DealLawyers.com Blog

October 28, 2021

SPACs: Fitting Square Pegs into Corporate Law’s Round Holes

Over on “The Business Law Prof Blog,” Ann Lipton has an interesting post on how difficult it is to transpose the ordinary corporate law concepts that have guided M&A lawyers into the SPAC arena.  The blog uses the lawsuit involving the de-SPAC deal between GigCapital 3 & Lightning Systems to illustrate these problems. That lawsuit is premised on allegations that the deal was bad for the SPAC investors, and was rushed through in order to beat the deal deadline. This excerpt addresses the problem of applying Delaware’s Corwin doctrine to SPAC votes:

As I previously posted, one problem in this context is that there’s so little shareholder voting in SPACs that some SPACs have resorted asking people who already sold their shares to vote in favor of the merger.  But the other more fundamental issue is that you can vote in favor of the merger and still redeem your shares.  And shareholders do this, because many shareholders also hold warrants to buy shares in the combined company; those warrants are worthless without a merger, but probably worth something even in a bad merger.

This is one of the problems that Usha R. Rodrigues and Michael Stegemoller identify in the paper I highlighted a few weeks ago; they call it empty voting.

Given that, SPAC shareholders, on the whole, should actually prefer a bad deal over liquidation, if those are the only two choices.  Of course, as we know from Revlon and the note holders, the board could not and should not have worried about the warrant holders as warrant holders, even if some warrant holders were also shareholders, so saving the warrant holders could not legitimately be part of the board’s decisionmaking when it agreed to the deal.  But the SPAC shareholders may be thinking about their warrants, which means a vote in favor of the deal is meaningless; shareholders should either prefer a bad merger, or be rationally indifferent as between bad merger or liquidation.

And what that means is, it’s very hard to take the shareholder vote as some kind of Corwin ratification of the deal or the board’s conduct when it comes to SPACs; shareholders have an incentive to vote in favor if it’s a good deal, and they have an incentive to vote in favor if it’s a bad one.  Even if they think it’s bad, they have no incentive to vote no because they can redeem.  Corwin just doesn’t have the same role to play.

SPAC litigation is clearly a growth industry, so sorting out this mess is going to be a lot of fun for the courts – and litigators – that are called upon to do it.

John Jenkins