Chancery Applies Traditional Fiduciary Principles to SPAC in 1st Test of Popular Vehicle for Private Companies to Access Public Markets Under Del. Corporate Law
The Delaware Court of Chancery applied entire fairness review and held that the plaintiff stockholders had stated legally sufficient "nonexculpated claims against the controlling stockholder and directors" of Churchill Capital Corp. III, a SPAC, in connection with its de-SPAC merger with a private operating company.
January 26, 2022 at 09:00 AM
7 minute read
A special purpose acquisition company, or SPAC, is a popular investment vehicle to take private companies public. A SPAC, commonly referred to as a blank check company, is a company whose stock is traded on a public market, but has no operations. Typically, the SPAC raises capital through an IPO with the singular goal of entering into a business combination with a private operating company (referred to as a de-SPAC merger), taking the private company public and giving the new public company its stock listing. A SPAC is often formed and controlled by a sponsor, whose primary job is to identify a target private operating company for the de-SPAC merger. A common feature of a SPAC is that the sponsor receives founder shares in the SPAC for a nominal capital contribution, which shares convert to substantial common shares in the new public company if a business combination with a private company is consummated within the market-standard, two-year period from the IPO. However, if no such transaction is completed within two years, the IPO proceeds are returned with interest to the public stockholders, and the SPAC winds up and liquidates, which renders worthless the sponsor's founder shares. While these features and structure are common in SPACs, and the attendant mismatched financial incentives between the sponsor and the public stockholders in a de-SPAC merger are known to SPAC investors, this does not remedy the conflicts of interest inherent in the SPAC structure. Moreover, that a de-SPAC merger may legally comply with the DGCL does not shield the merger from application of well-established equitable fiduciary principles of Delaware corporate law.
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