In reporting in prior posts on SPAC-related litigation, I have primarily focused on federal court securities class action litigation (for example, here). In addition to the federal court litigation, there has also recently been state-court SPAC-related litigation filed, as I have also briefly noted (here, for example). In early April 2021, the Akin Gump law firm published a client alert memo noting that, at the time, over thirty SPACs has been sued in merger objection lawsuits filed in New York state court. In a May 5, 2021 post on her On the Case blog (here), Alison Frankel updated the Akin Gump filing data and reported that there have now been over 60 New York state court SPAC-related lawsuits filed. As Frankel’s article notes, the litigation itself is only part of the picture, as the plaintiffs’ lawyers involved have also been active in presenting SPACs with pre-lawsuit demand letters as well.
The New York litigation, typically filed in the New York Supreme Court in Manhattan, generally involves claims brought by shareholder plaintiffs against the boards of directors of special purpose acquisition companies (SPACs) that have announced the intention of their companies to merge with a private company target. These lawsuits allege that the directors have breached their fiduciary duties by omitting material information about the targets or about the de-SPAC merger transaction itself.
The initial Akin Gump memo, to which I linked above, stated that between September 2020 and March 2021, over 35 SPACs had been hit with one or more New York state court merger objection lawsuits. In her article, Frankel reported that as of the end of April, there were at least 62 cases on Akin Gump’s list of New York SPAC disclosure lawsuits. Frankel reported that based on her review electronic dockets for these cases, she was able to determine that all of the lawsuits had been filed by just four plaintiffs’ law firms: Ridgorsky law, with 24 cases; Brodsky & Smith, with 22; Moore Kuhn with 13; and Weiss Law with 3.
Based on her review of the electronic court dockets, Frankel was also able to determine that (as is the pattern with merger objection-type lawsuits generally) these cases are not being litigated beyond the initial pleadings. Instead, consistent with the general merger objection litigation pattern, the cases are being settled for the defendants’ agreement to provide supplemental disclosures to investors regarding the proposed transaction and their agreement to pay the plaintiffs’ lawyers a “mootness” fee. Frankel cites academic research in her article showing that plaintiffs’ lawyers’ mootness fees typically range from $50,000 to $300,000.
To many of this blog’s readers, Frankel’s description of this New York litigation will be all too familiar. The earlier version of these types of lawsuits had been filed in Delaware until January 2016 when the Chancery Court in the Trulia lawsuit evinced its distaste for this type of litigation. Since that time, plaintiffs in merger objection lawsuits typically have been filing merger objection lawsuit in federal court, usually based on alleged proxy disclosure violations under Section 14(a) of the Securities Exchange Act of 1934. The usual pattern for these federal court lawsuits is that the lawsuits are voluntarily dismissed in exchange for supplemental disclosures and the payment of a mootness fee.
In these SPAC-related merger lawsuits, the plaintiffs’ lawyers are following the same basic playbook, although rather than alleging violations of the federal securities laws, the plaintiffs’ lawyers are alleging state law causes of action, and asserting as their jurisdictional basis either the allegation that the SPAC is located or based in New York, or its shares are traded on a New York stock exchange.
The SPAC-related lawsuits typically will demand that the court enjoin the shareholder vote on the proposed merger, although Frankel found that the plaintiffs’ lawyers are not filings separate motions for preliminary injunctions to halt the shareholder vote. Indeed, she noted based on her review of the dockets that “there is no evidence … of any judicial involvement in the suits” and the dockets showed that the plaintiffs’ lawyers had filed voluntary dismissal notices in 23 cases (while no resolution was noted in the electronic docket for the other cases).
Frankel further reported that the lawsuits themselves are “only part of the story.” Several defense-side attorneys told Frankel that their clients had received “demand letters” in which plaintiffs’ lawyers had asserted disclosure violations and threatening to sue unless the SPAC issued supplemental disclosures and pay mootness fees. Many proposed de-SPAC merger deals face multiple different disclosure demands, both in and out of court.
