April 27, 2021

De-SPACs: Fiduciary Duties

This Sidley blog takes a hard look at director & controlling stockholder fiduciary duties in the context of a de-SPAC transaction. I haven’t seen much written about this topic when it comes to SPACs, but it’s one that may become more central as litigation over de-SPAC transactions plays out in Delaware and other courts.  The memo says that the fiduciary issues for the SPAC itself aren’t necessarily all that interesting, but this excerpt says that that’s not the case with the target:

In some instances, the SPAC target may be a company in which there is already a controlling shareholder, such as a private equity firm, or an affiliated group comprised of founders and early investors.  As such, Revlon as such would not normally apply, since the non-controlling target shareholders are not entitled to a control premium, and the transaction does not result in a “change of control” from that perspective.

Moreover, on both the SPAC and target side, stockholders will receive a stake in the resulting, publicly traded company, and so the concern about “end stage” situations discussed above has less force.  Nevertheless, the Delaware courts have scrutinized transactions in which a control group sells to an unaffiliated third party, particularly where the control block receives “differential consideration.”

In that situation, courts have applied the so-called “entire fairness” doctrine, requiring the seller to establish both a fair process and a fair price, unless there are procedural steps, including the delegation of the decision to an independent special committee of the board, a non-waivable requirement for approval by a majority of the disinterested and fully informed stockholders, and the absence of threats or coercion.  See, e.g., In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, (Del. Ch. Aug. 18, 2017); In re John Q. Hammons Hotels Inc. Shareholder Litigation, at *10 (Del. Ch. Oct. 2, 2009).  And the recent Presidio case suggests that a court may apply enhanced scrutiny even where the controller receives the same consideration as other shareholders.

The blog acknowledges that no de-SPAC transaction has been challenged on these grounds, and that it’s uncommon for SPAC targets to establish the MFW-type procedural protections often used to avoid entire fairness review in other contexts.  The blog also acknowledges that most SPAC targets don’t have the kind of widely-dispersed unaffiliated shareholder base where these claims are likely to be asserted, but says that advisors should be alert to the possibility of these claims.

John Jenkins