On January 4, 2023, the Delaware Court of Chancery denied a Special Purpose Acquisition (SPAC) defendants’ dismissal motion, raising questions about whether similar allegations could be raised against other SPACs.

GigCapital3, Inc. (Gig3) was a Delaware corporation formed in 2020 with a typical SPAC structure by its sponsor, GigAcquisitions3, LLC (Sponsor). Among Gig3’s features the court found to be “within the[] structural norms” for a SPAC were that its Sponsor received a “promote” in the form of 20% of the post-IPO equity; that the Sponsor appointed all of the members of the SPAC board, who were partially compensated with promote shares; that public stockholders had redemption rights in connection with a deSPAC transaction allowing them to recoup their investment of $10 per share while retaining their warrants (sold as a unit in the IPO) regardless of how they voted on the deSPAC transaction; that the SPAC had a limited timeframe to complete a deSPAC transaction or liquidate; and that the Sponsor’s shares were subject to a lock-up that prohibited the Sponsor from transferring, assigning, or selling the shares until a set time.

Gig3 ultimately engaged in a deSPAC merger with Lightning eMotors Inc. (Lightning). The proxy statement in connection with the stockholder vote included financial projections for the merged public company that forecasted dramatic growth. However, less than two weeks after the merger closed, the company publicly announced revenue guidance that was more than 12% below the proxy’s projections for the same period, followed by a falling stock price.

The plaintiff, a Gig3 stockholder, claimed the Gig3 board and Sponsor breached their fiduciary duties in connection with the public stockholders’ redemptions rights. Specifically, the plaintiff alleged that the proxy denied shareholders crucial information to help them make one of the most important decisions SPAC investors face: whether to cash out their investment or roll it into a business acquisition. The complaint further alleged that the redemption rights of certain investors and the dilutive impact of the various financial transactions completed simultaneously with the merger had the effect of substantially diminishing the SPAC’s per share cash value at the time of the merger. The complaint asserted that to justify the inflated valuation, Gig3 relied on unrealistic production and financial projections for Lightning.

In denying the defendants’ motion to dismiss, the court found that it was “reasonably conceivable” that the directors and the Sponsor breached their fiduciary “duties by disloyally depriving public stockholders of information material to their redemption decision.” Evaluating the claims under the stringent entire fairness standard, the court concluded that the SPAC’s Sponsor qualified as a controlling stockholder due to its control and influence over the SPAC, even though it held a minority interest, and that the SPAC directors lacked independence from the Sponsor. In addition, the entire fairness review was warranted based on the divergent interests between the Sponsor and public stockholders that are inherent in the SPAC structure, including the Sponsor’s unique incentive to take a “bad deal” over a liquidation of the SPAC and returning the public stockholders’ investment. In fact, the court recognized that “the nature of the Sponsor’s promote incentivized it to complete a merger with Lightning, even if the deal proved disastrous for non-redeeming public stockholders.”

For critics of SPACs, the decision may serve to bolster their position that SPAC transactions purportedly create potential conflicts of interest between public shareholders and insiders. This decision, combined with the MultiPlan decision, begs the question whether additional similar lawsuits can be expected. If one thing is certain, for those considering forming a SPAC and entering merger negotiations, a directors and officers liability policy should be maintained as one tool to help mitigate risk.

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If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker. This article can be discussed with Financial Services Group professional Adam Furmansky.



Adam Furmansky
Senior Vice President, Deputy D&O Product Leader - East
New York