January 13, 2022

M&A Agreements: When do Target Stockholders become Buyer Stockholders?

Last month, I blogged about Vice Chancellor Will’s decision in Swift v. Houston Wire & Cable, (Del. Ch; 12/21), which touched on the issue of when, under the terms of a merger agreement, a former target stockholder is no longer a “stockholder” for purposes of asserting a books & records claim.  Now, in Brown v. Matterport, (Del. Ch.; 1/22), she has addressed the issue of when a former shareholder of the target in a merger becomes a “stockholder” of the surviving entity.  This Jim Hamilton blog sets forth the factual background of the case:

William J. Brown was the CEO of Matterport Operating, LLC (Legacy Matterport), a privately held spatial data company, from November 2013 to December 2018. Brown received equity compensation in the form of stock options granting him the right to purchase 1,350,000 shares of Legacy Matterport. He also purchased 37,000 restricted shares in 2014. Brown exercised all his options on October 6, 2020.

In February 2021, Legacy Matterport agreed to a business combination with Gores Holding VI, Inc., a SPAC. In the proposed de-SPAC merger, Gores would be the surviving entity and would be renamed Matterport, and Legacy Matterport would become a wholly owned subsidiary of Matterport. In July 2021, Gores adopted bylaws in anticipation of the business combination, which imposed transfer restrictions on certain shares of Matterport Class A common stock, referred to as “Lockup Shares.” The transaction was completed and the bylaws became effective.

Brown filed a complaint contending that the share trading restrictions were adopted without his consent in violation of Section 202(b) of the Delaware General Corporation Law. He sought a declaration that the lockup shares provision was unenforceable as to his shares and that he could freely transfer his shares and/or conduct derivative trading without restriction. Brown also brought fiduciary claims against Legacy Matterport’s former directors. The court bifurcated the claims and held an expedited trial on the limited issue of whether Brown was bound by the transfer restrictions.

Vice Chancellor Will held that the plaintiff wasn’t bound by the transfer restrictions.  She noted that the bylaw’s language said that the restrictions applied to shares “held by the Lockup Holders immediately following the closing of the Business Combination Transaction.” The Vice Chancellor cited the language of Section 3.04 of the merger agreement, which provided that “[u]ntil surrendered . . . each share of [target stock] shall be deemed, from and after the Effective Time, to represent only the right to receive, upon such surrender, the Per Share Company Common Stock Consideration.”

Vice Chancellor Will went on to observe that the plaintiff did not complete the required paperwork and receive his shares until more than 100 after the closing.  As a result, she held that under the terms of the merger agreement, the plaintiff was not a shareholder of the target “immediately following” the closing, and that the bylaw restriction didn’t apply to him.

It’s important to keep in mind that the case addressed the application of a de-SPAC post-closing lockup akin to one found in a traditional IPO. When you do that, it becomes apparent that the Vice Chancellor’s opinion creates a practical problem that transaction planners are going to need to figure out a way to draft around. Ann Lipton summarized that problem on her Twitter feed:

So, under Will’s reading of the bylaw, whether the lockup applied or did not depended on the s’holder’s voluntary decision to submit their letter quickly or slowly – those that did so quickly were subject to the lockup, those that did so slowly were … not. That’s kind of nuts. It’s a 180-day lockup, but the theory is that you can shave 80 days off that by dragging your feet in requesting the transfer, and the choice is entirely up to the s’holder.  Would you like a 100-day lockup or a 180-day lockup? The choice is yours, depending on when you submit your letter.

Fortunately, in footnote 28 to her opinion, Vice Chancellor Will serves up a potential drafting solution to the problem the opinion creates:

Language in the bylaws of certain other post-de-SPAC corporations clearly restricts all shares issued to the targets’ stockholders. See the bylaws of 23andMe Holding Co., for example: “‘Lockup Shares’ means the shares of common stock received by the stockholders of the Corporation after the date of the adoption of these Bylaws as consideration in the [de-SPAC transaction].”

John Jenkins