The Significance of Recent Delaware Court of Chancery SPAC Opinions
Highlighted below are several recent opinions from the Delaware Court of Chancery relating to special purpose acquisition companies (SPACs) that provide helpful guidance to sponsors, investors and practitioners. These cases are a good reminder that well-worn principles of Delaware law still apply in the SPAC context:
In In re Multiplan Corp. Stockholder Litigation, 2022 WL 24060 (Del. Ch. Jan. 3, 2022), the court, on a motion to dismiss (meaning that inferences are drawn in favor of the plaintiff and claim dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances), (i) held the entire fairness standard of review (the most onerous standard under Delaware law) applied to a de-SPAC transaction where SPAC fiduciaries (including the sponsor) allegedly suffered from inherent conflicts with public stockholders due to the economic benefit they received in the transaction and (ii) denied dismissal of stockholders’ fiduciary duty claims against those fiduciaries for allegedly making materially misleading disclosures that impaired the stockholders’ ability to make a fully informed decision whether to redeem their stock in connection with the transaction.
In Brown v. Matterport, Inc., 2022 WL 89568 (Del. Ch. Jan. 10, 2022), the court held that the plain terms of a lock-up provision in a SPAC’s bylaws rendered the lock-up inapplicable to certain of the post-closing stockholders since those stockholders did not receive their post-closing shares “immediately following” the merger transaction, as was required under the lock-up provision. Delaware courts will apply the literal text of a contract (e.g., bylaws) as opposed to what may have been the spirit of the agreement.
In In re Forum Mobile, Inc., 2022 WL 322013 (Del. Ch. Feb. 3, 2022), the court denied appointment of a custodian over a defunct Delaware corporation (whose shares retained a CUSIP number) where the petitioner intended to revive the corporation in order to access the public markets. Delaware has a long-standing policy against permitting entrepreneurs to manipulate Delaware law for the purposes of reviving defunct Delaware entities with still-extant listings and using them as vehicles to access the public markets.
IN RE MULTIPLAN CORP. STOCKHOLDER LITIGATION
In this case, the SPAC’s initial public stockholders alleged that the SPAC’s sponsor and directors (who were not fully independent of each other and may have been motivated by financial incentives not shared with public stockholders, i.e., founder shares that provided a substantial return only if a business combination transaction closed within 24 months of the SPAC’s initial public offering (IPO)) breached their fiduciary duties by making materially misleading statements or omissions in the SPAC’s proxy statement which robbed the public stockholders’ of their right to make a fully informed decision whether to redeem their shares prior to the transaction.
The SPAC chose MultiPlan Corp. (MultiPlan) as its merger target. The proxy statement informed stockholders of the inherent conflicts of the SPAC’s fiduciaries and informed the stockholders about their ability to redeem their shares, and the stockholders overwhelmingly approved the transaction. Following the merger, it was reported that MultiPlan’s largest customer would be forming a competitor—this was not disclosed in the proxy statement—which resulted in a decline in MultiPlan’s share value and ensuing stockholder litigation.
The court held, on a motion to dismiss, that it was reasonably conceivable that the de-SPAC transaction was subject to the entire fairness standard of review (as opposed to director-friendly business judgment rule) since the sponsor (which held founder shares, a unique economic benefit not shared by the public stockholders) and directors (whose economic interest in, and relationship to, the sponsor rendered them not disinterested and independent) were allegedly conflicted, i.e., the terms of the SPAC incentivized the sponsor and directors to make a bad deal versus no deal at all.
These inherent conflicts allegedly led the fiduciaries to discourage stockholder redemptions even when faced with a value-decreasing deal and, as a result of these conflicts, the sponsor and the directors interfered with the public stockholders’ individual redemption rights by making materially misleading disclosures that impaired the stockholders’ ability to make an informed decision.
The court highlighted that it not addressing “the validity of a hypothetical claim where the disclosure is adequate and the allegations rest solely on the premise that fiduciaries were necessarily interested given the SPAC’s structure,” and also noted that “if public stockholders, in possession of all material information about the target, had chosen to invest rather than redeem, one can imagine a different outcome.”
