Special purpose acquisition companies (“SPACs”), also known as “blank check companies,” have emerged in recent years as a popular way for the public to invest in private companies. As the popularity of SPACs has increased, so too has private litigation and SEC enforcement actions aimed at recovering the assets of investors who have been fleeced by SPAC insiders who place their own financial interests before the interests of the investing public.
SPACs are corporations that are typically formed under Delaware law and their officers and directors are bound by the State’s fiduciary duties. Unlike most companies, a SPAC has no operations of its own but instead is created for one purpose – to acquire an operating company, otherwise known as the “target” entity. After its formation, the first phase of a SPAC is an initial public offer or “IPO,” which is used to raise money so that the SPAC has funds to eventually acquire a target. The investor money raised in the IPO is placed into a trust and invested in government securities until it is eventually used for a business combination. Once the SPAC has completed its IPO, it typically has 18 to 24 months to identify a target company and complete the merger (referred to as a “de-SPAC transaction”). If the SPAC is unable to identify a suitable target or de-SPAC transaction within the required timeframe, the SPAC will be liquidated and the money raised in the IPO will be returned to public investors, with interest.
The board of directors and the sponsor (often called founders) of the SPAC have two jobs: (1) conduct a fair process and sound due diligence to select an acquisition target; and (2) provide the SPAC’s public investors sufficient disclosures to make an informed decision as to whether to exercise their right to redeem their shares for cash plus interest, or invest in the private company that will go public through the de-SPAC transaction.
Public investors have successfully asserted legal claims against SPAC directors and sponsors based on allegations of (1) material misrepresentations and omissions during the IPO and/or de-SPAC transaction; or (2) conflicts of interest and breach of fiduciary duties owed by SPAC officers, directors and sponsors. Cases involving false statements are typically brought as class actions under Sections 14(a), 10(b), and 20(a) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78j(b), 78n(a), 78t(a)), and under Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)). See, e.g., Welch v. Meaux, No. 19-1260 (W.D. La. Sept. 26, 2019) (Class Action Complaint alleging a false and misleading proxy statement under Sections 14(a), 10(b), and 20(a)).
On the other hand, cases asserting breach of fiduciary duties, which challenge the fairness of the de-SPAC transaction and conflicts of interest, are usually brought under Delaware corporate law. Such conflicts arise because SPAC fiduciaries are typically incentivized to minimize redemptions in order to secure returns for the sponsor, which usually acquires a 20% stake in the target through the purchase of so-called “founders shares” for a nominal price. In these cases, the defendants are accused of acting on this conflict by issuing a false and misleading proxy statement that impaired public stockholders’ ability to make an informed decision as to whether to redeem their shares or invest in the target company. The Court of Chancery of Delaware has addressed such conflicts of interest in a recent series of cases denying motions to by the defendants, who were SPAC directors and officers.
- In re MultiPlan Corp. S’holders Litig., 268 A.3d 784 (Del. Ch. 2022) (public shareholder stated a claim, under entire fairness standard of review, that SPAC directors breached their fiduciary duties of loyalty by approving merger for their own interests to detriment of stockholders and by issuing misleading proxy that impaired stockholders’ informed exercise of their redemption rights).
- Delman v. GigAcquisitions3, LLC, 288 A.3d 692 (Del. Ch. 2023) (public stockholder adequately alleged that SPAC sponsor’s role as conflicted controller required application of “entire fairness” standard of review to public stockholder’s claim against SPAC’s directors).
- Laidlaw v. GigAcquisitions2, LLC, No. 2021-0821-LWW, 2023 WL 2292488, at *13 (Del. Ch. Mar. 1, 2023) (plaintiff stated a claim for breach of fiduciary duties where it was alleged that the SPAC sponsor was motivated by conflicts interests to discourage pubic shareholder redemptions and ensure that the mergers closed, as it would yield a windfall for the sponsor but a loss for public stockholders).
If you have lost money on an investment in a SPAC, please contact Edelson Lechtzin LLP’s SPAC litigation team at 844-696-7492 (toll-free) or email us at [email protected]. You can also fill out the form on this page.