Picking up where she left off with her decision in the Multiplan case almost exactly one year ago, Vice Chancellor Will last week declined to dismiss breach of fiduciary duty claims against the board and sponsors of a SPAC arising out of a de-SPAC merger, and held that the transaction should be evaluated under the entire fairness standard.
In Delman v. GigAcquisitions3 LLC (Del. Ch.; 1/23), the plaintiff alleged that the SPAC’s and sponsor breached their fiduciary duties by causing the SPAC to enter into a value decreasing acquisition of Lightning eMotors, a manufacturer of electronic vehicles. In support of his claims, the plaintiff pointed to alleged disclosure shortcomings in the proxy statement by which Gig3 sought to obtain stockholder approval of the deal. In response, the defendants moved to dismiss.
After rejecting the defendants’ contentions that the plaintiff’s claims – which were premised on his reliance on the challenged disclosures to refrain from exercising his redemption rights – were derivative in nature or represented nonactionable “holder” claims, the Vice Chancellor addressed the substance of the fiduciary duty claims. This excerpt from Sullivan & Cromwell’s memo on the decision reviews the Vice Chancellor’s approach to those claims:
In denying defendants’ motion to dismiss, the Court held that the SPAC sponsor’s “interests diverged from public stockholders in the choice between a bad deal and a liquidation” by virtue of the sponsor’s founders’ shares which it purchased for nominal consideration and could not redeem for $10.00 per share, unlike the shares held by the SPAC’s public stockholders. If the sponsor failed to complete a transaction and the SPAC was liquidated, the sponsor’s shares would be worthless, while the public stockholders “would receive their investment plus interest from the trust in a liquidation.”
According to the Court, this typical SPAC structure created a “unique benefit” for the sponsor “in the choice between a bad deal and a liquidation” that was not shared by the public stockholders. Although the Gig3 directors, unlike the MultiPlan directors, were compensated for their services in cash, and the Court found the Gig3 directors lacked any self-interest in the de-SPAC transaction, the Court nonetheless held that at least a majority of the directors lacked independence due to their “close ties” to the SPAC sponsor and his “enterprise of entities.”
The Vice Chancellor therefore concluded that the transaction should be evaluated under the entire fairness standard. Furthermore, she concluded that even if there was no defect in the proxy statement’s disclosure, Corwinwould be unavailable to cleanse the transaction. As the Sullivan & Cromwell memo explains, that conclusion again resulted from conflicts inherent in the typical SPAC structure:
According to the Court, the public stockholders’ vote on the de-SPAC transaction does not reflect their “collective economic preferences” because the “public stockholders could simultaneously divest themselves of an interest in” the SPAC’s target by redeeming their shares, while still voting in favor of the transaction.
Further, the Court reasoned that “redeeming stockholders remained incentivized to vote in favor of a deal—regardless of its merits—to preserve the value of the warrants” they received as part of their purchase of the SPAC’s “IPO units.” These IPO units consisted of one share of common stock and three-quarters of a warrant to purchase a share of common stock at an exercise price of $11.50 per share. If the de-SPAC transaction failed and the SPAC liquidated, the warrants would expire worthless.
Vice Chancellor Will’s decision reinforces her earlier decision in Multiplan and strongly suggests that SPAC sponsors & boards are going to find it very hard to avoid entire fairness scrutiny in the event that their actions in connection with a de-SPAC transaction are challenged by disappointed stockholders.
One of the questions raised by the 1% excise tax on stock repurchases by the Inflation Reduction Act was how it would apply to SPAC redemptions. The IRS recently issued Notice 2023-2, which provides initial guidance on the application of the excise tax, and this excerpt from a Ropes & Grey memo says that the IRS’s guidance answers some important questions about the treatment of SPAC redemptions:
Following the enactment of the Excise Tax, there was legal and market uncertainty regarding whether the Excise Tax would apply to SPAC redemptions, and notably whether the Excise Tax might apply to SPAC liquidations, as well as who would economically bear the cost of the Excise Tax. In reaction, many SPACs whose term would have expired in early 2023 opted to accelerate their liquidation into 2022, or opted to seek an extension during 2022 so that the redemptions associated with the extension process would occur during 2022. However, uncertainty remained for SPAC sponsors and shareholders regarding liquidations that may occur after 2022, including who would bear the incidence of the Excise Tax if it reduced the amount available to be redeemed from the trust account or otherwise available to the combined company following a de-SPAC.
Significantly, the Notice clarifies that the Excise Tax will not apply to complete corporate liquidations within the meaning of Section 331. There is reason to believe that this exception is intended to apply to the wind up of a SPAC. Nonetheless, it may be unclear whether the wind up of a SPAC would constitute a liquidation under Section 331 without careful attention to planning with respect to the liquidation. In general, the Notice also helpfully provides protection for de-SPAC transactions to the extent shares issued by the SPAC during the year exceed repurchases otherwise subject to the Excise Tax.
