SPAC Litigation Continues to Churn in the Belly of the Chancery Beast

As this blog has consistently observed, although the well of SPAC mergers substantially dried up a few years ago, the wave of lawsuits stemming from those de-SPAC mergers has not abated. In the latest decision addressing claims for breach of fiduciary duty arising from a de-SPAC merger, Solak v. Mountain Crest Capital LLC, Vice Chancellor Glasscock bemoaned “the bulge of SPAC carcasses [that] continues to be digested in equity.” Yet, despite acknowledging that the allegations were not strong and hewed “close to the line between an adequate and an inadequate claim,” he allowed the claims to proceed past a motion to dismiss.

In January 2021, a SPAC called Mountain Crest Acquisition Corporation (“MCAD”) completed an IPO; three months later, it announced that it had entered into a merger agreement with Better Therapeutics. MCAD then issued a proxy recommending that shareholders approve the merger and informing them of their right to redeem their shares.

As is typical in SPAC transactions, MCAD’s proxy attributed a value of $10 to each share that would be converted into a share in the post-merger entity. However, the proxy did not disclose any figure for “net cash per share.” Net cash per share is a relatively new financial metric that was not commonly used during the wave of de-SPAC mergers in 2020 and 2021. Plaintiffs have seized upon this metric in SPAC litigation filed over the past several years as supposedly better reflecting post-merger share value, though there remains substantial debate concerning its merit. The plaintiffs here alleged that, after accounting for founder shares, the dilutive effect of redemptions, and transaction costs, MCAD actually had less than $7.50 net cash per share to invest in the merger.

MCAD stockholders approved the merger and redeemed approximately 84% of shares before closing. Within three months after the merger, the stock price of the post-merger entity had dropped from $10.97 to $3.68 per share.

In 2023, an MCAD stockholder brought a putative class action against MCAD’s directors for breach of fiduciary duty and unjust enrichment. MCAD moved to dismiss the complaint.

Consistent with the line of SPAC decisions coming out of the Delaware Court of Chancery in recent years, Vice Chancellor Glasscock applied entire fairness review because the directors were adequately alleged to be conflicted due to their receipt of founder shares. He determined that, under that lenient standard, the claims survived dismissal. That is nothing new, as nearly every SPAC case that has reached this stage has survived dismissal – with the notable exception of the Hennessy decision discussed previously in this blog. What is noteworthy, however, is that Vice Chancellor Glasscock reached this conclusion despite acknowledging that the allegations, both as to the directors’ conflicts and MCAD’s failure of disclosure, were quite weak compared to other SPAC cases working their way through the Court of Chancery. In particular, unlike most other SPAC cases, which allege some fault in the proxy’s substantive disclosures about the prospects of the post-merger entity, the plaintiff here alleged only a single disclosure violation: that the directors misled investors by attributing a value of $10 to each share while failing to disclose that the net cash per share was less than $7.50.

Vice Chancellor Glasscock acknowledged that the failure to disclose net cash per share does not on its own constitute a breach of duty. But he found that, in light of the affirmative assertion that the shares were valued at $10, it was reasonably conceivable that a shareholder would “assume” that net cash per share would be roughly equivalent to the share value. And the delta of roughly 25% between the stated share value and the net cash per share figure conceivably could be material to shareholders in determining whether to redeem. Therefore, the absence of any statement at all about net cash per share was sufficient, in the court’s view, to support a claim for breach of fiduciary duty. Vice Chancellor Glasscock also acknowledged and accepted the rationale behind the SPAC defendants’ argument that the high redemption rate – far higher than many of the other de-SPAC mergers the Court of Chancery has considered – “suggests a lack of a material omission.” However, at the pleading stage, he declined to draw the defendant-friendly inference that a high redemption rate demonstrates adequate disclosures as a matter of law.

For SPAC defendants hoping to find some relief from the ubiquitous claims arising whenever a post-merger company underperforms, this case may suggest that the Court of Chancery is unlikely to stem the tide by tightening pleading standards – even for allegations that a court views as weak or unlikely to succeed on the merits.