Chancery Court Addresses Validity of a Post-Closing Lock-up in a de-SPAC Transaction
By Mark D. Hobson and Kellen Johansen
In Brown v. Matterport Inc., C.A. No. 2021-0595, 2022 WL 89568 (Del. Ch. Jan. 10, 2022), the Delaware Court of Chancery addressed the effectiveness of transfer restrictions (“lock-ups”) that are commonly imposed on stockholders post-closing in connection with a business combination transaction between a special purpose acquisition company (a SPAC) and a target company to mitigate share volatility and incentivize management and the SPAC sponsor. The Delaware Court of Chancery determined that the lock-up at issue did not apply to certain shares held by the plaintiff, the target’s Chief Executive Officer, because he did not actually hold SPAC shares immediately after the consummation of the transaction even though the restrictions at issue were imposed on shares “immediately following the closing of the Business Combination Transaction.” The Court held that plaintiff was not bound by the lock-up until after he turned in his shares for exchange because the shares subject to the lock-up were merely issuable, not outstanding at the effective of the merger.
This case arose from a business combination transaction between Matterport Operating, LLC, a privately held spatial data company (“Legacy Matterport”), and a special purpose acquisition company, Gores Holding VI, Inc. (the “Gores SPAC”), that was consummated on July 22, 2021. Plaintiff served as the CEO of Legacy Matterport from November 2013 to December 2018, during which time he received stock options and restricted shares, with the result that he was a stockholder of Legacy Matterport at the effective time of the business combination.
Gores SPAC and Legacy Matterport agreed to the business combination in February 7, 2021. As part of the business combination: (i) the Legacy Matterport stockholders would receive 4.1183 shares of Matterport Class A common stock for each share of Legacy Matterport that they owned, and (ii) Matterport was required to adopt amended bylaws (the “A&R Bylaws”) prior to the business combination, to include, inter alia, transfer restrictions on certain shares of Matterport Class A common stock issued as merger consideration for a 180-day period following the closing of the business combination. The transfer restrictions in the A&R Bylaws included language that such transfer restrictions were only applicable to holders of Matterport Class A common stock “outstanding immediately following the closing of the Business Combination Transaction.” To receive their Matterport Class A common stock, the former stockholders of Legacy Matterport were required to surrender their certificates to Matterport, together with a properly completed and duly executed letter of transmittal.
Plaintiff sued for declaratory relief from the lock-up imposed in connection with the business combination, arguing that the lock-up did not apply to certain of his shares because he had not actually received the shares due to his failure to deliver the required transmittal documents. The Court agreed with plaintiff, holding that plaintiff’s shares were not subject to the lock-up immediately following the effective time of the business combination because the shares had not been issued to plaintiff and were not actually outstanding.