The memo discusses the guidance’s application to SPAC liquidations, extensions, de-SPAC transactions and valuation issues associated with redemptions. It notes that although some open questions remain regarding the treatment of other repurchases by a SPAC, including redemptions in connection with an extension, the Notice overall provides helpful guidance for SPACs.
Liz’s change in status has prompted us to rethink how we email our blogs to you each morning. At the end of the month, we’re going to change over from our current practice of having our blogs come from the email address of one of our editors. Going forward, all of our blogs will be sent from Editorial@TheCorporateCounsel.net. Our objective is to establish a sender address that won’t need to be changed every time there’s a change on the editorial masthead, which hopefully means that this will be the last time we have to ask you to take the time to whitelist our email addresses.
We know that whitelisting is kind of a pain in the neck, so we’ve put together this whitelisting instruction page to help you and your IT department understand what actions you may need to take in order to ensure there’s no disruption in delivery. We’re going to begin to send blogs from the Editorial@TheCorporateCounsel.net address over the course of the next several weeks, so please be sure to whitelist the new address at your earliest convenience. We’re going to do this incrementally across our sites, and we’ll keep you apprised of when we plan to make the change for a specific site.
There are a couple of things that I also want to mention about this change. First, the name of the author of a blog will always appear in the email, so if you want to respond to the author, you can just click on the author’s name and their email address will pop up. Second, Editorial@TheCorporateCounsel.net isn’t a black hole. If you hit reply, your message will go to a folder that I’ll have access to. I’ll check that every few days and forward your email to the appropriate editor. Finally, thanks for your patience and cooperation.
The SPAC industry received an unwelcome present on Christmas Day when the WSJ announced that the party was officially over:
During the boom in blank-check companies, their creators couldn’t launch them fast enough. Now they are rushing to liquidate their creations before the end of the year, marking an ugly conclusion to the SPAC frenzy.
With few prospects for deals soon and a surprise tax bill looming next year, special-purpose acquisition companies are closing at a rate of about four a day this month, nearly the same pace they were being launched when the sector peaked early last year.
Roughly 70 special-purpose acquisition companies have liquidated and returned money to investors since the start of December. That is more than the total number of SPAC liquidations in the market’s history, according to data provider SPAC Research. SPAC creators have lost more than $600 million on liquidations this month and more than $1.1 billion this year, the data show.
The Journal says that many more SPACs had announced plans to liquidate by the end of 2022, and that one reason for the rush to get those done was the impact of the 1% excise tax on buybacks that became effective on January 1, 2023.
This recent article from “Mergers & Acquisitions” says that small deals outperformed the overall M&A market in 2022 and are poised to do so again next year. This excerpt explains some of the reasons for that:
M&A for small companies worth between $100 million and 500 million increased by 27 percent in 2022 compared to pre-pandemic levels (2015-2019), according to data published by EY. That’s a noteworthy trend in a year that has seen anemic deal flow.
The EY team believes this trend is sustainable. “We expect to continue to see this strong flow of smaller deals throughout 2023, as CEOs remain cautious as a result of ongoing geopolitical tensions and heightened uncertainty,” says Andrea Guerzoni, EY’s global vice chair of strategy and transactions. “Deal financing challenges on the back of higher interest rates, increased costs of financing, and regulatory scrutiny will also make smaller deals more attractive.”
Tech CEOs are particularly keen on small deals heading into 2023. A recent EY report found that 72 percent of tech CEOs plan to pursue M&A in the next 12 months, compared to an average of 59 percent across all sectors. A significant correction in tech valuations could be the reason for this. CEOs with ample liquidity and cash could use this correction to consolidate their position in the market.
Another reason that smaller deals may continue to prosper that the article doesn’t touch on is that under current market and financing conditions, PE buyers have shown a preference for smaller “bolt-on” deals for their existing portfolio companies rather than large platform acquisitions.
This White & Case memo reports that the Consolidated Appropriations Act that Congress passed just before Christmas includes some big changes for HSR filing fees. Here’s the intro:
Filing fees under the Hart-Scott-Rodino (HSR) Act have not been altered for 20 years, but that is about to change, and dramatically in 2023. President Biden is expected to sign into law the Consolidated Appropriations Act, 2023, which includes the Merger Filing Fee Modernization Act of 2022 (“Merger Filing Fee Modernization Act”).