Takeaway: This decision is a reminder that principles of Delaware law continue to apply in the SPAC context. Key points to remember are that (i) SPAC sponsors (and the directors they appoint) that receive a unique benefit from a de-SPAC transaction, which is not shared by other stockholders, will likely be subject to an entire fairness review, (ii) stockholder redemption rights in a de-SPAC transaction are individual to the stockholder, thus making their claims direct (as opposed to derivative, on behalf of the company) and avoiding the requirement of first having to make a litigation demand upon the board or prove demand futility as a result of a conflicted board, and (iii) whenever stockholders are being asked by the board to take an action (such as a vote), the board has the duty to fully disclose all material information. This case may give stockholders a roadmap to bring fiduciary claims in connection with de-SPAC transactions, but it is also helpful guidance to SPAC sponsors and directors of the need for robust and accurate disclosures regarding the de-SPAC transaction and the SPAC target’s business in order to minimize litigation risk.
BROWN V. MATTERPORT, INC., IN RE FORUM MOBILE, INC.
In this decision, the Delaware Court of Chancery addressed the effectiveness of transfer restrictions (lock-up) imposed on stockholders pursuant to bylaws adopted following the closing of a business combination transaction between a SPAC (the survivor of the business combination, renamed Matterport, Inc. (Matterport)) and Matterport Operating, LLC (Legacy Matterport), in which the SPAC acquired Legacy Matterport and equityholders of Legacy Matterport had the right to receive Matterport stock as consideration.
As a result of the business combination, Legacy Matterport stockholders had the right to receive Matterport shares only after they submitted a letter of transmittal. The Matterport bylaws provided that holders of shares of Matterport common stock issued (i) as consideration for the SPAC business combination or (ii) to directors, officers and employees upon the settlement or exercise of restricted stock units, options or other equity awards outstanding immediately following the closing of the business combination transaction in respect of awards of Legacy Matterport stock outstanding immediately prior to the closing of the business combination transaction were not permitted to transfer any of these “Lockup Shares” for 180 days following the closing.
The plaintiff only received his Matterport shares when he submitted letters of transmittal, more than 100 days after the closing, and therefore he argued that he did not hold Lockup Shares (and was not subject to the lock-up) since he did not hold Matterport shares “immediately following” the transaction. The court agreed with the plaintiff, holding that the plain terms of the bylaws provided that the lock-up only applied to holders of Matterport shares “immediately following” the closing and that, as a matter of law, a period of 100 days was not “immediately following” the closing.
Takeaway: Delaware courts apply the objective theory of contract interpretation to bylaws provisions and will give plain and unambiguous terms their commonly accepted meaning unless the context clearly requires a different one or legal phrases having a special meaning are used. Even though the lock-up provision in this case was likely intended to cover the plaintiff, the literal terms of the bylaws did not in fact accomplish this intent in light of the facts. SPAC sponsors are advised to use precise language when drafting contract terms, including bylaws, and should carefully consider how the mechanics of the proposed transaction may impact deal terms contained in such contracts.
IN RE FORUM MOBILE, INC.
Synergy Management Group LLC (Synergy) petitioned the court to have a custodian appointed for Forum Mobile, Inc. (Forum), a defunct Delaware corporation (whose shares continued to have a CUSIP number allowing them to trade over the counter), pursuant to Section 226(a)(3) of the Delaware General Corporation Law (the DGCL). Section 226(a)(3) of the DGCL provides that any stockholder may petition the court to have a custodian appointed for any corporation that has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. Synergy desired to have the custodian revive Forum in order to use it as a blank-check company to access public markets.
Since 2002, the Delaware courts have maintained a public policy against permitting entrepreneurs to use Delaware law to revive defunct Delaware entities with public listings in order to access the public markets and evade federal securities laws. The court observed that much has changed since the announcement of that policy and, therefore, the court sought guidance from the Securities and Exchange Commission (SEC) on its position with respect to Synergy’s attempt to use Delaware law to circumvent the federal securities regulatory regime. The SEC took no position on the matter (when it easily could have) but did detail the existing protections for public stockholders under the federal securities laws. The court interpreted the SEC’s decision not to take a position as meaning that Delaware’s public policy could not, in this case, provide a basis for denying Synergy’s petition.
The court ultimately denied Synergy’s petition on the basis that Section 226 of the DGCL limits the authority of a custodian to wind up the affairs of the corporation and terminate its existence, and not to revive a corporation.
Takeaway: While the court based its decision on the application of the provisions of the DGCL allowing for custodianship of an abandoned Delaware corporation (i.e., the custodian’s only power is to wind up and terminate), and not public policy, the court signaled that it is still unwilling to permit parties to utilize Delaware law to circumvent federal securities laws.