DealLawyers.com Blog

December 10, 2021

SPAC M&A Litigation: Recent Filings Highlight Alleged Process Failures

This Sidley blog highlights a pair of recent Delaware lawsuits challenging de-SPAC mergers. The blog notes that as with prior SPAC-related M&A lawsuits, conflicts of interest, process shortcomings & due diligence failings feature prominently in plaintiffs’ allegations.  This excerpt summarizes one recent filing:

In Yu v. RMG Sponsor, LLC, filed in the Court of Chancery on October 28, 2021, the plaintiff brought a class action complaint against a SPAC sponsor and certain of its officers and directors (but not the post-de-SPAC combined company, Romeo Power, Inc.).  The complaint alleges that the board of directors of the SPAC, RMG Acquisition Corp. (“RMG”), breached fiduciary duties to its stockholders by “knowingly and consciously failing to perform due diligence about Legacy Romeo’s business prospects or disloyally ignor[ing] such facts to benefit themselves to the detriment of RMG’s minority stockholders.”

Particularly, Romeo was experiencing a shortage of high-quality battery cells, which was a core material for its main products.  While the pre-merger disclosures stated that Romeo had a relationship with four power-cell providers, the plaintiff alleges that in reality it only had a relationship with two.  Three months after the merger, Romeo issued a press release revealing serious supply chain issues and estimating the company’s revenue projections at $18–$40 million for 2021, a notable departure from the $140 million that RMG had projected in various pre-merger disclosures filed with the SEC.  The complaint also alleges that pre-merger disclosures contained misleading statements and material omissions which impacted RMG’s stockholders’ decision whether to redeem their shares prior to the merger.

In addition to claims for breach of fiduciary duty, the plaintiff also asserts an unjust enrichment claim against the sponsor and certain individual defendants.  The unjust enrichment claim underscores SPAC plaintiffs’ oft-repeated concerns regarding the possible conflict of interest that exists between the SPAC founders’ significant financial gain in the event of a successful transaction and the best interest of the stockholders.

The blog says that these recent lawsuits once again highlight the need for SPAC sponsors to conduct extensive due diligence & mitigate conflicts by including independent directors in the approval process. They also provide a reminder of the critical importance of issuing accurate and clear disclosures to stockholders prior to any vote on the transaction.  The inclusion of the unjust enrichment claim in the RMG lawsuit also demonstrates that plaintiffs are exploring new theories of liability targeting SPAC sponsors and their affiliates.

John Jenkins