The Merger Filing Fee Modernization Act, among other changes, will increase HSR filing fees for many transactions, with US filing fees reaching $2.25 million for any transaction with a value of $5 billion or more. This is a substantial bump over the highest merger filing fee now ($280,000) and will increase resources for the US antitrust agencies to pursue their aggressive enforcement agendas.
While the filing fees for big deals are going to skyrocket, fees for deals at the lower end of the HSR reporting range will actually decline. For example, the filing fee for a deal that’s valued at less than $161.5 million will decline from $45,000 to $30,000, the fee for a deal that’s valued at less than $500 million will decline from $125,000 to $100,000, and the fee for a deal that’s valued at less than $1 billion will decline from $280,000 to $250,000. Once a deal crosses the $1 billion threshold, the fee increases start to kick in.
This recent memo from Goodwin’s Sean Donahue takes a look at some of the lessons learned from the first proxy contest conducted after the effective date for the universal proxy rules. The contest pitted activist investor Land & Buildings against Apartment Invesment and Management. L&B nominated two directors, and one was elected to the Aimco board. Sean points out that ISS’s recommendation that shareholders vote for one of L&B’s two nominees may have played a significant role in the outcome – that candidate received twice as many votes as the company’s nominee.
Many have predicted that proxy advisors will become more influential under the new regime, so it wouldn’t be surprising if ISS’s recommendation proved decisive. But not everything went as observers may have expected. For instance, many have predicted that it may be possible to conduct a proxy contest “on the cheap” under the new rules. The memo says that wasn’t the case with this fight:
Many observers have asserted that the universal proxy regime would significantly reduce the cost of proxy contests. We have been skeptical of this view as a shareholder still has to prepare an advance notice of nomination, file a proxy statement, and furnish a proxy statement and proxy card to shareholders having at least 67% of the voting power. We also believe that economic activists will conduct meaningful solicitation efforts that go beyond the SEC’s minimum solicitation requirements as their goal is to be victorious.
In the Aimco proxy contest, according to L&B’s proxy statement, it estimated that the cost of the proxy contest would be $1,000,000. Notably, at the time it filed its definitive proxy statement, it disclosed that it had only spent $200,000 on the proxy contest meaning that most of its costs were back-end loaded.
The memo goes on to note that, by way of comparison, L&B ran a proxy contest earlier this year before universal proxy kicked in & estimated that the cost of that proxy contest would be $1,200,000, of which $500,000 was spent prior to filing the definitive proxy statement.
Unless Delaware overrules Revlon or something equally significant happens next week, this will my final blog of the year. Thanks so much to everyone for reading my ramblings and passing on your suggestions and comments. Merry Christmas & Happy Hanukkah to everyone who celebrates those holidays, and best wishes for a healthy and prosperous New Year to all! I hope to see everyone back here in 2023.
Debevoise recently issued this list of FAQs on universal proxy & contested director elections. The memo walks through the various topics covered by the rule, but it also covers a few areas that aren’t addressed. This excerpt includes a couple of those:
Q: Are there any specific rules that govern a registrant’s engagement with a dissident stockholder?
A: No. If the registrant is content to allow the dissident’s nomination to proceed, the registrant should solicit a completed “director and officer questionnaire” and other information that it deems necessary to allow its nominating committee or board of directors to make a determination as to whether to support the nominee. In the alternative, the registrant may seek a settlement with the dissident with the objective of avoiding a contested director election.
Q: Does the dissident stockholder have a legal right to speak at the meeting?
A: No. While it is customary to allow stockholders to speak at meetings of stockholders, there is no statutory requirement. The chairperson of the meeting may acknowledge the nomination as part of the annual meeting script, rather than allowing the stockholder to present the nomination.
Other FAQs covered by the memo include, among other things, notice and disclosure obligations of registrants and dissidents, responding to statements made by the dissident in its proxy materials, and preliminary proxy filing obligations for contested elections.
As discussed in yesterday’s blog, the Delaware Supreme Court’s majority decision in Bandera focused primarily on the terms of the MLP’s partnership agreement and the appropriate way to interpret those terms under Delaware’s version of the Revised Uniform Limited Partnership Act. In her concurring opinion, Justice Valihura focused on the Chancery Court’s approach to the legal opinion delivered to the general partner in satisfaction of the call right’s opinion condition.
In the Chancery Court, Vice Chancellor Laster conducted a detailed review of the process by which the law firm came to render the legal and was sharply critical of that process, but Justice Valihura’s concurring opinion said that it was the Vice Chancellor’s decision to engage in that kind of review that got him off-track. She went on to explain that under Delaware law, courts should take a more deferential approach focusing on whether the lawyers were acting in good faith when they rendered the opinion. The concurring opinion found ample evidence of that good faith effort, and concluded that the Chancery Court erred in deciding otherwise:
In sum, I believe that the trial court erred in holding that the Opinion was rendered in bad faith. Under existing Delaware law, opinions of counsel are entitled to deference. It is not the place of a trial court, or this Court, to substitute our own judgment for that of the lawyers who are asked to render legal opinions. Although lawyers should always strive to reach the legally correct answer, the law does not require that opinions of counsel be substantively correct.
