Richard Delman v. GigAquisitions3, LLC ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
RICHARD DELMAN, )
)
Plaintiff, )
)
v. ) C.A. No. 2021-0679-LWW
)
GIGACQUISITIONS3, LLC, AVI )
KATZ, RALUCA DINU, NEIL )
MIOTTO, JOHN MIKULSKY, )
ANDREA BETTI-BERUTTO, and )
PETER WANG, )
)
Defendants. )
OPINION
Date Submitted: September 23, 2022
Date Decided: January 4, 2023
Michael J. Barry, GRANT & EISENHOFFER, P.A., Wilmington, Delaware;
Michael Klausner, Stanford, California; Attorneys for Plaintiff Richard Delman
John L. Reed, Ronald N. Brown & Kelly L. Freund, DLA PIPER LLP (US),
Wilmington, Delaware; Melanie E. Walker & Gaspard Rappoport, DLA PIPER LLP
(US), Los Angeles, California; Attorneys for Defendants GigAcquisitions3, LLC, Avi
Katz, Raluca Dinu, Neil Miotto, John Mikulsky, Andrea Betti-Berutto & Peter Wang
WILL, Vice Chancellor
Over the latter half of the 2010s, special purpose acquisition companies (or
SPACs) became wildly popular investment vehicles. Successful SPACs are
structured to create value for multiple participants. For private companies, SPACs
provide an efficient path to access the public equity markets without a traditional
initial public offering. The SPAC’s management team (or sponsor) can obtain
substantial profits on nominal invested capital. And the public stockholders who
purchase the SPAC’s units have a chance to invest early in an emerging company’s
lifecycle.
Because the ultimate investment opportunity is initially unknown, a SPAC’s
public stockholders rely on the entity’s sponsor, officers, and directors to identify a
favorable merger target. Public stockholders are given redemption rights, allowing
them to reclaim their funds—held in trust—before a merger if they choose to forego
investing in the combined company. For a SPAC organized as a Delaware
corporation, stockholders are also assured that the entity’s fiduciaries will abide by
standards of conduct.
The plaintiff in this action asserts that the sponsor and directors of a SPAC
failed to live up to those fiduciary obligations. The defendants allegedly undertook
a value destructive deal that generated returns for the sponsor at the expense of
public stockholders. The plaintiff claims that the defendants impaired stockholders’
ability to decide whether to redeem or to invest in the post-merger company. Public
1
stockholders were left with shares worth far less than the guaranteed redemption
price; the sponsor received a windfall.
Barring legislation providing otherwise, the fiduciaries of a Delaware
corporation cannot be exempted from their loyalty obligation and the attendant
equitable standards of review that this court will apply to enforce it. That the
corporation is a SPAC is irrelevant. Long-established principles of Delaware law
require fiduciaries to deal candidly with stockholders and avoid conflicted, unfair
transactions. Here, it is reasonably conceivable that the defendants breached those
duties by disloyally depriving public stockholders of information material to the
redemption decision. The defendants’ motion to dismiss is therefore denied.
I. FACTUAL BACKGROUND
Unless otherwise noted, the following facts are drawn from the plaintiff’s
Verified Class Action Complaint (the “Complaint”) and the documents it
incorporates by reference.1
1
Verified Class Action Compl. (Dkt. 1) (“Compl.”); see In re Books-A-Million, Inc.
S’holders Litig., 2016 WL 5874974, at *1 (Del. Ch. Oct. 10, 2016) (explaining that the
court may take judicial notice of “facts that are not subject to reasonable dispute” (citing
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 170 (Del. 2006))); Omnicare,
Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1167 n.3 (Del. Ch. 2002) (“The court may
take judicial notice of facts publicly available in filings with the SEC.”).
Citations in the form of “Defs.’ Opening Br. Ex. __” refer to exhibits to the Unsworn
Declaration of Kelly L. Freund to Defendants’ Opening Brief in Support of Their Motion
to Dismiss Verified Class Action Complaint. Dkt. 18.
