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(Article from Securities Law Alert, January 2023) 

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On January 4, 2023, the Court of Chancery of Delaware denied dismissal of a putative class action alleging breach of fiduciary duty claims against the sponsor and directors of a SPAC who allegedly undertook a value destructive merger and impaired the public stockholders’ ability to decide whether to redeem or to invest in the post-merger company. Delman v. GigAcquisitions3, 2023 WL 29325 (Del. Ch. 2023) (Will, V.C.). The court determined that it could not conclude that the de-SPAC merger was the product of fair dealing because plaintiff sufficiently pleaded that the proxy contained material misstatements and omitted material, reasonably available information.

Citing In re MultiPlan Shareholders Litigation, 268 A.3d 784 (Del. Ch. 2022)[1] where Vice Chancellor Will first applied the entire fairness standard in the SPAC context, the court determined that entire fairness applied here “due to inherent conflicts between the SPAC’s fiduciaries and public stockholders in the context of a value-decreasing transaction.” The essence of the alleged conflicts was that defendants undertook a value-decreasing transaction to obtain “colossal” returns on the sponsor’s investment although the public stockholders would have been better served by liquidation. Defendants also allegedly provided inadequate disclosures to discourage redemptions and ensure greater deal certainty.

The court explained that compliance with the duty of disclosure is included within the fair dealing facet of the fairness test. Weinberger v. UOP, 457 A.2d 701 (Del. 1983). The court rejected defendants’ contention that the proxy contained all material information. The court stated that the complaint provided “some facts” that the public stockholders’ redemption decisions were compromised because defendants failed to disclose the cash per share that the SPAC would invest in the combined company, and made an incomplete disclosure of the value that the SPAC and its non-redeeming stockholders could expect to receive in exchange. The court noted that “[b]oth pieces of information would be essential to a stockholder deciding whether it was preferable to redeem her funds from the trust or to invest them in [the combined company].”

The court pointed out that if non-redeeming stockholders were exchanging SPAC shares worth $10 each, “they could reasonably expect to receive equivalent value in return.” However, plaintiff alleged that net cash per share to be invested in the combined company was approximately $5.25 per share at the time the proxy was filed after accounting for “considerable dilution.”[2] The court reasoned that if the SPAC had less than $6 per share to contribute to the merger, the proxy’s statement that its shares were worth $10 each was false or at least materially misleading. The court concluded that “[b]ecause the Proxy allegedly misstated and obfuscated the net cash—and thus the value—underlying [the SPAC’s] shares, public stockholders could not make an informed choice about whether to redeem or invest.”

Separately, as a second category of disclosure violations, plaintiff alleged that defendants overstated the value of the target. Noting that this value would be highly relevant to the public stockholders’ investment decisions, the court concluded that the target’s “lofty projections were not counterbalanced by impartial information.” The court “inferred that the defendants knew (and should have disclosed) or should have known (but failed to investigate)” that the target’s production would be difficult to scale as predicted. Therefore, the court concluded that it was reasonably conceivable that the board deprived the public stockholders of an accurate portrayal of the target’s financial health, and consequently the public stockholders could not fairly decide whether it was preferable to redeem or invest.