As I have chronicled on this blog (most recently, here), a wave of litigation has followed in the wake of the SPAC boom in late 2020 and early 2021. Since January 1, 2021, over 60 SPAC-related securities class actions have been filed, and there has also been a number of Delaware state court breach of fiduciary duty lawsuits, as well. Although many of these suits have only just been filed and therefore have not yet been subjected to judicial scrutiny, there have been several dismissal motion rulings in a number of these cases. A May 2023 memo from the Jones Day law firm entitled “SPAC Litigation: A Review of Recent Developments” (here) reviews the state of play in the various judicial rulings so far in the SPAC-related cases.  As the memo notes, “many high-profile suits have recently survived motions to dismiss (at least in part), and at least one has been resolved through a significant settlement.”

Delaware Breach of Fiduciary Duty Litigation

The memo begins with a review of key developments in the Delaware state court breach of fiduciary duty litigation. As the memo notes, in January 2022, the court denied the motion to dismiss in the high-profile MultiPlan litigation. As discussed here, Vice Chancellor Lori Will held that plaintiffs had adequately alleged that the SPAC’s directors and sponsors were conflicted (triggering the “entire fairness” standard of review) and had breached their fiduciary duties to the stockholders. The plaintiffs, Vice Chancellor Will said, had adequately pled that they had been asked to choose whether to invest in MultiPlan or redeem their stock in the SPAC based on a materially misleading proxy statement. After the motion to dismiss was denied, the parties agreed to settle the case for $33.75 million.

In January 2023, Vice Chancellor Will, applying reasoning very similar to that in MultiPlan, also denied the motion to dismiss in the GigAcquisitions3 case, as discussed here. In March 2023, in another decision by Vice Chancellor Will, the motion to dismiss was denied in another similar case and on similar grounds in the GigAcquisitions2 case.

The law firm memo states that these various rulings show that “obtaining a dismissal of a breach of fiduciary duty claims in an action challenging a de-SPAC transaction may be challenging.” Not only did Vice Chancellor Will apply the more exacting “entire fairness” standard, but, the memo adds, the Gig3 decision can be “read to suggest that if a company performs poorly after a de-SPAC transaction, stockholder plaintiffs may be able to allege that the proxy statement was misleading because it did not sufficiently warn them of the potential risks.”

The memo notes that these decisions “have already significantly influenced motion practice in the Court of Chancery.” Among other things, the memo notes that in the Lordstown Motors Stockholder Litigation (also pending before Vice Chancellor Will) the defendants withdrew their motion to dismiss. In addition, after Vice Chancellor Will’s ruling in the Gig3 case, there was speculation that the ruling, viewed as favorable to claimants, could set off a “gold rush” of similar claims. As discussed here, there have indeed been further additional SPAC-related claims of this type filed in Delaware state court. (Also, discussed further here, as well.)

Federal Court Section 10(b) Claims

As I have noted in numerous posts on this site, there have been a host of SPAC-related federal court securities class action lawsuits filed since January 1, 2021, many of them alleging breaches of Section 10(b). In discussing the motion to dismiss rulings so far in these Section 10(b) case, the memo first discusses the court’s rulings in the Virgin Galactic case, involving allegations that before and after the SPAC merger, the defendants made misrepresentations about the safety and reliability of the company’s flights. The court dismissed most of the defendants’ motion, which ruling, the memo suggests, shows that “federal claims against the SPAC’s officers and directors (rather than the target’s) may be more difficult for shareholders to pursue, particularly where the alleged misstatements relate to the target’s operations or future prospects.”

The memo then discusses the dismissal motion ruling in the Lucid Motors case. As discussed here, in January 2023, the Court, although holding that the plaintiffs had standing to sue for alleged misrepresentations that allegedly were made in the period after the merger was announced and before it closed, held that the misstatements were immaterial as a matter of law. The plaintiffs had failed to allege that the merger between Lucid Motors and the SPAC was likely at the time the supposed misstatements were made.

The timing of alleged misrepresentations with respect to the date of the SPAC merger was again at issue in the CarLotz case. The plaintiff in that case alleged that the defendants had made false and misleading statements about the company and that the truth had only come to light after the de-SPAC transaction. As discussed here, the court dismissed the complaint because all of the statements complained of had been made by privately held, pre-merger CarLotz, and the plaintiff had been a stockholder of the SPAC, not of CarLotz before the merger.

Federal Court Section 14(a) Litigation

The federal court SPAC-related litigation has also involved claims under Section 14(a) alleging false or misleading statements in the SPAC’s proxy statement. As the memo notes, “Courts split on whether the plaintiff needs to allege and prove scienter or mere negligence to prevail on a Section 14(a) claim; the difference between these standards may, at the pleading stage, be dispositive. Courts also split on whether to treat the Section 14(a) claim as direct or derivative.”

As discussed here, in June 2022, the court granted the defendants’ motion to dismiss the plaintiffs’ claims in the Romeo Power case under Section 14(a), holding that the plaintiffs’ Section 14(a) claims were derivative rather than direct, and that the plaintiff had not made a demand on the SPAC’s board of directors to commence the suit or to pled that demand was futile. However, the court sustained the plaintiffs’ Section 10(b) claims against the Romeo Power’s CEO and CFO.

By contrast, however, in an October 2022 decision in the Faraday Future Intelligent Electric case, as discussed here, the court held that the plaintiffs Section 14(a) claims were direct, not derivative. The court nevertheless dismissed the plaintiffs’ Section 14(a) claims on other grounds, including because the statement about existing preorders, which had appeared in a press release, had not been incorporated by reference into the proxy statement.

Conclusions

In summarizing the key takeaways from the various rulings so far, the memo first states that the Delaware decisions in MultiPlan and Gig3 suggest that “defendants face an uphill battle in moving to dismiss SPAC-related breach of fiduciary duty claims in Delaware, at least depending on the facts asserted.”

The memo then observes that “SPAC transactions … created a high risk of lawsuits alleging violations of federal securities laws, as many such lawsuits challenge statements made by or about the target company both before and after the de-SPAC transaction closed,” noting further that the SPAC management may not have sufficient information to verify the accuracy of the pre-closing statements about the target’s business.

The memo further observes that “SPAC participants must make the disclosures as accurate as possible.” Not only do such disclosures have to comply with the securities laws, but “accurate disclosures may materially reduce the settlement value in the event that a lawsuit is filed and a motion to dismiss is denied.”