2
A. Gig3’s Formation and Sponsor
GigCapital3, Inc. (“Gig3” or the “Company”)—now Lightning eMotors, Inc.
(“New Lightning”)—is a Delaware corporation formed as a special purpose
acquisition company (SPAC) in February 2020.2
A SPAC is a financial innovation that traces its origins to the “blank check”
companies of the 1980s.3 It is a shell corporation, most commonly incorporated in
Delaware, that lacks operations and takes a private company public through a form
of reverse merger. The number of SPAC mergers skyrocketed in 2020 and 2021.4
That trend has recently slowed.5
SPAC structures have become largely standardized.6 The SPAC is formed by
a sponsor that raises capital in an initial public offering (IPO). Its IPO units are
customarily sold for $10 each and consist of a share and a fraction of a warrant (or
2
Compl. ¶¶ 1, 35, 39.
3
Id. ¶ 2; see Hamilton P’rs, L.P. v. Englard, 11 A.3d 1180, 1189 n. 3 (Del. Ch. 2010)
(discussing blank check companies as “common instruments of fraud in the 1980s”)
(citations omitted).
4
Compl. ¶ 2; see Michael Klausner, Michael Ohlrogge & Emily Ruan, A Sober Look at
SPACs, 39 Yale J. Reg. 228, 230-31 & 231 fig.1 (2022) (noting that in January 2020
through November 2021, SPAC IPOs accounted for more than half of total IPOs and,
among all firms that went public, SPAC mergers accounted for 22% in 2020 and 34% in
2021).
5
See Aziz Sunderji & Amrith Ramkumar, SPAC Activity in July Reached the Lowest Levels
in Five Years, Wall St. J. (Aug. 17, 2022), https://www.wsj.com/articles/spac-activity-in-
july-reached-the-lowest-levels-in-five-years-11660691758.
6
Compl. ¶¶ 2-8; see In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 793-96 (Del.
Ch. 2022) (discussing typical SPAC structure).
3
alternatively a warrant to purchase a fraction of a share). The IPO proceeds are held
in trust for the benefit of the SPAC’s public stockholders, who have a right to redeem
their shares after a merger target is identified. These redemption rights essentially
guarantee public IPO investors a fixed return.
The sponsor, most often a limited liability company, is responsible for
administering the SPAC. Sponsors are compensated by a “promote.” Though that
can take many forms, it is usually 20% of the SPAC’s post-IPO equity—issued as
“founder shares”—for a nominal price. The sponsor will also make an investment
concurrently with the IPO to cover the SPAC’s underwriting fees and other
expenses, since those expenses cannot be paid using cash in the trust. At the time of
its merger, a SPAC may also issue new shares as private investment in public equity
(PIPE).
The SPAC’s charter sets a fixed period—generally between 18 and 24
months—to complete a de-SPAC transaction with a yet-to-be-identified private
company. The SPAC must liquidate if it fails to merge within that window. In the
event of liquidation, the trust distributes its cash (IPO proceeds plus accrued interest)
to the SPAC’s public stockholders. The founder shares, meanwhile, become
worthless.
Gig3 fell within these structural norms.
4
Its sponsor was defendant GigAcquisitions3, LLC (the “Sponsor”), a
Delaware limited liability company. 7 The Sponsor was responsible for incorporating
the entity, appointing its directors, and managing its IPO.8
In February 2020, shortly after it was incorporated, Gig3 issued founder
shares to the Sponsor amounting to approximately 20% of Gig3’s post-IPO equity
for the nominal sum of $25,000.9 This came to about five million founder shares,
referred to as the “Initial Stockholder Shares,” at a price of $0.005 per share.10
The Initial Stockholder Shares differed from those that would later be offered
to the public. The Initial Stockholder Shares could not be redeemed and lacked
liquidation rights.11 They were also subject to a lock-up that prohibited the Sponsor
from transferring, assigning, or selling the shares until a set time.12
7
Compl. ¶¶ 4, 26.
