Richard Delman v. GigAquisitions3, LLC
Not yet reported; Opinion on motion to dismiss (2023)
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Rule of Law:
The fiduciaries of a Special Purpose Acquisition Company (SPAC) organized as a Delaware corporation owe the same traditional, non-waivable fiduciary duties of loyalty as directors of any other corporation. A de-SPAC transaction rife with conflicts that disadvantage public stockholders will be subject to entire fairness review.
Facts:
- In February 2020, GigAcquisitions3, LLC (the 'Sponsor'), controlled by Avi Katz, formed GigCapital3, Inc. ('Gig3'), a SPAC.
- The Sponsor purchased approximately five million 'founder shares' for a nominal price of $25,000, which would become worthless if Gig3 failed to complete a merger within a set timeframe.
- In May 2020, Gig3 held an Initial Public Offering (IPO), raising $200 million by selling units to the public at $10.00 each. Public stockholders were granted a right to redeem their shares for approximately $10.10 per share if they disapproved of a future merger.
- The board of directors, appointed by Katz and composed of individuals with close personal and professional ties to him, identified electric vehicle manufacturer Lightning eMotors ('Lightning') as a merger target.
- Gig3 struggled to raise private investment in public equity (PIPE) financing based on its initial valuation of Lightning, eventually securing only $25 million after lowering the valuation.
- To obtain sufficient funding, Gig3 entered into a dilutive $100 million convertible note financing agreement, which included warrants, with investors who had previously declined to participate in the PIPE.
- On March 22, 2021, Gig3 filed a proxy statement recommending the merger. The proxy used a $10.00 per share value for Gig3 stock in the transaction and included highly optimistic, unverified financial projections from Lightning's management.
- After the merger closed in May 2021, the combined company's stock price fell from around the $10.00 redemption price to $7.82 per share, while the Sponsor's initial $25,000 investment became worth over $39 million.
Procedural Posture:
- Plaintiff Richard Delman filed a putative class action complaint in the Delaware Court of Chancery against GigAcquisitions3, LLC (the Sponsor), its controller Avi Katz, and the members of the Gig3 Board of Directors.
- The complaint alleged direct claims for breach of fiduciary duty against the directors and the Sponsor, and a claim for unjust enrichment against all defendants.
- Defendants filed a motion to dismiss the complaint for failure to state a claim under Court of Chancery Rule 12(b)(6) and for failure to plead demand futility under Rule 23.1.
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Issue:
Do the fiduciaries of a Special Purpose Acquisition Company (SPAC) state a valid claim for breach of fiduciary duty, subjecting a conflicted de-SPAC merger to entire fairness review, by plausibly alleging that the fiduciaries provided materially deficient disclosures that impaired public stockholders' ability to exercise their redemption rights?
Opinions:
Majority - Vice Chancellor Will
Yes. A claim for breach of fiduciary duty against SPAC fiduciaries is reasonably conceivable where it is alleged that a conflicted de-SPAC transaction was approved based on materially misleading disclosures that impaired stockholders' redemption rights, thus triggering an entire fairness review. The court held that the traditional fiduciary duties of Delaware corporate law apply fully to SPACs. The business judgment rule was rebutted, and entire fairness review applies for two independent reasons. First, the merger was a conflicted controller transaction because the Sponsor, despite its minority stake, exercised effective control over Gig3 and had a unique interest in completing any deal, even a value-destructive one, to realize a massive return on its founder shares. Second, a majority of the board was not disinterested or independent, as every member had extensive, interlocking business and personal relationships with the controlling fiduciary, Avi Katz. The subsequent stockholder vote did not cleanse the transaction under Corwin because the disclosures were materially deficient and the voting structure decoupled stockholders' economic interests from their voting rights. The complaint plausibly alleged the transaction was unfair as to both dealing (materially misleading proxy statement) and price (stockholders received shares worth significantly less than their redemption value).
Analysis:
This decision, along with In re MultiPlan, solidifies the application of Delaware's most stringent standard of review, entire fairness, to the unique conflict-of-interest structure inherent in SPACs. It confirms that SPAC fiduciaries cannot hide behind the entity's novel structure or boilerplate disclosures to escape their fundamental duty of loyalty. The ruling emphasizes that the stockholder's redemption right is the key protective mechanism in a SPAC, and any impairment of that right through deficient disclosure will be viewed as a potential breach of loyalty. This precedent puts SPAC sponsors and directors on notice that courts will scrutinize de-SPAC transactions for both procedural and price fairness, especially where the deal appears to primarily benefit the insiders at the expense of public investors.
