Though SPAC-related lawsuits were among the most important factors contributing to securities class action litigation filing volume in 2022, SPAC-related litigation has not yet been as significant of a factor so far in 2023. But while there have been relatively few SPAC related securities suits filed this year, there has been SPAC-related Delaware state court breach of fiduciary duty litigation. In the latest example of this Delaware state court litigation activity, plaintiff shareholders recently filed a Delaware Chancery Court lawsuit against the directors of a SPAC; the post-merger de-SPAC company, as successor in interest in the SPAC; and the SPAC’s sponsor, alleging that the defendants breached their fiduciary duties in connection with the merger. A copy of the plaintiff’s March 31, 2023, complaint can be found here.
Adara Acquisition Corp. was a special purpose acquisition company (SPAC). Adara completed an IPO on February 11, 2021. In June 2022, the SPAC announced its plan to complete a business combination with Alliance Entertainment, a distributor of movies, video games, compact disks, and vinyl records. The parties issued their proxy statement on December 12, 2022, and the parties completed the business transaction on February 10, 2023.
The recently filed complaint alleges that “the deal closed even though Adara investors would have been better off if the acquisition had not closed, and without Adara informing the stockholders of updated risks that had materialized since the definitive Proxy statement was filed.” The complaint alleges that in closing the deal, Adara “did not take into account the interests of the remaining post-redemption investors of Adara.”
Specifically, the complaint alleges that Adara did not inform investors until February 13, 2023 – that is, after the February 10, 2023, closing date – that Legacy Alliance (the pre-merger target company) had received a notice of default letter from a creditor, subjecting it to a deferred action by the lender. The complaint alleges further that Adara failed to inform the NYSE American Exchange of the pending de-SPAC transaction, leading to it being delisted from the NYSE American Exchange and onto the OTC Markets.” The complaint alleges that the SPAC investors who did not redeem when they had the right to do so “are now left holding stock trading below the redemption value.” The complaint alleges that the defendants breached their fiduciary duties and seeks to recover damages on behalf of the class.
As I noted at the outset, SPAC-related securities litigation was a significant factor in the volume of securities lawsuit filings in 2022. There were 23 SPAC-related securities suits filed in 2022. But of the 23 suits filed last year, 17 were filed before May 31, 2022, and only six were filed between May 31, 2022, and the end of the year. The slowdown in SPAC-related securities suits continued this year. By my count, there have been only two SPAC related securities suits filed YTD as of March 31, 2023. The slowdown undoubtedly is due to the general slump that overtaken the whole financial market for SPACs. With SPAC share prices trading down across the board, there are fewer highfliers to attract attention and to create a stir following a significant share decline.
But while SPAC-related securities litigation may have lost its attraction for the plaintiffs’ lawyers, SPAC-related Delaware state court direct action breach of fiduciary duty litigation may have greater appeal. The recent high-profile success the plaintiffs’ lawyers achieved in the Delaware breach of fiduciary duty suit involving Gig3 (discussed here) and MultiPlan (discussed here), may make the Delaware state court direct action breach of fiduciary duty litigation look more attractive. (Importantly, the MultiPlan case settled for $33.75 million after the denial of the motion to dismiss.) Indeed, following the Delaware Chancery Court’s denial of the motion to dismiss earlier this year in the Gig3 case, there was public discussion whether the ruling might set of a “gold rush” of SPAC-related litigation in Delaware’s courts.
While, at least so far, nothing like the supposed “gold rush” of SPAC-related lawsuit filings in Delaware state courts has materialized, the plaintiffs’ lawyers in this case did choose to file this suit as a Delaware court breach of fiduciary duty action rather than as a securities class action lawsuit. And while the theory of liability in this case is quite a bit different than the theory in the Gig3 and MultiPlan cases (in which the plaintiffs allege that the defendants wrongfully failed to disclose the impact on the enterprise’s cash value from shareholder redemptions), the plaintiffs’ success in those earlier cases may well have contributed to the plaintiffs’ decision to pursue their claim in the forum and the form that they did.
All of that said, it is clear that, even with this latest filing, the volume of SPAC-related litigation is nowhere near what it was before May 31, 2022. At this point, there is relatively little to suggest that SPAC-related lawsuit filings will be as significant of a factor this year as was the case last year.