Following these ten steps will prepare SPAC boards, sponsors, and advisors for the likely shareholder suits and potential regulatory investigations that are increasingly becoming part of the SPAC landscape.

If 2020 was the “year of the SPAC,” 2021 may be the year of SPAC litigation. SPACs—Special Purpose Acquisition Companies—are publicly traded companies launched as vehicles to raise capital to acquire a target company. Often called blank-check companies, SPACs are companies in which shareholders buy shares without knowing which company the SPAC will target and acquire. Investors place their faith in the sponsor: the entity or management team that forms the SPAC. The SPAC generally has around twenty-four months to seek out and acquire a target, or else must liquidate and return the capital.

Hundreds of new SPACs were launched in 2020 alone. Booming M&A or other transactional activity in any sector can invite litigation driven by plaintiffs’ attorneys, and SPACs are no exception. In just the first three months of 2021, more than 40 suits targeting SPACs have been filed. The nature of these claims evidence growing sophistication, as lawyers used to challenging traditional M&A transactions begin to tailor their claims to the unique characteristics of the SPAC lifecycle. And with SPACs going mainstream—and attracting attention from outside the usual financial circles—regulators are closely examining transaction disclosures and other aspects of SPAC deals. [1]

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On January 29, 2021, Vice Chancellor Laster of the Delaware Court of Chancery refused to dismiss a shareholder class action stemming from the 2019, $2.2 billion sale of Presidio, Inc., an IT solutions provider specializing in digital infrastructure and cloud and security solutions, to BC Partners Advisors L.P. (“BCP”), a private-equity firm. In Firefighters’ Pension System of the City of Kansas City v. Presidio, Inc., a shareholder of Presidio filed suit against Presidio’s CEO, its board of directors, Apollo Global Management LLC (Presidio’s controlling shareholder, owning approximately 42% of its outstanding common stock), LionTree Advisors, LLC (financial advisor to both Presidio and Apollo), and the acquiror, BCP.

The shareholder claimed that Apollo, Presidio’s CEO, and LionTree all favored—out of their own self-interests—a sale to BCP rather than a more competitive sales process. Apollo was allegedly seeking an exit from its investment in Presidio and favored a quick sale to BCP rather than a drawn-out bidding war. Presidio’s CEO allegedly favored steering the sale to BCP because BCP had promised him a lucrative post-sale pay package. As for LionTree, it allegedly was motivated by ongoing, lucrative relationships with both BCP and Apollo and tipped off BCP to another incoming bid so that BCP could stave-off a bidding war. The shareholder claimed that, as a result, Apollo, Presidio’s CEO, and the board breached their fiduciary duties and that LionTree and BCP aided and abetted the fiduciary duty breaches.

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On July 9 and October 12, 2020, the Delaware Supreme Court added two more opinions to its growing suite of recent appraisal decisions underscoring the prominence of market-based factors in determining fair value. In Fir Tree Value Master Fund, LP v. Jarden Corp., the Delaware Supreme Court affirmed Vice Chancellor Slights’ finding that Jarden’s unaffected stock market price was the most reliable indicator of fair value under the facts presented there. In Brigade Leveraged Capital Structures Fund and Brigade Distressed Value Master Fund Ltd. v. Stillwater Mining Co., the Delaware Supreme Court affirmed the lower court’s reliance on deal price for its fair value determination and confirmed that deal price remains the most reliable indicator of fair value if the seller runs an appropriate, conflict-free sales process.

After Verition Partners Master Fund Ltd. v. Aruba Networks, lnc., in which the Delaware Supreme Court reversed the lower court’s reliance on the unaffected stock price for fair value and found instead that the merger consideration minus deal-specific synergies was the more reliable indicator of fair value, many speculated that transaction price would be the primary source of fair value evidence going forward. In Jarden, however, the Delaware Supreme Court agreed with the Court of Chancery’s decision that deficiencies in Jarden’s sales process undermined the reliability of the deal price as evidence of fair value, which in turn supported the Court of Chancery’s determination to consider other evidence. The Court of Chancery found-and the Delaware Supreme Court agreed-that in light of a sub-par sales process, Jarden’s pre-announcement market price was the most reliable indicator of fair value given that Jarden stock traded in an efficient market and in the absence of material, non-public information.

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In In re HomeFed Corp. Stockholder Litigation (“HomeFed”), the Delaware Court of Chancery considered on a motion to dismiss whether a squeeze-out merger by a controlling stockholder complied with the procedural framework set forth in Kahn v. M&F Worldwide Corp. (“MFW”). In MFW, the Delaware Supreme Court held that the business judgment rule—rather than the entire fairness standard—applies to a controlling stockholder transaction if the transaction is conditioned “ab initio,” or at the beginning, upon approval of both an independent special committee of directors and the informed vote of a majority of the minority stockholders.

In HomeFed, however, the court denied a motion to dismiss by the defendants, the directors of HomeFed Corporation (“HomeFed”) and its controller Jeffries Financial Group, Inc. (“Jeffries”), crediting allegations that Jeffries did not commit to the dual MFW protections before commencing discussions with HomeFed’s largest minority stockholder. In addition, the court found that a one-year “pause” in negotiations between Jeffries and HomeFed’s special committee did not “reset” the ab initio requirement of MFW.