8
Id. ¶ 4.
9
Id. ¶ 39; see also Defs.’ Opening Br. Ex. 3 (“Prospectus”) at 13-14.
10
Compl. ¶¶ 7, 39. Specifically, there were 4,985,000 Initial Stockholder Shares. See
GigCapital3, Inc., Definitive Proxy Statement (Amendment No. 3 to Form S-4) (“Proxy”)
at 5 (Mar. 22, 2021), available at https://www.sec.gov/Archives/edgar/data/1802749/
000119312521088347/d70436ds4a.htm.
11
Compl. ¶ 8; see also Prospectus at 15, 26.
12
Prospectus at 14-15.
5
B. Gig3’s IPO
Gig3 completed its IPO on May 18, 2020, selling 20 million units to public
investors at $10 per unit and raising proceeds of $200 million. 13 The units were
offered pursuant to a Form S-1 Registration Statement, filed with the Securities and
Exchange Commission (SEC) on February 25, 2020, and a May 13, 2020
prospectus.14 The prospectus disclosed certain conflicting interests between the
Sponsor and Gig3’s public stockholders:
Since our Sponsor will lose its entire investment in us if
our initial business combination is not consummated, and
our executive officers and directors have significant
financial interests in our Sponsor, a conflict of interest
may arise in determining whether a particular acquisition
target is appropriate for our initial business combination.15
Each unit consisted of a share of common stock and three-quarters of a
warrant to purchase a share of common stock at an exercise price of $11.50 per
share.16 The shares of common stock had redemption and liquidation rights. If Gig3
failed to complete a de-SPAC merger within 18 months, it would liquidate and
public stockholders would receive their $10 per share investment back plus
13
Compl. ¶ 40; see also Prospectus at 9.
14
See generally Defs.’ Opening Br. Ex. 5; Prospectus.
15
Prospectus at 46.
16
Compl. ¶ 40; see also Prospectus at 9. For example, the warrants contained in four units
would allow the holder to purchase three common shares at $11.50 per share.
6
interest.17 If Gig3 identified a target, public stockholders could redeem their shares
for $10 per share plus interest but keep the warrants included in the IPO units.18 The
warrants were essentially free for public IPO investors.19
The IPO proceeds were deposited in a trust. The cash in the trust was
earmarked for the exclusive purposes of redeeming shares in the first instance,
contributing the remainder to a merger, or returning funds to stockholders in the
event of a liquidation. 20
Nomura Securities International, Inc. (“Nomura”) and Oppenheimer & Co.
Inc. (“Oppenheimer”) acted as the joint lead book-running managers for the offering,
and Odeon Capital Group LLC acted as co-manager.21 The underwriters agreed to
defer two-thirds (or $8 million) of their underwriting fees until a merger was
accomplished.22
17
Compl. ¶ 4; see also Defs.’ Opening Br. Ex. 9 (“Charter”) § 9.1(b); Prospectus at 26.
It bears noting that the transaction discussed in this decision is technically a series
of business combinations involving Gig3’s merger subsidiary and the target, leading to the
target becoming a subsidiary of Gig3. See Proxy at A-13.
18
Compl. ¶¶ 8, 40; see also Prospectus at 20. Whole warrants became exercisable after
the merger closed.
19
Compl. ¶ 40. In the event of a liquidation, the warrants would expire worthless. In the
event of a merger, public stockholders could redeem their shares—recouping the cost of
purchasing IPO units—and retain the warrants.
20
Id.
21
Prospectus at Cover Page.
22
Compl. ¶ 52.
