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SPAC Litigation: An In-Depth Analysis of Recent Legal Trends

Special Purpose Acquisition Companies (SPACs) experienced a meteoric rise in 2020, serving as a popular vehicle for taking emerging private companies public. However, increased regulatory oversight from the U.S. Securities and Exchange Commission and underwhelming post-merger performance led to a decline in SPAC enthusiasm by early 2021.

Litigation Landscape

Despite waning interest in SPACs, legal battles concerning these entities have surged. Shareholders have increasingly filed lawsuits in both Delaware and federal courts, challenging the legitimacy of numerous SPAC transactions. Several of these cases have successfully passed the motion to dismiss stage, and some have even reached substantial settlements.

Future Outlook

Legal disputes surrounding SPACs have predominantly centered on alleged conflicts of interest and the veracity of disclosures about the target companies' future prospects. These issues are expected to remain at the forefront as more cases proceed through the courts.

Delaware Court Rulings on Fiduciary Duties

The MultiPlan Case

The Delaware Court of Chancery made a landmark ruling in In re MultiPlan Corp. S'holders Litig. in January 2022. MultiPlan, a healthcare analytics company, merged with a SPAC in October 2020. Post-merger, the company's stock plummeted following a report by a short-selling firm. The court rejected most of the defendants' motions to dismiss, finding that the SPAC's directors and controlling shareholders had conflicts of interest and had breached their fiduciary duties. The case was eventually settled for $33.75 million in February 2023.

The Gig3 Decision

In a similar vein, the court ruled in Delman v. GigAcquisitions3, LLC that the SPAC's fiduciaries had inherent conflicts of interest with public shareholders. The court emphasized that the proxy statement lacked critical information, thereby misleading investors.

Implications

These rulings indicate that dismissing breach of fiduciary duty claims in SPAC-related cases is increasingly challenging. The court's application of the "entire fairness" standard suggests a rigorous review process that defendants will find difficult to navigate.

Federal Court Cases: Section 10(b) Claims

Virgin Galactic Case

In the Eastern District of New York, the court largely dismissed the plaintiffs' claims in Kusnier v. Virgin Galactic Holdings, Inc. The ruling highlighted that federal claims against SPAC officers are more challenging to sustain when the alleged misrepresentations pertain to the target company's operations.

Lucid Motors Case

In contrast, a federal court in San Francisco allowed plaintiffs to proceed with their claims in In re CCIV/Lucid Motors Secs. Litig. The court ruled that even though the alleged misstatements were about Lucid Motors and not the SPAC, the plaintiffs still had standing to sue.

Section 14(a) Claims

Federal courts are divided on whether Section 14(a) claims should be treated as direct or derivative and whether they require proof of scienter or mere negligence. Cases like In re Romeo Power, Inc. Secs. Litig. and Zhou v. Faraday Future Intelligent Elec. Inc. illustrate the varying judicial approaches to these issues.

Key Takeaways

1. Challenging Landscape in Delaware: The application of the "entire fairness" standard in Delaware courts makes it difficult for defendants to dismiss SPAC-related fiduciary duty claims.
2. Federal Securities Law Risks: SPACs are susceptible to federal securities lawsuits, especially those challenging pre and post-merger statements about the target company.
3. Importance of Accurate Disclosures: Ensuring the accuracy of disclosures is crucial, not only for compliance with securities laws but also for potentially reducing settlement values in litigation.
4. Jurisdictional Variances: The statutes governing federal securities lawsuits allow plaintiffs some latitude in choosing the jurisdiction, leading to a lack of uniformity in legal outcomes concerning SPACs.

This commentary aims to provide a comprehensive legal perspective on the evolving landscape of SPAC litigation. Given the complexities and ongoing developments in this area, it is imperative for stakeholders to remain vigilant and well-informed.