multiplan theory of liability (i.e., allege a disclosure violation in connection with the redemption decision) popular among Delaware plaintiffs at least in the near-term.

State-Law Derivative Actions Accompanying Federal Securities Lawsuits

Whereas MultiPlan-style lawsuits assert claims on behalf of a class of stockholders on the theory that stockholders were directly harmed through impairment of their redemption rights, other stockholder plaintiffs are asserting claims against SPAC sponsors and directors derivatively — that is, on behalf of the SPAC itself. But as in MultiPlan-style lawsuits, these derivative suits most commonly claim that the SPAC’s sponsor and directors breached their fiduciary duties by making misleading disclosures. For example, in Moubarak v. Breitfeld, a SPAC stockholder brought derivative claims alleging that the SPAC’s board aided and abetted the sponsor in committing securities fraud and breached their fiduciary duties by allegedly misrepresenting the target company’s sales pipeline and production capabilities.⁶

Such derivative suits typically follow separate lawsuits filed in federal courts alleging violations of the federal securities laws, and the derivative suits often simply repeat the factual allegations made in the federal securities suit. Quite frequently, defendants in state-law derivative claims agree to stay their actions pending a ruling on a motion to dismiss in the related federal securities law actions.⁷ Moreover, a derivative lawsuit in the Delaware Court of Chancery is often just one of several suits filed in multiple jurisdictions. For instance, following a series of federal securities class actions pertaining to the de-SPAC of Lordstown Motors, related derivative actions were filed in the Delaware Court of Chancery and multiple federal courts.⁸ This interplay between Delaware derivative suits and federal securities litigation is a long-observed phenomenon more generally, but is increasingly being seen in SPAC litigation in particular.

Pre-Closing Proxy Litigation

SPACs have also seen a number of lawsuits brought after a proxy statement for the de-SPAC transaction is issued but before the transaction has closed. These cases differ from the above-refenced suits in that they are filed before the deal is closed and seek primarily an injunction of the de-SPAC transaction, rather than damages. For example, in Laidlaw v. Acamar Partners Acquisition Corp., the plaintiff (purportedly representing a class) alleged that a SPAC’s directors breached their fiduciary duties by rushing into a transaction with a target company and by withholding projections and financial analyses regarding the target’s business model from the Prospectus.⁹ Instead of damages, however, the plaintiff sought an injunction to stop the de-SPAC transaction “unless and until the Company discloses the material information” omitted from the Prospectus.¹⁰ As is often the case in such lawsuits, the plaintiff in Laidlaw ultimately agreed to dismiss this action on the condition that the SPAC would file supplemental disclosures regarding the transaction in a Form 8-K.¹¹

Other pre-closing suits seek to enforce specific voting rights of a SPAC’s stockholders. For example, SPACs sometimes condition business combination agreements on board and stockholder approval of an amendment to the SPAC’s articles of incorporation increasing the number of authorized shares for the SPAC. Some stockholders have filed suit contending that Class A stockholders of Delaware SPACs have the right to vote separately from Class B stockholders (founders) on whether to approve the share increase amendments.¹²

Traditional Contract-Based Deal Litigation

Because a de-SPAC is a business combination, it is unsurprising that SPAC litigation has also included traditional deal counterparty claims. In Brown v. Matterport, for example, a former officer of a legacy company sought a declaration from the Delaware Court of Chancery that, among other issues, he was not bound by stock transfer restrictions in the de-SPAC company’s bylaws.¹³ The court agreed, relying on ordinary principles of contract interpretation.¹⁴ Traditional theories of liability under M&A counterparty litigation have also arisen in the SPAC context. For example, SPAC entities in the recently-filed Dune Acquisition Corp. v. Pipitone have sued their target alleging that the target misrepresented its investment plans and growth projections to induce the SPAC to acquire the company.¹⁵

The Theories of Liability Currently Seen in SPAC Litigation Are Not Mutually Exclusive

Traditional principles from corporate, contract, and securities laws serve as foundations for the above theories of liability, and ensuing claims are not mutually exclusive. Indeed, a de-SPAC transaction could readily result in plaintiffs asserting the following claims arising out of the same set of facts and allegations:

• A pre-closing lawsuit challenging the proxy disclosures and seeking an injunction under the federal securities laws and/or state fiduciary duty laws.
• A post-closing Multiplan class action claim by a SPAC’s stockholders against the SPAC’s sponsor and directors alleging an impairment of the stockholders’ redemption decision.
• Derivative claims against the SPAC’s sponsor and directors alleging breach of fiduciary duty for prioritizing their own self-interest in approving an unfair merger.
• Post-closing claims under the federal securities laws by a class of stockholders in the post-closing entity alleging misrepresentations in the proxy disclosures.
• Derivative claims against the target and its officers and directors for participating in or aiding and abetting alleged breaches of fiduciary duty.

This is not to say that all possible theories of liability will be asserted in a SPAC-related lawsuit. However, the interplay between the various claims currently being tested by plaintiffs should be a consideration in anticipating and defending against challenges to de-SPAC transactions.

¹ 268 A.3d. 784 (Del. Ch. 2022).

² Id. at 816-17.

³ Id. at 811-13.

⁴ See e.g., Complaint, In re XL Fleet (Pivotal) S’holder Litig., No. 2021-0808-KJSM (Del. Ch. Sept. 20, 2021) (alleging failure to disclose target’s lackluster sales pipeline, among other issues impaired shareholders’ decision whether to redeem shares in advance of the merger); In re Lordstown Motors Corp. Litig., No. 2021-1066-LWW, 2022 WL 678597, at *1-2 (Del. Ch. Mar. 7, 2022).

⁵ Complaint, Laidlaw v. GigAcquisitions 2, LLC, No. 2021-0821-PAF (Del. Ch. Sept. 23, 2021) (claiming that proxy was materially misleading due to omission that the SPAC allowed PIPE investors to reduce the size of their investments pre-merger and that the SPAC’s own shares were highly diluted).

⁶ Complaint, Moubarak v. Breitfeld, No. 1:22-cv-00467 (D. Del. Apr. 11, 2022).

⁷ E.g., Defendant Trevor Milton’s Motion to Stay Proceedings and Joinder, In re Nikola Corp. Derivative Litig., No. 2022-0023-KSJM (Del. Ch. Apr. 13, 2022).

⁸ See Lordstown, 2022 WL 678597, at *1-2 (discussing pending related litigation in a direct class action suit).

⁹ No. 2021-0016-SG (Del. Ch. Jan. 7, 2021).

¹⁰ Id. at 22.

¹¹ Laidlaw v. Acamar Partners Acquisition Gp., No. 2021-0016-SG, 2021 WL 2076034 (Del. Ch. May 20, 2021).

¹² E.g., Delman v. Fusion Acquisition Corp., 2021-0752 (Del. Ch. Aug. 31, 2021); Elstein v. Hagerty, Inc., No. 2022-0214-LWW (Del. Ch. March 7, 2022).

¹³ Brown v. Matterport, No. 2021-0595-LWW, 2022 WL 89568, at *1 (Del. Ch. Jan. 20, 2022).

¹⁴ Id. at *3-4.

¹⁵ Dune Acquisition Corp. v. Pipitone, No. 2022-0304-LWW (Del. Ch. Apr. 6, 2022).