7
Simultaneously with the IPO, the Sponsor purchased 650,000 Gig3 units for
$10 per unit in a private placement.23 The $6.5 million in proceeds were used to pay
Gig3’s underwriting fees and operating expenses.24 The IPO underwriters also
collectively purchased 243,479 private placement units for $10 per unit.25 Like an
IPO unit, each private placement unit consisted of a share of common stock and
three-quarters of a warrant to purchase a share of common stock. 26 But unlike the
IPO shares, the shares included in the private placement units lacked liquidation or
redemption rights and were subject to a lock-up.27
C. Gig3’s Directors and Officers
Defendant Avi Katz is a “serial founder of SPACs” affiliated with GigCapital
Global, where Katz is a founding managing partner, Chief Executive Officer, and
Executive Chairman.28 Katz served as a member of Gig3’s Board of Directors (the
“Board”) and as Gig3’s Executive Chairman, Secretary, President, and Chief
23
Id. ¶ 41.
24
Id.
25
Id. ¶ 52; see also Prospectus at 110.
26
Prospectus at 110.
27
Id.; see supra notes 11-12 and accompanying text.
28
Id. ¶¶ 6, 37; see id. ¶¶ 27-32 & ¶ 27 n.1; GigCapital, https://www.gigcapitalglobal.com
(last visited Jan. 1, 2023).
8
Executive Officer.29 He held a controlling interest in the Sponsor and was its
managing member.30
Katz, through the Sponsor, had the power to select Gig3’s initial directors and
officers.31 Katz appointed defendants Raluca Dinu (his spouse), Neil Miotto, John
Mikulsky, Andrea Betti-Berutto, and Peter Wang to the Board. 32 These individuals
have prior ties to Katz, are associated with GigCapital Global, and have held multiple
roles at GigCapital Global affiliated business.33
The directors also held membership interests of an undisclosed quantity or
value in the Sponsor, which in turn held Gig3 Initial Stockholder Shares.34 In
addition, Wang and Betti-Berutto were each given 5,000 Gig3 common shares as
consideration for future services (the “Insider Shares”).35 Like the Initial
29
Compl. ¶ 27; see Prospectus at 109.
30
Compl. ¶ 26; see Prospectus at 109 (“The shares held by our Sponsor are beneficially
owned by Dr. Katz . . . who has sole voting and dispositive power over the shares held by
our Sponsor.”).
31
Compl. ¶¶ 4, 6, 9.
32
Id. ¶¶ 28-32.
33
Id. ¶¶ 42-45; see infra notes 185-96 and accompanying text.
34
Compl. ¶ 43. Miotto held a 10% ownership interest in GigFounders, LLC, which held
membership interests of an undisclosed quantity or value in the Sponsor. Id.
35
Id.; see also Prospectus at 14. Non-party Brad Weightman, Gig3’s Chief Financial
Officer and Vice President, was likewise given 5,000 Insider Shares. Prospectus at 14.
9
Stockholder Shares, the Insider Shares lacked redemption and liquidation rights and
were subject to a lock-up restriction.36
D. Lightning eMotors
After the IPO, Gig3’s officers and directors began to search for a merger
target. They identified Lightning eMotors Inc. (“Lightning”), an electric vehicle
manufacturer focused on zero-emission medium duty vocational vehicles and shuttle
buses.37 Katz and Dinu “dominated” the Company’s negotiations with Lightning. 38
Oppenheimer and Nomura—two of the three IPO underwriters—were hired
to serve as Gig3’s financial advisors.39 The Board did not ask Oppenheimer or
Nomura to provide a fairness opinion on the merger.40
On December 9, 2020, the Board approved a proposed transaction with
Lightning.41 The next day, Gig3 and Lightning announced that they had entered into
a merger agreement. 42 The merger agreement provided that Lightning stockholders
would receive consideration in the form of Gig3 common shares plus a right to
36
See Prospectus at F-8; supra notes 11-12 and accompanying text.
37
Compl. ¶ 65; see also Proxy at 244.
38
Compl. ¶ 51.
39
Id. ¶ 52.
40
Id. ¶ 53.
