SPACs: Delaware Opts Out of “Untold Chaos”

Possibly regretting the repercussions of its recent decision in Delman v. GigAcquisitions3, the Delaware Court of Chancery opted on February 21, 2023, to restore relative peace to dozens of SPACs for which the capital structures were called into question by the December 2022 Court of Chancery’s decision in Garfield v. Boxed, Inc. 

Vice Chancellor Will, who issued decisions in both Delman and MultiPlan, addressed a Section 205 petition in her opinion in In Re Lordstown Motors Corp. Lordstown sought to validate and declare effective a pre-merger amendment to its certificate of incorporation relating to an increase in the number of authorized Class A common shares and the stock issued in reliance on that amendment. Lordstown was not the only SPAC seeking relief from the uncertainty over its capital structure caused by the earlier Boxed decision.

The Boxed Decision: So Much More Than a Demand for Plaintiff Attorney’s Fees

In Boxed, the plaintiff, a stockholder of the defendant SPAC, challenged the structure of stockholder votes on proposed charter amendments relating to a forthcoming merger. The plaintiff demanded that the SPAC, despite contrary disclosure in its proxy materials, count the votes of its Class A common stockholders separately from the votes of its Class B common stockholders when voting on the charter amendments. The SPAC acquiesced. The Class A common stockholders voted as a separate class, and the de-SPAC merger was completed.

The plaintiff’s counsel subsequently sought $2 million in attorney’s fees and expenses from the SPAC for the benefits they allegedly conferred on the SPAC and its stockholders by “facilitating statutorily compliant votes.” The SPAC opposed the claim, arguing that the changes were unnecessary because the voting structure that was originally proposed, where Class A and Class B stockholders could vote together, was already legally compliant.

The Court of Chancery’s analysis focused on whether the SPAC’s original certificate of incorporation “authorized Class A and Class B as two classes of common stock, or as series within a single class.” Siding with the plaintiff’s counsel, the Court of Chancery determined that the company’s Class A common stock was a separate class of stock based upon the plain text of the SPAC’s certificate of incorporation, consequently requiring a separate vote.

Additionally, the Court of Chancery found that the separate class vote undertaken by the SPAC, as demanded by the plaintiff, “defuse[d] a ticking time bomb.” In the end, the plaintiff’s attorney was awarded an $850,000 fee for their troubles.

Garfield v. Boxed, Inc.: The Frenzied Aftermath

The Boxed decision left many post-de-SPAC companies in doubt as to the soundness of their own completed de-SPAC mergers. If separate class votes on their own charter amendments were required, as indicated in the Boxed decision, these companies would potentially face hundreds of millions of overissued shares.

The millions of overissued shares could have resulted in forced recissions, which would effectively require impacted de-SPACs to repurchase overissued shares and refund the purchase price plus interest to their investors.

Downstream impacts included jeopardizing equity financings, difficulties filing periodic reports with the SEC, and the possibility of stock exchange delisting. Not surprisingly, the Boxed decision resulted in dozens of de-SPACs rushing to submit Section 205 petitions, each requesting that the Court of Chancery effectively validate their post-de-SPAC merger voting structure.

In Re Lordstown Motors Corp.: A Decision That Should Help Avoid “Untold Chaos”

In assessing a request for validation, the Court of Chancery may consider, among other things, any factors it “deems just and equitable.” In her Lordstown decision, Vice Chancellor Will found that validation was appropriate for several reasons, including that the record showed that Lordstown had a good faith belief in the validity of its charter amendment and that it, along with third parties, acted in reliance on that belief for years. Vice Chancellor Will also indicated that she could not “conceive of any legitimate harm that would result from” validating the charter amendment, that the ratification would “restore confidence in the company’s capital stock and assuage market fears,” and that “a contrary ruling would invite untold chaos.”

The Lordstown decision should bring a sigh of relief to dozens of similarly situated de-SPACs. The Court of Chancery will need to evaluate each of their Section 205 petitions on a case-by-case basis. But while the legal analysis in the Lordstown decision is specific to Lordstown, it is instructive to other companies seeking similar relief.

Delaware's Views on SPACs: A Work in Progress

Many SPAC market participants are of the opinion that the Delaware Court of Chancery, through its decisions in MultiPlan and Delman, is becoming inhospitable to SPACs. However, the decision in Lordstown indicates a willingness to take a market-wide view and assess the limits of potential mayhem. After 2022, a year filled with SPAC mayhem, it is indeed a welcome relief for SPAC teams and their merger partners.

The next area of improvement for the Delaware Court of Chancery will undoubtedly need to be on the directors and officers (D&O) insurance front. Its February 6, 2023, decision in Clover Health—making the SPAC’s post-merger D&O tail policy responsible for covering the target’s pre-merger directors—is unlikely to be popular with D&O carriers. For our coverage of that gem and its repercussions on SPACs and the SPAC D&O insurance market, continue reading the SPAC Notebook.