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Business Law Today

April 2023

April 2023 in Brief: Mergers & Acquisitions

Chauncey Lane and Yelena Dunaevsky

April 2023 in Brief: Mergers & Acquisitions

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Another SPAC Breach of Fiduciary Duty Suit Pulls in Bankers

By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance

Another SPAC-related direct breach of fiduciary duty lawsuit was filed on April 3, 2023, in the Delaware Court of Chancery. This lawsuit follows on the heels of the Multiplan and Gig3 lawsuits that are similar in nature. In both of those cases, Vice Chancellor Lori W. Will denied the defendants’ motions to dismiss and held that the entire fairness standard rather than the business judgement rule should be applied in those cases. Many thought those two decisions would embolden the plaintiff’s bar to launch a wave of similar lawsuits against SPACs. The wave has not yet materialized, but the current case, brought by stockholders of Trident Acquisition Corp. against directors and officers of Trident Acquisition Corp. in connection with the SPAC’s merger with AutoLotto, is continuing the trend. 

The allegations in the Trident case are that the defendants, “aided and abetted by each other and Chardan [Capital Markets, LLC], granted themselves financial interests in the SPAC that diverged from those of public stockholders and allowed their financial interests to override their fiduciary duties and responsibilities as controlling stockholders, directors, and officers of a Delaware corporation by forcing through a value-destroying merger with AutoLotto… and accomplishing the Merger on the basis of false and misleading disclosures.” The complaint further alleges that those “false and misleading disclosures induced Trident’s public stockholders to invest in the Merger… rather than redeem their shares.” That investment allegedly proved to be a bad one for the plaintiffs.

Interestingly, the complaint in this instance is not limited to the directors and officers of the SPAC. It extends to the SPAC’s sponsor, which is not unusual, but also, for aiding and abetting breaches of fiduciary duty, to Chardan Capital Markets, the financial adviser in the merger.

The extension of the complaint to the financial adviser is rather unusual. Outside of the SPAC’s directors and officers, the typical parties implicated in SPAC-related complaints are the SPAC itself, the SPAC’s sponsor, the directors and officers of the target company, and possibly the target company itself. It is uncommon to see the bankers or other SPAC advisers pulled into a complaint. In 2022, the SEC did settle an enforcement action against Perceptive Advisors (the SEC’s first SPAC-related enforcement action against an investment adviser) for failing to disclose SPAC-related conflicts of interest. But lawsuits against SPAC advisers have not been the norm. Whether more will follow is anyone’s guess, but it is safe to say that we will likely see more direct breach of fiduciary duty lawsuits filed in Delaware if their motions to dismiss continue to be denied.