41
Id. ¶ 17.
42
Id. ¶ 46.
10
receive additional shares in an earnout. 43 Upon the completion of the transactions
contemplated by the merger agreement, Gig3 would change its name to New
Lightning and its common stock would trade on the New York Stock Exchange
under the symbol “ZEV.”44
E. PIPE and Convertible Note Financing
At the same time that it announced the proposed merger, Gig3 entered into a
PIPE subscription agreement and a convertible note subscription agreement. Both
agreements were contingent on the merger closing. 45
Gig3 met with 46 potential PIPE investors, hoping to raise between $100
million and $150 million in PIPE financing at $10 per share based on a $899 million
valuation of Lightning’s equity.46 Initial feedback indicated that Gig3 would have
to improve the share exchange (that is, reduce the valuation of Lightning) to justify
a $10 investment in common stock.47 Lightning’s valuation was then lowered to
$539 million to support a PIPE financing of at least $75 million. 48 Gig3 ultimately
43
Id.
44
Proxy at Cover Page.
45
Compl. ¶ 47.
46
Id. ¶ 61; Proxy at 151.
47
Compl. ¶ 61.
48
Proxy at 152.
11
raised $25 million in PIPE financing from a single investor, who “was the largest
owner of Lightning’s pre-merger equity.”49
With the failure of the PIPE, Gig3 pursued a dilutive convertible debt
financing.50 It entered into an agreement with 30 undisclosed investors—20 of
whom had declined to participate in the PIPE—for the purchase of convertible notes
(the “Notes”) at an aggregate price of $100 million.51 The Notes have a three-year
term and accrue 7.5% interest annually.52 They are convertible into 8,695,652 shares
of Company common stock at a conversion price of $11.50 per share.53 Under the
terms of the convertible note subscription agreement, if the conversion right is
exercised before the Notes mature, the Company is responsible for future interest
payable on the Notes.54 The Note holders also received—at no additional cost—
49
Compl. ¶ 61.
50
Id. ¶ 62; see also Proxy at 154.
51
Compl. ¶¶ 47-48, 62; see also Proxy at 2, 156-57.
52
Compl. ¶ 47.
53
Id. New Lightning has the option to force conversion after one year if Gig3’s stock price
exceeds $13.80 per share for 20 out of 30 trading days. Id.
54
Id. ¶ 47 & n.2. For example, assume New Lightning’s stock price was $14 per share at
the end of year one. If the conversion right was exercised, the Note holders would receive
nearly $15 million in cash (from the future interest payable for the two remaining years),
plus 8,695,652 shares worth $14—for a price of $11.50. In total, the Note holders would
gain $36,114,130. That is a $2.50 per share profit times 8,695,652 shares, plus 23/24 of
$15 million in remaining interest. Id.
12
8,695,652 warrants to purchase common stock at an exercise price of $11.50 per
share.55
F. The Proxy
Gig3’s definitive proxy statement (the “Proxy”) was filed with the SEC on
March 22, 2021.56 The Proxy informed stockholders that a special meeting would
be held on April 21. 57 Stockholders were invited to vote on the Lightning merger
and related transactions, including the PIPE and convertible note financings.
Stockholders were also informed that the deadline to exercise their
redemption rights was April 19—two business days before the special meeting.58
They were reminded that redeeming would entitle them to “approximately $10.10
55
Id. ¶ 48. Continuing the example in footnote 54, if the Note holders exercised their
warrants along with their conversion rights, they would receive a profit of $2.50 on another
8,695,652 shares—for an additional profit of $21,739,130 and a total profit of $57,853,260.
Id. That would equate to approximately a 58% return over one year on the $100 million
investment. Id.
56
Id. ¶ 49.
57
Proxy at Cover Page.
58
Compl. ¶ 49; see also Proxy at 25.
