Earlier this year, when Vice Chancellor Lori Will sustained the plaintiff’s SPAC-related Delaware State Court direct breach of fiduciary duty action against the motion to dismiss of the former directors of Gig Capital3 (Gig3), there was some speculation that the court’s ruling would lead to a “deluge” of similar lawsuits. While no onslaught of new lawsuits has yet materialized, there was (as I noted in a recent post, here) a SPAC-related Delaware state court direct breach of fiduciary duty action filed late last week against the board of Adara Acquisition Corp. Now, a shareholder plaintiff has filed an additional SPAC-related Delaware State Court direct breach of fiduciary duty action, against the board of Trident Acquisition Corp. in connection with the SPAC’s merger with AutoLotto, to form Lottery.com. As discussed below, the allegations against Trident’s board (as well as its sponsor and its financial underwriting advisor) more closely resemble those alleged in the Gig3 case, underscoring the possibility that plaintiffs’ attorneys may well seek to pursue the state court breach of fiduciary duty claim on similar theories. A copy of the April 3, 2023 complaint against the Trident board can be found here.
Trident Acquisitions Corp. was a special purpose acquisition company (SPAC) formed in 2016. Trident completed an IPO on June 1, 2018. On February 21, 2021, Trident entered an agreement to complete a business combination with AutoLotto, Inc. AutoLotto was a private company doing business as Lottery.com. AutoLotto operated a platform enabling players to remotely purchase legally sanctioned lottery games in the U.S. and internationally. The two companies completed the business combination on October 29, 2021, with the surviving entity re-named Lottery.com.
According to the recently filed Delaware state court complaint, shortly after the merger was completed, a “negative sequence of events rapidly unfolded that revealed the truth” and the extent to which the defendants’ financial conflicts inflicted the board’s decision making. Among other things, the complaint alleges, the company revealed that the post-merger company’s board was investigation accounting issues and alleged non-compliance with state and federal laws for ticket sales. The company’s CFO was terminated as a result of the investigation, and the company announced it would have to restate two years of financials. The company’s CEO later resigned, as did other executives and directors. The complaint alleges that as a result of these and other post-merger disclosures, the company’s share price declined, by the time the Delaware complaint was filed, to over 90% below the price at which the public shareholders could have redeemed their shares prior to the merger.
The complaint alleges that as a result of the way the SPAC had constituted itself, the SPAC’s directors had huge financial incentives to complete a deal – any deal – rather than to permit the SPAC to liquidate. In order to try realize the huge potential financial benefits, the SPAC insiders took steps, first, to find a deal after six extension of the search period deadline, and, second, to push the deal to its completion. The board’s incentives, the complaint alleges, created an “inherent conflict of interest.”
It was “no surprise,” the complaint alleges, that the board disseminated at “false and misleading proxy statement that also omitted material information as to the value of the public shareholders’ investment.” The Proxy, the complaint alleges, did not disclose any of the internal regulatory or investigatory issues that soon surfaced post deal. The Proxy, the complaint alleges, also falsely represented that shares in the combined company would be worth $11 per share, even though the board new that Trident would be contributing less than $1.00 per share in the merger.
The complaint, filed in the Delaware Chancery Court on April 3, 2023 against the former SPAC’s board, the SPAC Sponsor, and the SPAC’s underwriting financial advisor, alleges that the Board “breached its duty of loyalty and candor to Trident’s public stockholders, not only by failing to disclose how little net cash per share there was underlying Trident’s shares, but also by withholding critical information from the Proxy concerning (1) AutoLotto’s potentially criminal violations of state and federal laws and regulations; (2) impending financial restatements; and (3) the fantastical nature of AutoLotto’s projections in light of the foregoing. Defendants’ actions in this regard served to promote only their own interests in having redemptions minimized and having the Merger close.” The complaint alleges that the merger should be assessed under the “entire fairness” standard, and that in light of the circumstances, the Merger “cannot meet the exacting entire fairness test.”
The court’s decision, which I noted above, sustaining the complaint in the Gig3 Delaware state court direct breach of fiduciary action, together with the earlier decision of the same court sustaining the complaint in the Multiplan state court direct breach of fiduciary duty action, represented what I called at the time “a short but significant track record that suggests the promising potential (from the plaintiff’s perspective) of these kinds of Delaware SPAC-related direct action breach of fiduciary duty suits.” It is significant in that regard that after the motion to dismiss was denied in the MultiPlan case, the case settled for $33.75 million. My post about the Gig3 ruling including comments from various observers that the ruling could mean a “lawsuit gold rush.” While no lawsuit deluge has yet materialized, there have been other SPAC-related lawsuits proceeding on similar theories.
This new lawsuit involving the Trident SPAC is noteworthy not only because it represents another example of the SPAC-related Delaware state court direct breach of fiduciary duty action, but also because it proceeds on a factual premise that is similar to the one that survived the dismissal motions in the Gig3 and MultiPlan cases. That is, the plaintiff’s claims depend in significant part on allegations concerning the misleading nature of the SPAC’s undisclosed diluted cash value in connection with the merger transaction. Indeed, in the Gig3 case, the plaintiff’s allegations about the undisclosed diluted cash value were instrumental to Vice Chancellor Will’s ruling in the case denying the defendants’ motion to dismiss.
Indeed, it was the plaintiff’s success on this theory in the Gig3 case that was the basis of the various commentators that the court’s ruling in the Gig3 case could lead to a deluge of similar claims. The recent filings, including this recent suit against the former board of the Trident SPAC, suggest that plaintiffs’ lawyers do indeed seem inclined to pursue claims based on this theory.
This new complaint is interesting in one other respect, and that is that the merger of Trident with AutoLotto is already part of an existing securities class action lawsuit. As noted here, in August 2022, a plaintiff shareholder filed a securities class action lawsuit against the de-SPAC company, Lottery.com, and certain of its directors and officers, with allegations relating to the supposed undisclosed regulatory violations and the subsequent financial restatements. However, the allegations in the securities class action lawsuit are lodged solely against the de-SPAC company and its executives; there are no allegations of pre-merger misconduct against the board of the pre-merger SPAC or the SPAC’s sponsor. Thus, while there is some factual overlap, the cases pertain to different alleged misrepresentations and proceed against different defendants, and also are based on different legal theories.
Because the new lawsuit involving the former SPAC directors relates to alleged pre-merger misrepresentations, and because the prior securities suit relates to alleged post-merger misrepresentations, the two lawsuits arguably hit different insurance structures. The earlier securities suit would hit the de-SPAC’s go-forward post-merger insurance structure, while the new Delaware state court complaint apparently would hit the former SPAC’s run-off D&O insurance program. To the extent that is the case, the two lawsuits would not appear to be competing to try to capture the same set of insurance funds.
The new lawsuit has only just been filed and it remains to be seen how it will fare. However, in light of the court’s ruling in the Gig3 case, it will be interesting to see how the new lawsuit progresses.