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Chancery Finds SPAC’s Sponsor and Board Potentially Violated Fiduciary Duties by Depriving Public Stockholders of the Information Material to the Stock Redemption Decision

Delman v. GigAcquisitions3 LLC, C.A. No. 2021-0679-LWW (Del. Ch. January 4, 2023)
Delaware law establishes that fiduciaries of a corporation cannot be exempted from "their loyalty obligation and the attendant equitable standards of review that [the] court will apply to enforce it." In this case, following last year's Multiplan decision (discussed here), stockholders alleged that a SPAC's sponsor and board members breached their fiduciary duties by failing to disclose information material to the stockholders' decision on whether to redeem the stock prior to the de-SPAC transaction. This decision denies the defendants' motion to dismiss and finds that stockholders properly brought the lawsuit as a class action based on the fact that the alleged harm they suffered was individually compensable.

The Court distinguished a derivative overpayment claim from a direct stockholders' claim related to a de-SPAC transaction where the funds that are being allegedly depleted are held in trust for the public stockholders to redeem if they choose to. The Court further distinguished between the claim in this case and a "holder" claim. In this case, stockholders were not induced to hold the stock as opposed to selling it but were rather convinced to invest in a post-merger entity instead of redeeming their shares. The Court reviewed the de-SPAC transaction under the entire fairness standard of review because it involved a conflicted controlling stockholder (i.e., the sponsor), and the majority of the board was not disinterested or independent. According to the Court, this case included allegations of deficient disclosures that were closely connected to potentially disloyal behavior. The Court also pointed out the "inherent conflicts between the SPAC's fiduciaries and public stockholders in the context of a value-decreasing transaction." Here, the SPAC's sponsor, that was also the corporation's controller, could favor a value-decreasing merger over liquidation to realize a great return on its investment, which could harm the public stockholders. Therefore, the Court did not parse the alleged disclosure violations focusing on the materiality aspect, as the defendants urged, but rather considered the defendants' motivations in providing allegedly misleading statements. Importantly, the Court emphasized that, despite general disclosures of such conflicts in the SPAC's public documents, the duty of loyalty cannot be waived under Delaware corporate law.



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