CURRENT MONTH (August 2021)
Abandoned SPAC Merger Leads to Claims of Investment Company Act Violations
On August 17, 2021, former SEC commissioner and now NYU law professor Robert Jackson and Yale law professor John Morley, representing a shareholder of Bill Ackman’s SPAC, Pershing Square Tontine Holdings Ltd., filed a derivative suit in the Southern District of New York on behalf of the SPAC and against the SPAC’s directors, its sponsor and others. Although SPACs have faced multiple lawsuits, including 20 securities class actions, so far this year—a considerable increase from previous years—the allegations in this complaint are novel. The complaint essentially alleges that the SPAC is, and should have registered as, an investment company under the Investment Company Act of 1940 (ICA) and that its directors received compensation that was illegal under the ICA and the Investment Advisers Act.
Bill Ackman’s name, coupled with the fact that his SPAC raised the most funds in SPAC history (close to $4 billion when it went public in July of 2020), coupled with the fact that the plaintiff is represented by a former SEC commissioner, coupled with the fact that this SPAC tried to complete a merger last month but called it off, and coupled with the fact that the allegations in the complaint seemed to suggest serious violations of yet another major set of laws, immediately catapulted this case onto the front pages of all major business news sections. The question floating around SPACland was shocking in its enormity: does the current SPAC structure, which has been used by hundreds of SPACs that have gone public and dozens more that have completed their business combinations and are now operating as public companies, violate Investment Company Act rules?
The first general reaction to the allegations was that this was an experimental, somewhat absurd, but ultimately innocuous, shot in the dark by a couple of academics seeking to make a splash and create headlines. Most practitioners in the market thought that perhaps the unusual terms of the SPAC’s failed merger with Universal Music Group, which was questioned by the SEC and eventually abandoned, were what sparked this challenge. Bill Ackman’s reaction to the suit was captured in his August 19, 2021, letter to the SPAC’s shareholders. The letter stated that he believes the lawsuit to be meritless and pointed out that “[a]s the law professors who brought the case should very well know (as both are securities law experts), holding cash and government securities while seeking a business combination does not make PSTH an illegal investment company, nor does it make any of the hundreds of other SPACs that do the same, illegal investment companies either.” But Jackson and Morley did not stop at Pershing Square, however. They promptly filed two more lawsuits with similar allegations against two related SPACs, GO Acquisition Corp. and E.Merge Technology Acquisition Corp.
The legal community responded promptly as well. First with a succinct but very clear August 24, 2021, memo from the SPAC team at White & Case, aptly entitled “SPACs are Not Investment Companies.” And then with an August 27, 2021, statement, signed by 49 law firms, including the leading firms in the SPAC space and the most preeminent US law firms, stating that “[c]onsistent with longstanding interpretations of the 1940 Act, and its plain statutory text, any company that temporarily holds short-term treasuries and qualifying money market funds while engaging in its primary business of seeking a business combination with one or more operating companies is not an investment company under the 1940 Act. As a result, more than 1,000 SPAC IPOs have been reviewed by the staff of the SEC [including while Robert Jackson served as SEC commissioner] over two decades and have not been deemed to be subject to the 1940 Act.”
More to come.
Delaware Superior Court Denies Motion to Dismiss Regarding Claims of Unjust Enrichment and Tortious Interference in Proposed Transaction Between Lo70s and Kubient, Inc.
By Kolby A. Boyd
On August 6, 2021, the Superior Court of the State of Delaware (the “Court”) declined to dismiss a lawsuit brought by Aureus Holdings, LLC, an advertising data and lead generation company doing business as Lo70s (“Lo70s”), against Kubient, Inc., an advertising technology company (“Kubient”), involving claims regarding failure to enter into an asset purchase agreement (the “APA”).
Lo70s alleged that Kubient breached a binding letter of intent (the “LOI”) by failing to move towards executing the APA, breached the duty to negotiate in good faith, was unjustly enriched, and tortiously interfered with Lo70s’s business relations. The partial motion to dismiss at issue here focused on the unjust enrichment and tortious interference claims.
According to the complaint, Kubient was interested in Lo70s’s sales infrastructure to bolster its initial public offering (“IPO”), and thus entered into the LOI under which Kubient agreed to create an APA detailing its acquisition of substantially all of Lo70s’s assets. After executing the LOI and during the exclusivity period, Lo70s helped integrate its assets into Kubient at Kubient’s request and began assisting Kubient with market participation and client base development, giving attention to Kubient’s business to the detriment of its own.
Allegedly, the parties agreed that Kubient would pay Lo70s $500,000 cash upon execution of the APA and would later provide an undetermined amount of stock following its IPO. Kubient represented to Lo70s that its board had approved the acquisitions and terms. The following day, Kubient instead offered $200,000 cash and no stock, which Lo70s rejected. Kubient never drafted the APA or any ancillary documents before the expiration of the exclusivity period.
