CURRENT MONTH (January 2022)
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.
Court of Chancery Awards $689M in Damages for Breach of Partnership Call Right Requiring an Opinion of Counsel as a Condition Precedent
By Tarik Haskins, Morris, Nichols, Arsht & Tunnell LLP
In a recent opinion, Bandera Master Fund LP v. Boardwalk Pipeline Partners LP, the Delaware Court of Chancery considered whether a general partner of a master limited partnership (the “Partnership”) breached the Partnership’s limited partnership agreement by exercising a contractual call right when the conditions precedent to such exercise were not satisfied. See Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP 2021 WL 5267734 (Del. Ct. Ch. November 12, 2021).
In Bandera, the Partnership’s general partner possessed a call right entitling the general partner to purchase the Partnership’s limited partnerships units that the General Partner and its affiliates did not own if certain conditions precedent were satisfied. Two of those conditions precedent included: (i) obtaining a legal opinion that “the Partnership’s status as an association not taxable as a corporation and not otherwise subject to an entity-level tax for federal, state or local income tax purposes has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers” (the “Opinion Condition”) and (ii) a determination by the Partnership’s general partner that the legal opinion is acceptable to the general partner. Following the general partner’s determination that the conditions precedent to exercising the call right were satisfied, the general partner purchased the limited partnership units that it did not own. The plaintiffs, former holders of the Partnership’s limited partnership units, alleged that the general partner breached the Partnership’s limited partnership agreement by exercising the call right without first satisfying the relevant conditions precedent to its exercise. With respect to the Opinion Condition, the Court of Chancery stated, “… when parties agree that the delivery of an opinion of counsel is necessary to satisfy a condition precedent, it is counsel’s subjective good-faith determination that is the condition precedent.” Id. * at 53. In finding that the opinion of the Partnership’s outside counsel did not satisfy the Opinion Condition, the Court of Chancery expounded on what it means for an opinion giver to act in subjective good faith, and in doing so the Court of Chancery relied upon the opinion standards that have been established by authorities with respect to third-party opinions. Based upon such opinion standards, the Court of Chancery found that outside counsel’s conduct in preparing the opinion did not constitute a good faith effort to render a legal opinion.
The Court of Chancery also determined that the condition precedent that the Partnership’s general partner determine that the legal opinion was acceptable was not satisfied because the governing documents for the Partnership and its general partner were ambiguous as to “who” at the general partner should make the determination. Based on the doctrine of contra proferentem, the ambiguity regarding “who” at the general partner should make the determination should have been resolved against the Partnership’s general partner, which the Partnership did not do. Consequently, the Court of Chancery determined that the Partnership’s general partner was liable for damages in an amount over $689 million for its breach of the Partnership’s limited partnership agreement. The Court of Chancery determined that the exculpatory provisions that would otherwise protect the general partner from personal liability should not apply. The Bandera opinion represents a fascinating opinion for attorneys who render legal opinions, including non-Delaware lawyers who render opinions on Delaware alternative entities.