April 2025 in Brief: Mergers & Acquisitions

SPAC Directors and Officers Team Up with D&O Insurer to Sue SPAC Target

By Yelena Dunaevsky, Woodruff Sawyer

On April 14, 2025, a group of directors and officers of a former SPAC (“D&O Plaintiffs”) filed a lawsuit in the Delaware Court of Chancery against the ultimate owner of the company that merged with their SPAC, Spartan Acquisition Corp. II. Strong v. Sunlight Financial Holdings Inc., No. 2025-0399. The complaint is to enforce the directors’ and officers’ indemnification and advancement rights flowing from the merger and related agreements that they entered into with Sunlight Financial. What is interesting and unusual here is that along with the SPAC’s directors and officers, the SPAC’s D&O insurance carrier, Beazley, which has been a very active player in the SPAC market, is also a plaintiff in this suit.

The complaint stems from defense, settlement, and books and records demands costs incurred by the plaintiffs in underlying federal securities action and Delaware Chancery Court lawsuits (“Underlying Lawsuits”). Although the entity that merged with the SPAC (the “deSPAC”) has acknowledged that it owes indemnification and advancement obligations to the D&O Plaintiffs, it has failed to fulfill these obligations. Beazley is joining the D&O Plaintiffs in this suit because it provided “Side A” D&O liability insurance coverage to the SPAC’s officers and directors and is required to cover them if an indemnitor fails or refuses to meet its indemnification obligations.

According to the complaint, the D&O Plaintiffs were entitled to broad indemnification and advancement rights prior to and at the time of the merger pursuant to (1) the SPAC’s certificate of incorporation, (2) its bylaws, and (3) the indemnification agreements entered into between each of the D&O Plaintiffs and the SPAC. In the merger agreement, according to standard market practice, the deSPAC agreed that it would continue to provide indemnification and advancement to the D&O Plaintiffs for a period of six years and that it would not adversely modify their existing indemnification and advancement rights.

The deSPAC was ultimately acquired by its secured lender (“Lender”), but the terms of the acquisition included the Lender’s agreement to honor all of the deSPAC’s obligations to indemnify and hold harmless past, present, and future directors and officers of the deSPAC, which includes the D&O Plaintiffs. As part of this acquisition, the deSPAC went into a Chapter 11 bankruptcy and reorganization, the terms of which required the deSPAC and the Lender to continue to indemnify the D&O Plaintiffs.

The deSPAC’s response to multiple requests for payment from both the D&O Plaintiffs and Beazley was to acknowledge its indemnification obligations but to contend that those obligations are not implicated prior to the “final disposition” of the Underlying Lawsuits. The Lender contends that it has no obligation to indemnify the D&O Plaintiffs unless it has absolute control of the deSPAC, which it contends it does not.

Plaintiffs seek (a) declaratory relief, (b) damages for the deSPAC’s and Lender’s breaches of their indemnity obligations, (c) advancement of expenses with respect to the ongoing defense of the Delaware lawsuit, (d) repayment, via subrogation, of the defense and settlement amounts Beazley paid on behalf of the D&O Plaintiffs, and (e) the fees and costs Plaintiffs have incurred pursuing their indemnification rights.

Delaware Superior Court Refuses to Dismiss Dispute in Stock Purchase Agreement Arising from Ambiguity in Deferred Payments Terms

By Ann E. Sheppard, Elon University School of Law; Bailey Kirby and Shawn Garrett, Garrett, PLLC

On April 15, 2025, the Delaware Superior Court issued its order in a case stemming from a disagreement around the language in a stock purchase agreement. In Brooks v. Maxwell (C.A. No. N24C-10-440 FJJ), Raphael O. Brooks III, founder of Pace Neurohealth TMS Centers, Inc. (“Pace”), brought suit against Dominic Maxwell and Claude Smith, as well as Pace, after the parties entered into negotiations that resulted in the drafting and execution of a Stock Purchase Agreement (the “Agreement”) on November 19, 2021, to acquire shares in Pace. In the Agreement, Maxwell and Smith each agreed to acquire 50 percent of Pace’s shares, resulting in the pair becoming 100 percent owners of the entity. A disagreement arose between the parties as the Agreement mentioned “tender[ing]” deferred payments to Brooks, yet the document was ambiguous in relation to the payments. In an amended complaint, Brooks asserted various claims including breach of contract, anticipatory repudiation, unjust enrichment, and breach of implied covenant of good faith and fair dealing, and he sought declaratory judgment. The defendants moved to dismiss all of the plaintiff’s claims under Delaware’s civil rules, claiming the court lacked subject-matter jurisdiction and the plaintiff failed to state a claim.

The Court denied the defendant’s motions. In its denial, the Court held that it had subject matter jurisdiction over the plaintiff’s claims, as Brooks sought monetary damages rather than an equitable remedy such as specific performance. The Court noted it found no indication that the company was required to hold funds in escrow or that equitable relief was necessary in relation to the deferred payments. The Court also denied the motion to dismiss Brooks’s breach of contract and anticipatory repudiation claims, finding that the Agreement was ambiguous as to who was responsible for the deferred payments—the buyers, Pace, or both. The Court ultimately held additional discovery was needed to clarify the parties’ intent.

The Court declined to dismiss Brooks’s unjust enrichment claim. The Court allowed his claim because it was pled in the alternative and the Agreement’s ambiguity left open the possibility that no valid agreement covered the disputed obligation. Last, the Court held that Brooks’s claim for breach of the implied covenant of good faith and fair dealing could not be dismissed. The Court determined it was premature to conclude that the Agreement did not leave a gap as to the obligations of the parties.

This case highlights the importance of accuracy and precision in contract drafting. When ambiguous terms exist in a transaction, the potential for unintended consequences increases.