In its present motion, Kubient argued the unjust enrichment and tortious interference claims should be dismissed because the LOI controls the remedies relating to claims stemming from the contract. Additionally, Kubient argued that Lo70s failed to state a claim for tortious interference because it failed to allege a reasonable probability of a business opportunity, causation, and intentional interference. Lastly, Kubient argued that the economic loss doctrine, which prohibits recovery in tort for losses unaccompanied by a bodily harm or a property damage, precluded the tortious interference claim.
The Court ruled that Lo70s had pled all the elements of an unjust enrichment claim, including that the LOI failed to provide a mechanism for recovering its damages resulting from Kubient’s misconduct. Additionally, the Court ruled the LOI did not bar the unjust enrichment claim because it did not govern this aspect of the parties’ relationship. The Court held that Lo70s pled the elements of a tortious interference claim, including that Kubient directed Lo70s to abandon its own business even though the LOI did not provide for that. Lastly, the Court held that the economic loss doctrine did not bar the tortious interference claim because the LOI only imposed duties related to the parties entering into an APA, and Kubient’s alleged tortious conduct did not violate any duty imposed by the LOI. According to the Court, if a claimed duty is independent from the duties imposed by the contract, the tortious interference claim should survive.
Delaware Court of Chancery Denies Motion to Dismiss Regarding Fraud and Other Claims in Connection with Sale of OnCourse Learning Corporation
By Kolby A. Boyd
On August 12, 2021, the Court of Chancery of the State of Delaware (the “Court”) denied a motion to dismiss in the lawsuit brought by Online Healthnow, Inc. (“OHN”) and Bertelsmann, Inc., a German publishing group (“Buyer”), against CIP Capital Fund, L.P., a private equity fund (“CIP Capital”), CIP OCL Investments, LLC, CIP Capital’s holding company (“Seller”), and its beneficial owners and agents, in connection with a stock purchase agreement (“SPA”) for OnCourse Learning Corporation, an online learning company (“OCL”), that contained representations and warranties that were allegedly known to be false when made.
The SPA provided for a base purchase price of $525 million. However, Buyer alleged that the defendants fraudulently induced this purchase price by deliberately misrepresenting that the online learning company had a tax liability as a result of a software error, damages from which exceeded $1 million plus legal costs for Buyer. Buyer alleged that the defendants knew of the substantial tax liability and intentionally created separate data rooms where only some information was disclosed to bidders in the sales process, which resulted in Buyer not being aware of the severity of the tax liability.
The SPA represented that there were no material tax issues or undisclosed liabilities, and also contained a provision that the representations and warranties in the SPA would terminate at closing and there would be no liability on the part of any party involved in the sale. The SPA also provided for a working capital adjustment process with review by an accounting firm to adjust the final purchase price should there be disputes. Additionally, the SPA contained a savings clause, stating that should any provision of the SPA be unlawful or against public policy, that the rest of the SPA would remain in full force and effect.
During post-signing diligence, Buyer discovered the alleged tax liabilities and fraudulent representations. The defendants contended that the Buyer’s issues should be adjudicated by the accounting firm as provided in the SPA, but Buyer’s position was that the claims related to fraudulent inducement could not be left to the accounting firm, and Buyer filed the present lawsuit. The defendants’ primary argument in the present motion to dismiss was that the terms of the SPA precluded Buyer’s claims after the transaction closed.
The Court ruled that under Delaware law, a party cannot invoke provisions of a contract that it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud, and thus the claim for fraud must survive dismissal.
Delaware Chancery Court Dismisses All Counts in Genomic Health, Inc. – Exact Sciences Corp. Merger Litigation
By Courtney Black
On August 16, 2021, the Court of Chancery of Delaware (the “Court”) granted motions to dismiss in a lawsuit originating out of the July 2019 merger between Genomic Health, Inc., a global provider of genomic-based diagnostic tests (“Genomic”) and Exact Sciences Corp., a molecular diagnostics company (“Exact”). The merger was structured so Exact would acquire Genomic for cash and stock valued, in combination, at $2.8 billion. A stockholder of Genomic (the “Plaintiff”) brought the lawsuit against Genomic, its directors and CEO, Exact, Spring Acquisition Corp.—a wholly-owned subsidiary of Exact formed for the merger (“Spring”), Goldman Sachs & Co.—Genomic’s financial advisor (“Goldman Sachs”), and significant Genomic stockholders (the “Bakers Brothers Entities”) and its controllers.
