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  • Applying Entire Fairness, Delaware Court of Chancery Sustains Class Action Claims for Breaches of Fiduciary Duties Arising from Alleged Omissions in SPAC Merger Proxy

    On March 1, 2023, Vice Chancellor Lori Will of the Delaware Court of Chancery declined to dismiss a putative class action brought by stockholders of special purpose acquisition company (or “SPAC”) GigCapital2, Inc. (“Gig2”) against Gig2’s controlling stockholder and directors, asserting that they breached their fiduciary duties in connection with Gig2’s acquisition of UpHealth Holdings, Inc. and Cloudbreak Health, LLC in a so-called “de-SPAC” merger. Laidlaw v. Gigacquisitions2, LLC, et. al., C.A. No. 2021-0821-LWW (Del. Ct. Ch. Mar. 1, 2023) (“Gigacquisitions2”). Plaintiffs alleged that defendants issued a false and misleading merger proxy to obtain approval of a value-destructive de-SPAC transaction and thereby enrich themselves through their unique ownership interests. Defendants moved to dismiss, arguing that (i) plaintiffs’ claims were derivative (alleging harm to the company rather to individual stockholders) but plaintiffs failed to make a demand or plead demand futility, and (ii) the business judgment rule applied. The Court held that plaintiffs’ claims were direct, not derivative, and that entire fairness—Delaware law’s most stringent standard of review—applied because inherent conflicts of interest existed between defendants and Gig2’s public stockholders.
  • Delaware Court Of Chancery Validates SPAC Charter Amendment Called Into Question By A Recent Decision

    On February 21, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted the petition of Lordstown Motors Corporation (the “Company”) under Section 205 of the Delaware General Corporation Law (“DGCL”) to validate and declare effective the Company’s certificate of incorporation as amended in connection with a “de-SPAC” merger more than two years ago.  In Re Lordstown Motors Corp., C.A. 2023-0083-LWW (Del. Ch. Feb. 21, 2023).  In advance of the merger, the Company—then a special purpose acquisition company (“SPAC”)—adopted the amendment to increase the number of authorized Class A common shares, which were subsequently issued in connection with the merger.  The Company requested validation from the Court after the approval of the amendment—by a majority of Class A and Class B shares voting together rather than a vote exclusively by the Class A stock—was called into question by a recent decision related to another SPAC.  Because a “significant number of SPACs” had similar provisions and followed a similar process, that decision, Garfield v. Boxed, Inc., No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022)—discussed in a prior post—resulted in “pervasive uncertainty” regarding their capital structures and the validity of their stock.  Granting the petition, the Court concluded that validation of the charter amendment would be “just and equitable.”  The Court added that its decision “should prove instructive to other companies seeking the court’s assistance to validate similar corporate acts.”
  • Delaware Court Of Chancery Finds Personal Jurisdiction Over LLC “Acting Manager” In Post-Closing Investor Action Challenging Merger With SPAC

    On October 26, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss for lack of personal jurisdiction claims of tortious interference asserted against a principal of a private equity fund (the “Fund”), which had been the majority investor of a limited liability company (the “LLC”).  In re P3 Health Grp. Holdings, LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022).  Plaintiff — which had been the second largest investor in the LLC — alleged that defendant tortiously interfered with its contractual rights under the limited liability company agreement in connection with the merger of the LLC with a special purpose acquisition company (“SPAC”).  The Court concluded that the complaint adequately alleged that defendant “participated materially in the management” of the LLC such that he “can be served [process] as an acting manager” and that the “exercise of personal jurisdiction over [defendant] comports with … due process.”
    CATEGORIES : Corporate GovernanceSPACs
  • Delaware Court Of Chancery Rejects Motion To Stay SPAC Breach Of Fiduciary Duty Suit Pending Parallel Federal Securities Action

    On March 7, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to stay a putative class action brought by legacy stockholders of DiamondPeak Holding Corp., a special purpose acquisition company (“SPAC”), alleging that its directors and controlling stockholders breached their fiduciary duties in connection with the SPAC’s acquisition of Lordstown Motors Corp. (“Legacy LMC”).  In re Lordstown Motors Corp. Stockholders Litigation, CA. No. 2021-1066-LWW (Del. Ch. March 10, 2022) (the “Delaware Action”).  Plaintiffs alleged that  defendant directors failed to disclose certain information about Legacy LMC’s business and that the SPAC’s controlling stockholders pursued the acquisition to advance their own interests to the detriment of minority stockholders.  Defendants argued that the Delaware Action should be stayed pending resolution of an earlier-filed securities class action (the “Securities Action”) in the United States District Court for the Northern District of Ohio.  The Court declined to grant the stay, reasoning that application of Delaware fiduciary duty law to SPACs “raises emerging issues” and that the Court’s “essential role in providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”
    CATEGORIES : Fiduciary DutiesSPACs