As is the case with merger objection lawsuits generally, the defendants often decide it is “less expensive to issue the additional disclosures and pay the mootness fees rather than to litigate.” In effect, defendants are “willing to pay a nuisance fee to shareholder firms to keep their deals on track.” One defense attorney Frankel quotes in her article refers to these nuisance fees as a “deal tax.”
NOTE: One reader, a defense attorney, provided this interesting additional commentary about the New York SPAC-related merger objection litigation: “these are breach of fiduciary duty claims and the SPACs that I have been involved in have Delaware exclusive forum charter provisions and the cases cannot be maintained in NY state court (although it would take motion practice to enforce). In my view, the plaintiffs’ firms know this and do not even take steps to serve the complaints on the defendants. It almost like a more robust demand letter than an actual lawsuit.”
According to the Akin Gump memo, many of these New York lawsuits are being filed as individual actions, rather than as class actions. This use of individual litigation rather than class action litigation is consistent with the recently developing practices in the evolving federal court merger objection litigation, in which the plaintiffs’ lawyers increasingly are filing their suits as individual rather than as class actions.
The plaintiffs’ lawyers increasingly are resorting to individual rather than class actions to even further reduce the likelihood of any judicial involvement in the litigation. Though the plaintiffs’ lawyers are using court processes to petition the court based on alleged legal grievances, the last thing in the world the plaintiffs’ lawyers actually want is the attention of the court. (The plaintiffs’ lawyers know all too well that if it should happen that a court gets wind of the cynical game that they are playing, courts consistently react with outrage and opprobrium – as illustrated, for example, here.)
The fact is that there is nothing new about the plaintiffs’ lawyers’ game in the SPAC-related litigation. As has been the case with the merger objection litigation generally, the plaintiffs’ lawyers have set themselves as toll takers, using the leverage provided by the threat of litigation expense and disruption, to extort a fee from the participants of the deal process. The lawyers involved in the SPAC-related merger objection litigation are in fact the same lawyers involved in the federal court merger objection litigation.
For anyone who cares about the integrity of the judicial system, the spectacle of these plaintiffs’ lawyers leveraging the threat of litigation expense as a way to wrest a fee from the deal parties is a truly revolting display. As Frankel noted in her article, Judge Posner of the Seventh Circuit, in his 2016 opinion in the Walgreen’s case, said the merger objection litigation is “no better than a racket.”
Indeed, the merger objection litigation bar is using the availability of judicial processes as an instrumental part of what is, as Judge Posner suggests, no better than a protection racket – as in, “That’s a nice little proposed de-SPAC transaction you’ve got there. Be a shame if something were to happen to it … something like an expensive lawsuit, for example.”
In his opinion, Judge Posner also said that this kind of litigation “must end.” But as the plaintiffs’ lawyers well know, without judicial involvement, it is very difficult to stop this type of litigation through the court processes alone. Indeed, as long as the plaintiffs’ lawyers can manage to avoid actually attracting the attention of the courts, there is little reason for them to stop.
As readers of this blog are aware, at the present moment there are over 400 SPACs looking for merger partners. Over the next twelve to 24 months, there are going to be massive numbers of de-SPAC transactions developing. As things currently stand, the parties to these transactions can expect that the very small number of self-appointed toll-taking plaintiffs’ lawyers are going to continue to extract fees as an economically and legally worthless and pointless part of these many transactions. However, as Frankel notes in her article, “Until a SPAC defendant refuses to pay – and is willing to justify that refusal through litigation – the new deal tax is going to be another cost of doing business.”
It may be a topic for another day, and perhaps another context, but I think it is worth asking whether this is a situation that requires a legislative fix, rather than a judicial fix. I will say that I think it is a worthy project for the New York State Bar to consider whether there is a procedural mechanism that can be put in place to ensure that the state’s judicial processes are not abused as part of this kind of a truly deplorable fee-extraction racket.
All of that said, it is worth observing as a concluding note that, as the Akin Gump law firm memo notes, “SPAC shareholder lawsuits are likely to multiply, potentially subjecting SPACs, their boards and sponsors to more significant civil risk and exposure.”