Delaware Chancery’s First De-SPAC Decision: Four Take-Aways

In one of the first decisions to analyze fiduciary duty claims in the context of a SPAC merger, the Delaware Chancery Court recently sustained the legal viability of a putative shareholder class action brought against a SPAC's directors, officers, controlling shareholder, and financial advisor based on an allegedly false and misleading proxy statement. The court concluded that the plaintiffs had successfully pleaded "a reasonably conceivable impairment of public stockholders' redemption rights—in the form of materially misleading disclosures." As noted in this client alert that I penned along with Matt Riccardi and Arthur Greenspan, the decision—which marks the first time that the Chancery Court has applied Delaware law in the SPAC context—is important for several reasons and may provide a roadmap for plaintiffs' attorneys in crafting SPAC-related lawsuits that are sure to be filed in the coming months and years. Most notably, the decision suggests that the existence of the SPAC public shareholders' right of redemption prior to a de-SPAC transaction—often thought of as a key mitigating factor against conflict of interest claims—will not shield SPAC fiduciaries from liability where they have failed to disclose information to the public shareholders that is material to their decision of whether to redeem their SPAC shares or convert them to shares in the combined public company. Here are four take-aways from the decision: 1. Full and accurate disclosure of all material facts is key to mitigating liability -In upholding the plaintiffs' fiduciary duty claims, the court made clear that its decision that the plaintiffs' claims are viable was "not simply because of the nature of the transaction or resulting conflicts"—which are inherent in most de-SPAC transactions—but "because the complaint alleges that the director defendants failed, disloyally, to disclose information necessary for the plaintiffs to knowledgeably exercise their redemption rights." Thus, the court's conclusion "does not address the validity of a hypothetical claim where the disclosure is adequate and the allegations rest solely on the premise that fiduciaries were necessarily interested given the SPAC's structure." Indeed, "one can imagine a different outcome" if public SPAC stockholders were given "all material information about the target, [and] had chosen to invest rather than redeem."