SPACs have been criticized extensively for favoring the promoters and their cronies while the merged operating company does not reward the investors.  Most SPACs are formed and will continue to be formed in Delaware.  The Chancery Court early this month agreed to allow a shareholder suit to proceed against the founders of a SPAC in a manner suggesting how Delaware courts will view claims leveled at SPAC directors (see In re: MultiPlan Corp Stockholders Litigation, #2021-0300).

There are technical elements to this case which defy terse analysis,  but basically the claim is that the promoters did not give full disclosure of details to the SPAC investors, who then did not ask for their investment to be refunded (as they were at the time legally entitled to request), but stayed invested and became thus shareholders of target company that the SPAC acquired; in this fashion the acquired company became publicly held.  Stockholders claim that they were not given all the facts when they decided to stay with the merged company, and sued the directors (and the promoter who got a .$300M promote on the merger) for the money they lost when the new company shares fell in value by reason of facts known to the directors at time of deal.

Disclosure in SPAC acquisitions historically has not been complete as to the insider deals, and promoters have sometimes named the same people over and over as directors, who made profit without risk and voted in favor of the acquisition.  Perhaps the thrust of this case is that the level of SPAC disclosure of deal terms will be stepped up in order to protect promoters and directors; the mere receipt of profit is not itself wrongful if it is disclosed in fullness, so as to permit investors to say “no” and get their money back pre-merger if they so elect.

A separate issue is the SEC regulatory view: if SPAC acquisition disclosure were made as robust as is required in a regular IPO as to insider benefits, presumably application of such a standard would insulate profiting directors and promoters from liability even if those SPAC investors ultimately lose money by staying in the deal.

Forgive me, finally, if you know this but I just love the nomenclature here: the transaction by which a SPAC acquires a target and makes the target a publicly held entity is called a “de-SPAC.”  I guess the plaintiffs in the above case would choose different wording.