Delaware Court Of Chancery Finds Transfer Restrictions On Stock Issued In Connection With A De-SPAC Merger Inapplicable To A Legacy Operating Company Stockholder Based On The Language Of The Relevant Bylaw
On January 10, 2022, Vice Chancellor Lori W. Will held that shares of defendant Matterport Inc. (“New Company”) issued to plaintiff in connection with the acquisition of Matterport Operating, LLC (“Legacy Company”) by a special purpose acquisition company (“SPAC”) in a “de-SPAC” merger were not subject to a transfer restriction in the New Company’s bylaws. As part of the transaction, Legacy Company stockholders, including plaintiff, were given the right to receive shares of the New Company. Prior to closing, the SPAC adopted a bylaw that restricted the transfer by such stockholders of shares “held . . . immediately following the closing” of the transaction. After a two-day trial, the Court found that plaintiff was not issued shares of the New Company until more than three months after the merger when he executed letters of transmittal to the transfer agent. Concluding that the “plain language” of the bylaw was “straightforward,” and that plaintiff had not held shares “immediately” following the merger, the Court granted declaratory relief in favor of plaintiff.
Plaintiff had sought a declaration that the bylaw was unenforceable as to his shares. Plaintiff also asserted claims for breaches of fiduciary duty and a declaratory judgment that the transfer restriction bylaw was invalidly adopted without his consent in violation of Section 202 of the Delaware General Corporation Law. The Court bifurcated the matter so that the question of whether the plaintiff was bound by the transfer restrictions could be resolved before they expired.
The Court noted that the bylaw became effective and the transaction closed on July 22, 2021. The bylaw purported to impose a lockup for 180 days after closing. According to the Court, Legacy Company stockholders “did not automatically become [New Company] stockholders” at closing, as New Company shares were to be issued by the transfer agent upon receipt of a letter of transmittal surrendering their Legacy Company shares. The Court noted that plaintiff did not receive shares until at least November 5, 2021, after he sent executed letters of transmittal to the transfer agent. The Court thus found that plaintiff “held only the right to receive” New Company shares at the time of closing.
The Court rejected defendants’ argument that plaintiff’s construction of the bylaw would “nullify” the transfer restrictions. The Court noted that some Legacy Company stockholders—who executed their letters of transmittal around the time of closing—would have received their shares within a few days of closing, and the application of the restriction “could be viewed as consistent with a plain reading of the bylaw.” The Court indicated it would not “rewrite” the bylaw and also noted that “[l]anguage in the bylaws of certain other post-de-SPAC corporations clearly restricts all shares issued to the targets’ stockholders.” Because the Court found the restrictions inapplicable to plaintiff, it did not reach the question of the validity of the bylaw in this phase of the litigation.