What the law requires is that lawyers undertake a good faith effort. Such good faith effort is entitled to deference. Although there are, for sure, outer limits to this deference, this case does not push beyond that boundary in my view. Because the trial court’s findings of bad faith are inextricably intertwined and dependent upon this legal error, I would reverse. In the aggregate, the record rather supports the conclusion that Baker’s Opinion was rendered in good faith and, at a minimum, was not rendered in bad faith.
Yesterday, the Delaware Supreme Court issued its decision in Boardwalk Pipeline Partners v. Bandera Master Fund, (Del. 12/22). The Court reversed a 2021 Chancery Court decision which found that the general partner of a Master Limited Partnership (“MLP”) was liable for nearly $700 million in damages as a result of a breach of the partnership agreement involving willful misconduct that left the general partner exposed to unexculpated claims under the terms of that agreement.
The Supreme Court’s decision is likely to be an important one, both as a result of its deferential approach to a partnership agreement’s language conveying broad discretionary authority to the general partner, and because of a concurring opinion addressing the standard of review that Delaware courts should apply to a law firm’s legal opinion.
The case involved the permissibility of a general partner’s decision to exercise a contractual call right on the limited partners ownership interests provided under the terms of a MLP partnership agreement. The exercise of that right was conditioned upon the general partner’s receipt of a legal opinion concerning the impact of pending regulatory action by the Federal Energy Regulatory Commission on the company’s oil & gas pipeline business. Under the terms of the partnership agreement, exercise of the call right was also conditioned upon the general partner’s determination that the opinion of its counsel was acceptable. In order to assist in that determination, the general partner retained another law firm to shadow that counsel’s work and provide its own opinion on the reasonableness of relying on the first counsel’s opinion.
The plaintiffs alleged, among other things, that the general partner breached its obligations under the partnership agreement when it exercised the call right. After surviving a motion to dismiss, the case went to trial., and Vice Chancellor Laster ultimately held that the general partner breached the agreement because it did not satisfy the opinion-related conditions to the exercise of the call right. He held that the legal opinion did not reflect a good faith effort on the part of counsel to discern the relevant facts and apply professional judgment. Furthermore, because the determination that the opinion was acceptable was made by the general partner and not the MLP’s board, he concluded that it did not comply with the terms of the agreement.
The Vice Chancellor also found that general partner engaged in willful misconduct when it exercised the call right, and that the exculpatory provisions in the partnership agreement didn’t protect the general partner from liability for its actions.
The Supreme Court disagreed. The majority focused on the terms of the MLP agreement, and in particular the broad discretionary authority provided to the general partner. After rejecting the Chancery Court’s conclusion that the opinion should have been directed to the MLP board, it addressed the general partner’s right to rely on that opinion.
In particular, the Supreme Court noted that Section 7.10(b) of the agreement provided that the general partner was “conclusively presumed” to have acted in good faith when it relies on advice of counsel “as to matters that the General Partner reasonably believes to be within [counsel’s] professional or expert confidence.” The Court held that in the context of the broad powers given to an MLP’s sponsor under the Delaware Revised Uniform Limited Partnership Act and the clear disclosure provided to investors in the MLP concerning the authority of the general partner, that language meant exactly what it said:
Unlike a rebuttable presumption, Section 7.10(b)’s conclusive good faith presumption is, as its name denotes, conclusive. Interpreting a nearly identical provision in Gerber, this Court explained that “Section 7.10(b) is a contractual provision that establishes a procedure the general partner may use to conclusively establish that it met its contractual fiduciary duty.” In other words, once Section 7.10(b) is validly triggered through reliance on expert advice, good faith is “conclusively establish[ed]” and no longer subject to challenge.
Here, the Sole Member Board received the Skadden Opinion, followed its advice that it would be reasonable to accept the Baker Botts Opinion, and caused the call right exercise. The conclusive presumption was triggered and therefore required a finding of good faith by the Sole Member Board. In turn, the Sole Member Board’s good faith actions on behalf of the General Partner exculpate the General Partner from damages.
Earlier in what’s become an alarmingly lengthy blog, I mentioned that the concurring opinion addressed the Chancery Court approach to the legal opinion provided to the general partner. I can feel your eyes glazing over, so I think I’ll save that part of the decision for tomorrow.