Plaintiff’s complaint alleged that defects in the merger process resulted in a fundamentally unfair price for Genomic stockholders. The Plaintiff alleged six counts against the various defendants, and the defendants filed a motion to dismiss for all six counts. In this opinion, the Court granted the motion to dismiss on all six counts.
Plaintiff’s first and second counts were brought against Genomic, Exact, Spring, and the Bakers Brother Entities. Plaintiff alleged Exact entered into a business combination with Genomic two days after Exact became an interested stockholder, which is a violation of Section 203 of the Delaware General Corporation Law (“Section 203”). Plaintiff also alleged a conversion claim based on the alleged Section 203 violation. First, the Court found Exact was not an interested stockholder prior to the merger. Under Section 203, interested stockholder status can result from an agreement for the purpose of acquiring, voting, or disposing stock with a person that beneficially owns such stock. Here, the Court rejected the Plaintiff’s inference that language in the proxy statement created such an agreement. There was no evidence of a meeting of the minds between the Baker Brothers Entities and Exact. Second, the Court found the Board implicitly approved the merger’s voting agreement prior to its consummation and execution of the Merger Agreement, which complies with Section 203(a). Here, the evidence showed that draft merger agreements contemplated voting agreements, so it was reasonable to infer the Board understood that there would be voting agreements in the transaction. Lastly, the Court found the purpose of Section 203, to avoid abuse takeover tactics, was not present on these facts.
Plaintiff’s third and fourth counts were breach of fiduciary duty claims brought against the Directors of Genomic, the then-CEO of Genomic, and the Baker Brothers Entities. Plaintiff argued to rebut the business judgment rule and apply a higher standard of review. First, the Court held that an entire fairness standard of review was not justified. Under Delaware law, the entire fairness standard of review can be triggered when there is a reasonable inference that a conflicted transaction involved a controlling stockholder. Delaware courts find that a controlling stockholder exists when a stockholder owns less than 50% of the voting power of the corporation but exercises control over its business affairs. Here, the Court held the complaint lacked any well-pleaded allegations of general control or domination over Genomic’s corporation decisions. Second, the Court held that Revlon’s enhanced scrutiny standard of review was not justified. An enhanced scrutiny standard of review can be triggered in three ways, including the existence of an active bidding process or a transaction involving a change of control. Here, the Court held there was no active bidding process because the merger originated when Exact communicated with Genomic “out of the blue.” Further, the Court analyzed the merger’s mixed consideration of cash and stock to conclude there was no change of control because 58% of the shares of each Genomic stockholder would convert to Exact stock. Because there was no heightened standard of review, the Court then reviewed whether the complaint pleaded breaches of fiduciary duty due to bad faith disclosure violations. The Court held there were no bad faith disclosure violations by reviewing the proxy language. There was no evidence of bad faith in the choice of M&A advisors, and there was a disclaimer that Exact customarily does not make certain disclosures, making the omission of material information outside the scope of bad faith.
Plaintiff’s fifth and sixth counts were aiding and abetting claims, brought against Goldman and Exact, for their roles in facilitating the breaches of fiduciary duty in counts three and four above. The Court dismissed these claims given that Plaintiff failed to well plead the breach of fiduciary duty element of these aiding and abetting claims.
SPAC Terminates Merger Agreement with Topps following Major League Baseball Announcement and Pending Action
By: Dixon Babb
On August 20, 2021, Mudrick Capital Acquisition Corporation II, a special purpose acquisition company backed by the private equity firm Mudrick Capital Management (“MCAC”), announced that it terminated its Agreement and Plan of Merger with Topps Intermediate Holdco Inc., a Delaware corporation (“Topps”). Topps has provided trading cards for Major League Baseball since 1952 in exchange for a royalty on the cards the company sells. MCAC had valued Topps at $1.3 billion, and it would have been the second time that Topps was taken public, having gone private in 2007. The Agreement and Plan of Merger was terminated by mutual agreement on August 20, 2021, and came on the heels of Major League Baseball announcing it would not be renewing its 70-year-old trading card deal with Topps.
Even if the Agreement and Plan of Merger had not been cancelled, the transaction was facing resistance. On August 10, 2021, Lawrence Bass, a stockholder of MCAC, filed a class action complaint in the Delaware Court of Chancery against MCAC and the board of directors of MCAC (the “Board”). The complaint alleged that MCAC and the Board violated Section 242(b)(2) of the Delaware General Corporation Law when it denied holders of Class A common stock a separate class vote in connection with a charter proposal that would increase the authorized number of Class A common stock, and that, as a result of the violation, the Board breached its fiduciary duties. The suit sought to block a vote on the Topps merger until a vote could be held on the charter proposal, and a hearing on a motion for preliminary injunction was scheduled to be held on August 20, 2021.