August 9, 2021

Shareholders Agreements: De-SPACs v. IPOs

It’s fairly standard for shareholders agreements to include a “lockup” provision obligating a shareholder to refrain from selling shares for a period of time following an initial public offering of the company’s shares. Other rights and obligations under these contracts are sometimes triggered by an initial public offering as well.  But what happens when the initial public offering isn’t a traditional IPO, but a de-SPAC merger?

There are a couple of interesting pieces of litigation rattling around in Delaware that address interpretive issues about whether contractual provisions designed to address a traditional IPO also cover a de-SPAC. This excerpt from a recent blog by Ann Lipton explains what’s at issue in the two cases:

In two cases pending in Delaware Chancery, investors in private companies slated for a SPAC merger are arguing that their shareholder agreements impose certain obligations on them in the event of a traditional IPO, but impose no obligations in the event that a company goes public via SPAC.

In the first, Brown v. Matterport et al., 2021-0595, the plaintiff is the former CEO.  He claims that he agreed to a lockup for his shares in the event of an underwritten IPO, but that no such restriction attaches for a de-SPAC transaction – and that Matterport is improperly trying to bind him to a lockup via the merged company’s bylaws.

In the second, Pine Brook Capital Partners v. Better Holdco et al., 2021-0649, a venture capital firm claims that its shareholder agreement only gives the company redemption rights for some of its shares in the event of an underwritten IPO – not a de-SPAC transaction.  (The firm also claims that the company is improperly requiring that larger shareholders – including itself – agree to a lockup as a condition to receiving merger consideration; the complaint does not specify whether its shareholder agreement provides for a lockup in the event of an IPO.)

Ann’s blog points out that the shareholders agreements at issue were entered into before the SPAC market exploded, and their language didn’t specifically address the possibility of going public via a de-SPAC deal.  That means it’s time for the Chancery Court to put on its thinking cap.

John Jenkins