Special purpose acquisition companies, or SPACs, have grown in popularity over the past decade, and as a result, more than 30% of all transactions that took companies public in 2021 involved a de-SPAC merger. The rise in SPACs' popularity led to the rise of SPAC-related litigation, especially following the poor performance of many companies taken public by SPACs. Recent decisions by the Delaware Court of Chancery demonstrate that when a SPAC transaction and the disclosures surrounding it are challenged, defendants may face an uphill battle to prevail on a motion to dismiss, especially where breach of fiduciary duty claims have been asserted.

Understanding how SPAC transactions work is critical to understanding the challenges that defendants may face in litigation involving a SPAC. A SPAC is a company that lacks business operations and tangible assets, but is formed by a sponsor to raise capital through an initial public offering (IPO) for the purpose of merging with, or acquiring, an existing company. The sponsor, which oftentimes is a limited liability company, is also responsible for administering the SPAC, and is typically compensated in the form of founders shares from the SPAC's post-IPO equity, which are acquired at a large discount.