13
per share” from the trust.59 The Proxy emphasized that “[p]ublic stockholders may
elect to redeem their shares even if they vote for the [merger].”60
The Proxy indicated that the merger consideration to be paid to Lightning
stockholders consisted of Gig3 stock valued at $10 per share. 61 It defined
“Aggregate Closing Merger Consideration” to mean “a number of shares of [Gig3]
Common Stock equal to the quotient of (a) the Aggregate Closing Merger
Consideration Value divided by (b) $10.00.”62 The Proxy also disclosed a general
risk of dilution caused by the merger and related transactions, including the PIPE
financing and the Notes.63
59
Proxy at Cover Page, 3, 23-24. The Proxy also warned that there could be insufficient
funds to pay redemptions if a third party brought a claim that the Sponsor was unable to
indemnify. Compl. ¶¶ 88-91; see also Proxy at 81, 84. The Proxy explained “[t]he Sponsor
may not have sufficient funds to satisfy its indemnity obligations” because Gig3 “ha[d] not
asked the Sponsor to reserve for such indemnification obligations.” Compl. ¶ 90 (quoting
Proxy at 84). The plaintiff alleges that the likelihood of the SPAC being unable to satisfy
redemptions was extremely low; public sources indicate it has never occurred.
Id. ¶¶ 90-91.
60
Proxy at Cover Page, 23, 123. As a practical matter, because the record date was
March 15, 2021, public stockholders could elect to redeem their shares and then vote at the
April 21 special meeting. See id. at 19.
61
Id. at Cover Page, A-14.
62
Id. at Cover Page, A-2. “Aggregate Closing Merger Consideration Value” was
equivalent to the valuation of Lightning equity ($539 million) adjusted for Lightning’s
outstanding options, debt, and cash. Id.; see id. at 152.
63
E.g., id. at 14, 87 (“Warrants will become exercisable for our Common Stock, which
would increase the number of shares eligible for future resale in the public market and
result in dilution to our stockholders.”), 94 (“Our public stockholders will experience
dilution as a consequence of [the merger and related transactions].”).
14
Gig3’s Proxy contained projections prepared by Lightning management that
forecast dramatic growth over the next five years. From 2020 to 2025, Lightning’s
revenues were predicted to rise from $9 million to more than $2 billion and its annual
gross profits would grow from zero to more than $500 million.64 The Lighting
management projections reported to stockholders in the Proxy were as follows: 65
In 2019 and 2020 combined, Lightning delivered 97 vehicles and built an
additional 12 demonstration and test vehicles.66 The Proxy stated that Lightning
would “expand[] its production facility by roughly 107,000 square feet to prepare
for capacity expansion to 3,000 vehicles per shift per year” from its current capacity
of 500 vehicles per shift per year.67 It explained that Lightning had built “a complete
64
Compl. ¶¶ 65-66; Proxy at 164.
65
Compl. ¶ 65; Proxy at 164.
66
Compl. ¶ 67.
67
Proxy at 161; see also Compl. ¶¶ 68, 69 (quoting Proxy at 253).
15
modular software and hardware solution” that “broaden[ed] and strengthen[ed]” its
access to a $67 billion total addressable market.68
Finally, the Proxy disclosed potential conflicts of interest between Gig3’s
Sponsor and Board, on one hand, and its public stockholders, on the other. One such
conflict was caused by “the fact that [the] Sponsor, officers and directors w[ould]
lose their entire investment in [Gig3] and w[ould] not be reimbursed for any out-of-
pocket expenses if an initial business combination [wa]s not consummated by the
applicable deadline.”69
Approval of the merger required the affirmative stockholder vote of a majority
of the votes cast at the special meeting. 70 Stockholders overwhelmingly approved
the transaction, with more than 98% of the votes cast being in favor. 71
Approximately 29% of public stockholders elected to redeem 5.8 million shares.72
G. Post-Merger Performance
On May 6, 2021, a merger subsidiary of Gig3 merged with and into Lightning,
with Lightning surviving the merger. 73 Upon closing, Gig3 changed its name to
68
Proxy at 246; see also Compl. ¶ 68.
