March 28, 2022

SPACs: Delaware Looks to Weigh-in Again

It has been a little surprising that nearly three years into the SPAC boom, Delaware has only weighed-in on the corporate law issues surrounding SPACs on one occasion.  However, this memo (p. 3) by Hunton Andrews Kurth’s Steve Haas says that a recent decision by the Delaware Chancery Court not to stay an action in the face of parallel federal securities litigation suggests that it is looking for an opportunity to say more about SPACs.  Here’s an excerpt:

The Delaware Court of Chancery recently denied a motion to stay a lawsuit challenging a de-SPAC transaction wherethe defendants asked the court to wait for the outcome in a related federal securities action. Although the decision to allow state law claims to proceed alongside a related federal action is not itself extraordinary, the court’s commentary signals the Delaware judiciary’s desire to weigh in on SPACs. Among the factors negating a stay, according to the court, were the “emerging” and “novel issues of Delaware law” implicated by SPAC transactions.

In In re Lordstown Motors Corp. S’holders Litig., C.A. No. 2021-1066-LWW (Del. Ch. Mar. 7, 2022), the state law plaintiffs purportedly represent the SPAC stockholders who did not exercise their redemption rights in the de-SPAC transaction. They alleged injury from inadequate disclosures and conflicts of interest driving the transaction. In contrast, the federal securities action involves a broader class of securities holders spanning before and after the de-SPAC transaction and alleging that the company artificially inflated its stock price through misleading disclosures about the acquired company’s electric vehicle business.

While acknowledging some overlap, the court held that the actions involved different plaintiffs, defendants, and remedies. But more importantly, the court focused on Delaware’s need to address SPACs, stating that “[t]his court’s essential role of providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”

John Jenkins