Saturday, August 7, 2021

Another SPAC legal development

Very quick post this week just to call to your attention the recent complaint filed in Delaware Chancery by Grant & Eisenhofer, Delman v. GigAcquisitions3 LLC , No. 2021-0679.  (Bloomberg article on the case here, with links to the docket and complaint).

The complaint challenges the Lightning eMotors de-SPAC transaction on behalf of a class of investors in the SPAC shell company.  Rather than bring federal fraud claims, though – as many prior SPAC plaintiffs have – this plaintiff is alleging that the acquisition was a poor deal for the SPAC, initiated to benefit the SPAC sponsor, who had a limited time to complete a deal before liquidating.  Therefore, the directors and the SPAC’s sponsor breached their fiduciary duties to the SPAC.

Two things of note:

First, G&E seems to be self-consciously pitching the case as a bellwether challenge to the SPAC trend generally.  In the complaint, it alleges:

Gig3’s history is part of a disturbing trend of SPAC transactions in which financial conflicts of interest of sponsors and insiders override good corporate governance and the interests of SPAC stockholders….

This Court should take this opportunity to affirm that the boards and controllers of SPACs incorporated in Delaware owe the same fiduciary duties to their stockholders as do the boards and controllers of any Delaware corporation, and thus put an end to the money-grabbing SPAC bonanza that has been burgeoning in recent years at the expense of the investing public

Second, obviously, the shareholders needed to vote in favor of the merger, which raises the specter of Corwin cleansing.  So G&E argues that the vote was not fully informed but, more interestingly, also argues that the SPAC sponsor and its principal were minority controlling shareholders by virtue of their roughly 20% stockholdings, their chummy relationships with several directors, and the compensation of the “independent” directors which included financial interests in the sponsor.

Yadda yadda yadda me on the malleable definition of a controlling shareholder, which means – it’ll be interesting to see whether Delaware is willing to take this bait.  If it is, then, like the SEC’s recent scrutiny, this could represent another significant speedbump in the SPAC boom.

One other point about this: retail SPAC shareholders are speculators and often do not vote their shares in favor of the de-SPAC transactions; on at least two occasions, this has led to SPACs openly encouraging anyone to vote who held as of the record date even if they have since sold their shares.  If we see more suits like G&E’s, I look forward to the Corwin cleansing arguments in those cases.

Ann Lipton | Permalink


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