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The Delaware courts have not been shy about warning of the dangers that can arise when merger negotiations are handed over to conflicted directors who fail to keep their boards fully informed about their divided loyalties. Over the last two years, the Delaware Supreme Court has faulted a director for lining up a buyer without disclosing that he had negotiated a lucrative equity roll-over deal on the side, and the Court of Chancery chastised a director (and his hedge fund sponsor) for engineering a quick sale of a company without disclosing to the rest of the board that he had been tipped off to the price the buyer had in mind. Directors have an “‘unremitting obligation’ to deal candidly with their fellow directors,” the Delaware courts have stressed, and that is no more true than when they are entrusted to lead merger negotiations.

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In Lebanon County Employees’ Retirement Fund, et al. v. AmerisourceBergen Corporation, the Delaware Court of Chancery ordered the inspection of the books and records of AmerisourceBergen Corporation, one of the leading opioid distributors in the country, for the purpose of investigating potential mismanagement or breaches of fiduciary duty in connection with the company’s distribution of opioids. In his decision, Vice Chancellor J. Travis Laster confirmed that stockholders are not required to show that the misconduct central to the investigation supports an actionable claim in order to meet their low burden to enforce inspection rights under Section 220 of the Delaware General Corporation Law. The decision also reinforced that, in appropriate circumstances, the Court will allow stockholders to inspect both board-level documents reflecting the directors’ decisions at formal board meetings and less formal communications by and among directors, officers, and senior-level managers. This decision is notable because the Court rejected the company’s efforts to impose heightened burdens on stockholders seeking to discover additional information about the types of books and records a company may or may not have, and in what formats those records exist. This decision also serves as a reminder to boards considering inspection demands that stockholders bear a low burden to show they are entitled to enforce their inspection rights under Delaware law, and if stockholders meet clear this threshold—which is seemingly easier in the context of publicly scrutinized events—Delaware courts are increasingly likely to find that stockholders are entitled to inspect minutes and other sources of information. Companies confronted with inspection demands should be strategic in what demands to oppose, and consider whether negotiation with the stockholder ultimately may produce a more favorable outcome than litigating the issue in court.

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In Channel Medsystems, Inc. v. Boston Scientific Corporation, the Delaware Court of Chancery rejected an attempt by Boston Scientific to terminate and thus avoid consummating a merger agreement with Channel on the grounds that a material adverse effect as defined in the parties’ agreement had occurred. In so holding, Chancellor Andre Bouchard signaled that last year’s Court of Chancery decision in Akorn, Inc. v. Fresenius Kabi AG, in which the Court of Chancery for the first time found the existence of a material adverse effect permitting merger agreement termination, was not necessarily a watershed moment that would make such findings more common. The decision also provides important guidance on merger agreement drafting and litigation strategy and pitfalls.

Background

Channel was a privately held medical technology company and developer of a single product, Cerene. Boston Scientific, a publicly traded medical technology company, agreed to acquire Channel pursuant to the merger agreement, dated November 1, 2017 (“Agreement”). Prior to that time, in 2013, Boston Scientific had acquired approximately 15% of Channel’s equity and had an “observer” on Channel’s board of directors. Upon executing the Agreement, this observer (Christopher Kaster, Boston Scientific’s Vice President of Business Development and Venture Capital), became a “full board member.” In this pre-merger agreement period, Boston Scientific received periodic updates about Channel from Kaster and from Channel itself.

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The Delaware Court of Chancery’s recent decision, Genuine Parts Company v. Essendant Inc., [1] provides a helpful reminder that Delaware courts will enforce the clear and unambiguous terms of a merger agreement, and will consider contractual interpretation issues on a motion to dismiss when it finds the contractual terms to be clear and unambiguous. In Essendant, the Court denied the defendant’s motion to dismiss and found that: (i) Genuine Parts Company (“GPC”) adequately pled that the termination fee in the merger agreement was not the exclusive remedy for termination or a breach of the agreement; (ii) GPC did not waive its breach of contract claim by accepting the termination fee; and (iii) GPC pled sufficient facts to support a reasonably conceivable claim that the exclusivity provision in the merger agreement between the parties was a material term of the agreement which could be the basis for a breach of contract claim. This decision once again reinforces the need for parties to be mindful when negotiating and drafting a contract that contractual provisions reflect their understanding of the agreements they have made in the event of a breach or termination of the agreement. [2] In particular, Essendant cautions that contracting parties who want to limit recovery to the terms of the termination fee provision should carefully craft broad termination fee provisions that clearly and unambiguously state the parties’ intentions. Essendant also serves as a further reminder that a contractual party’s acceptance of a termination fee, absent specific contractual language to the contrary, will not preclude that party from pursuing a breach of contract claim. (more…)

Three recent Delaware Court of Chancery appraisal decisions offer a wealth of guidance not only regarding the determination of a merger partner’s fair value, but also regarding elements that potentially undermine a quality sale process and strategic considerations for litigating valuation and sale process issues.

Statutory appraisal litigation, initiated after virtually every sizeable merger, requires the Delaware Court of Chancery to determine the fair value of a target company’s shares, exclusive of any merger-created value, as of the effective date of the merger. Though the appraisal statute broadly empowers the Court to consider “all relevant factors” in determining fair value, the Delaware Supreme Court has clarified the particular importance of certain market-based factors, namely, unaffected market price and merger consideration. Though the unaffected market price is an “important indicator” of fair value (so long as the stock is trading in an efficient market), deal price that is the product of “a robust market check will often be the most reliable evidence of fair value[.]”

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