SPACs Take Center Stage In Delaware
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In the first few weeks of 2022, the Delaware Chancery Court has
delivered its first three opinions on Special Purpose Acquisition
Companies (SPACs). A SPAC is a publicly traded company that raises
money through an IPO in order to merge with a private company to
take the private company public – a so-called “de-SPAC
transaction.” SPACs have a management group called sponsors,
but no operations. Typically, its only assets are IPO proceeds.
SPACs must combine with a private company within a narrow window
(usually two or three years) or risk liquidating and returning IPO
proceeds to investors.
SPACs surged in 2019, with 59 IPOs raising $13.6 billion. In
2020, 248 SPAC IPOs raised $83.4 billion. Observers anticipate most
of those SPACs must merge or liquidate by the first quarter of
2023. Based on the amount of money at stake and the number of
de-SPACs on the horizon, the Delaware courts will likely stay busy
well into 2024. SPAC decisions in the first few weeks of 2022 are
In a detailed, 61-page decision, Vice Chancellor Will had the
first “opportunity to consider the application of our law in
the SPAC context.” Plaintiffs alleged the SPAC sponsors
withheld material information about the target-company’s
largest customer. The court ultimately denied the
SPAC-sponsor’s motion to dismiss, rejecting arguments that
plaintiffs’ claims were derivative claims requiring a demand.
Instead, the court concluded that plaintiffs pleaded direct claims
against the sponsors for fiduciary duty breaches. The court
reasoned, plaintiffs “are suing because the defendants,
purportedly for self-serving purposes, induced Class A stockholders
to forgo the opportunity to convert their . . . shares into a
guaranteed $10.04 per share in favor of investing in” the new
public company. The court also determined the entire fairness
standard of review applied due to inherent conflicts between SPAC
sponsors and stockholders.
SPAC adopted trading restrictions following a de-SPAC
transaction, which precluded the transfer of certain shares for 180
days following the merger. The target private company’s CEO
held various options to receive shares in the new public company,
which he had previously received as stock options and bonuses
during his tenure. The CEO sued, claiming his shares were not
subject to the trading restrictions. The court agreed, finding that
the CEO “held only the right to receive [the public
company’s] Class A common shares,” and concluded the
CEO’s shares were not subject to a lock-up.
A sponsor sought to have its president appointed custodian of a
defunct Delaware corporation. While defunct, the company’s
shares had a CUSIP number, which allowed them to trade over the
counter. Sponsor sought to revive the defunct company as a SPAC (or
blank check company) in order to access the public markets through
a reverse merger. The Court rejected sponsor’s request. It
ruled the Delaware General Corporation Law does not authorize the
appointment of a custodian to revive an entity that has abandoned
its business. It held that the power of “a custodian appointed
under Section 226(a)(3) . . . is limited to liquidating the affairs
of the abandoned corporation and distributing its assets.” The
court concluded that “[u]nder the plain language of Section
226(b), [sponsor] cannot use a custodian appointed under Section
226(a)(3) to revive [the defunct company] and use the entity as a
blank check company.”
- These decisions are the tip of the SPAC iceberg in Delaware.
Challengers to de-SPAC transactions are three-for-three so far.
Given the volume of de-SPAC transactions likely over the next 12-16
months, the Courts will have ample opportunity to build upon these
nascent SPAC-related decisions.
- The Multiplan decision emphasizes that
traditional aspects of Delaware Corporate Law will continue to
apply to de-SPAC transactions while also recognizing the inherent
conflicts present between sponsors and investors.
- Sponsors would be wise to follow an old legal axiom: “No
one ever got in trouble for giving too much notice.” Sponsors
should double-down on disclosure requirements and ensure all
material information is provided to investors.
In the Forum Mobile case, the Chancery Court
engaged court-appointed amicus for assistance and solicited the
SEC’s opinion on the transaction’s validity. The courts are
fittingly writing on a blank slate when it comes to blank check
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