November 20, 2024
Controllers: Del. Chancery Refuses to Dismiss Fiduciary Duty Claims Against SPAC Sponsor
Last month, in Solak v. Mountain Crest Capital, (Del. Ch.; 10/24), the Chancery Court refused to dismiss fiduciary duty claims against a SPAC sponsor and other insiders arising out of alleged misrepresentations concerning the value of the SPAC’s shares in a de-SPAC proxy statement. This excerpt from an A&O Shearman blog on the case notes that Vice Chancellor Glasscock allowed the plaintiff to cast a wide net when it came to identifying potential controlling stockholders:
Although two defendants held in the aggregate 20% of the SPAC’s shares, the Court nevertheless inferred that they were controllers because they were the sole members of the SPAC sponsor, which plaintiff alleged generally controlled all aspects of the entity from creation to merger. The Court also inferred that three additional individual defendants were controlled by the two controllers because they expected to be considered for directorships in future SPACs and because they were granted 2,000 founder shares.
While these shares only represented $20,000 (an arguably nominal amount for these defendants), the shares would be completely worthless if the SPAC did not reach a merger deal. The Court inferred that the controllers and directors engaged in a conflicted transaction, triggering entire fairness review, because defendants had a financial interest in effectuating any merger, regardless of its value. The Court also credited plaintiff’s theory that defendants competed with the common stockholders for value in the transaction.
The plaintiff challenged statements in the proxy to the effect that the de-SPAC merger had a value of $10 per share. He argued that the pre-merger net cash value per share was only $7.50 and that by failing to disclose the actual net cash per share being put into the merger, the proxy statement’s claims about the value of the merger were misleading. Although Vice Chancellor Glasscock didn’t think that the plaintiff’s allegations were strong, he ultimately concluded that the plaintiff “barely” satisfied the pleading standard for its breach of fiduciary duty of loyalty and unjust enrichment claims.
– John Jenkins