Is Delaware About to Flex on SPACs?

The Delaware Court of Chancery recently denied a motion to stay a lawsuit challenging a de-SPAC transaction where the defendants asked the court to wait for the outcome in a related federal securities action.  Although the decision to allow state law claims to proceed alongside a related federal action is not itself extraordinary, the court’s commentary signals the Delaware judiciary’s desire to weigh in on SPACs.  Among the factors negating a stay, according to the court, were the “emerging” and “novel issues of Delaware law” implicated by SPAC transactions.

In In re Lordstown Motors Corp. S’holders Litig., C.A. No. 2021-1066-LWW (Del. Ch. Mar. 7, 2022), the state law plaintiffs purportedly represent the SPAC stockholders who did not exercise their redemption rights in the de-SPAC transaction.  They alleged injury from inadequate disclosures and conflicts of interest driving the transaction.  In contrast, the federal securities action involves a broader class of securities holders spanning before and after the de-SPAC transaction and alleging that the company artificially inflated its stock price through misleading disclosures about the acquired company’s electric vehicle business.  While acknowledging some overlap, the court held that the actions involved different plaintiffs, defendants, and remedies.  But more importantly, the court focused on Delaware’s need to address SPACs, stating that “[t]his court’s essential role of providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”

Although the SPAC boom started in earnest in 2020 with a record number of de-SPACs in 2021, only one substantive ruling has been rendered by a Delaware court, which came in January 2022 (see In re MultiPlan S’holders Litig., 2022 WL 24060 (Del. Ch. Jan. 3, 2022)).  Since the SPAC boom, numerous legal issues have been raised with respect to SPACS, including allegations relating to the integrity of projections and other disclosures, sponsor conflicts of interest, director independence and compensation, and the availability of a stockholder ratification defense in de-SPAC transactions.  Several academics and a former SEC official have also voiced various concerns.  The plaintiffs’ bar has also become increasingly focused on SPACs.

Thus, many observers have been surprised that Delaware has not offered more definitive guidance to SPACs.  That is why Vice Chancellor Will’s opinion in Lordstown is notable – indicating that “Delaware has a substantial interest in addressing the issues presented” and that the “court’s interest in resolving corporate governance issues under Delaware law prevails over considerations of comity and practicality.”