• Delaware Court Of Chancery “Barely” Sustains Claims Challenging Representations About Value Of SPAC Shares

  11/05/2024

  On October 18, 2024, Vice Chancellor Glasscock of the Delaware Court of Chancery declined to dismiss a putative class action brought by stockholders of special purpose acquisition company (“SPAC”) Mountain Crest Acquisition Corp. II (“MCAD”) against MCAD’s sponsor and alleged controlling stockholder (“Sponsor”), asserting that they breached their fiduciary duties in connection with MCAD’s acquisition of a digital therapeutics company in a so-called “deSPAC” merger. Solak v. Mountain Crest Capital LLC, Del. Ch., C.A. No. 2023-0460-SG (Oct. 18, 2024). Plaintiff alleged that defendants issued a materially misleading proxy, breaching their fiduciary duties by misrepresenting that the SPAC’s shares were worth $10 per share—the same as their redemption value. The Court held that, while the allegations were “not strong,” plaintiff “barely” alleged reasonably conceivable claims for breach of fiduciary duty of loyalty and unjust enrichment under the entire fairness standard.

  In applying the entire fairness standard, the Court adhered to a well-developed body of precedent in Delaware in concluding that the incentive structure of the SPAC created inherent conflicts between the SPAC’s fiduciaries, on the one hand, and its public stockholders, on the other, in the context of a merger. Although two defendants held in the aggregate 20% of the SPAC’s shares, the Court nevertheless inferred that they were controllers because they were the sole members of the SPAC sponsor, which plaintiff alleged generally controlled all aspects of the entity from creation to merger. The Court also inferred that three additional individual defendants were controlled by the two controllers because they expected to be considered for directorships in future SPACs and because they were granted 2,000 founder shares. While these shares only represented $20,000 (an arguably nominal amount for these defendants), the shares would be completely worthless if the SPAC did not reach a merger deal. The Court inferred that the controllers and directors engaged in a conflicted transaction, triggering entire fairness review, because defendants had a financial interest in effectuating any merger, regardless of its value. The Court also credited plaintiff’s theory that defendants competed with the common stockholders for value in the transaction.

  In evaluating the adequacy of the factual allegations themselves, the Court noted that the decision was the “first to deny a motion to dismiss solely on an affirmative statement of investment value in conflict with a failure to also disclose net cash.” Plaintiff argued that the net cash per share held by the SPAC was just $7.50 and that “pre-merger net cash per share is closely related to post-merger share value.” Accordingly, plaintiff reasoned that by omitting the actual net cash per share from the proxy and asserting that the merger had a value of $10 per share, defendants misled stockholders as to the value of their shares. The Court observed that, while the failure to disclose net cash share per share was not, per se, a breach of duty, the proxy misstated an investment value of $10 per share and failed to disclose that the actual amount of cash being placed into the merger was 25% less than implied.

  Categories: Deal Disputes, Disclosures, Fiduciary Duties, SPACs, Standard of Review
  

Links & Downloads

• Solak v. Mountain Crest Capital LLC