69
Proxy at 5; see also supra note 15 and accompanying text.
70
Proxy at Cover Page.
71
Compl. ¶ 50; see also Defs.’ Opening Br. Ex. 6 (“April 21, 2021 Form 8-K”) at Item 5.07.
72
Compl. ¶ 50.
73
Id. ¶ 36; see also Defs.’ Opening Br. Ex. 1 (“May 6, 2021 Form 8-K”) at Item 2.01.
16
Lightning eMotors, Inc.74 New Lightning subsequently elected a nine-member
board of directors, which included Miotto, Dinu, and Katz.75
Before the vote, Gig3’s stock price had traded around the redemption price,
closing at $10.07 on April 15.76 By the May 6 closing date, Gig3’s stock price had
fallen to $7.82 per share.77 Still, the Initial Stockholder Shares were worth more
than $39 million when the merger closed.78
On May 17, New Lightning issued a press release announcing its first quarter
2021 financial results and 2021 projections.79 It announced quarterly revenues of
$4.6 million and reduced its 2021 revenue guidance, stating that projected 2021
revenues would “be in the range of $50 million to $60 million.” 80 Taking the
midpoint ($55 million), this was a 12.7% downward revision from the projection in
the Proxy.81
74
Compl. ¶ 1; see also May 6, 2021 Form 8-K at Item 2.01.
75
Compl. ¶ 11; see also May 6, 2021 Form 8-K at Item 5.02.
76
Compl. ¶ 92.
77
Id. ¶ 93.
78
Id. ¶ 96.
79
Id. ¶ 72.
80
Id.
81
Id. ¶ 73; see supra note 65 and accompanying text (noting that the 2021 projection was
$63 million).
17
By August 2, Gig3’s stock price had fallen to $6.57 per share. 82 As of the day
before this opinion was filed, trading closed at $0.41 per share.83
H. This Litigation
Plaintiff Richard Delman has held stock in Gig3 since August 26, 2020.84 On
August 4, 2021, he filed a putative class action Complaint on behalf of himself and
current and former Gig3 stockholders.85
His Complaint advances three claims. Count One is a direct claim for breach
of fiduciary duty against the six members of the Gig3 Board. 86 Count Two is a direct
claim for breach of fiduciary duty against Katz and the Sponsor as the controlling
stockholders of Gig3.87 Count Three is a direct claim for unjust enrichment against
the Sponsor and the director defendants.88
82
Compl. ¶ 94.
83
NYSE, Lightning eMotors Incorporated (ZEV), https://www.nyse.com/quote/ZEV (last
visited Jan. 3, 2021).
84
Compl. ¶ 25.
85
Id. ¶¶ 99-107.
86
Id. ¶¶ 108-15.
87
Id. ¶¶ 116-24.
88
Id. ¶¶ 125-28.
18
The defendants moved to dismiss the Complaint on August 31, 2021.89
Briefing was completed on March 1, 2022.90 I heard oral argument on the motion to
dismiss on September 23.91
II. LEGAL ANALYSIS
The defendants moved to dismiss the Complaint under Court of Chancery
Rule 23.1 for failure to plead demand futility and under Rule 12(b)(6) for failure to
state a claim upon which relief can be granted.
The standard that governs a motion to dismiss under Rule 12(b)(6) is well
settled:
(i) all well-pleaded factual allegations are accepted as true;
(ii) even vague allegations are “well-pleaded” if they give
the opposing party notice of the claim; (iii) the Court must
draw all reasonable inferences in favor of the non-moving
party; and [(iv)] dismissal is inappropriate unless the
“plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of
proof.”92
The “pleading standards for purposes of a Rule 12(b)(6) motion ‘are minimal.’” 93
The “reasonable conceivability” standard a plaintiff must meet to survive a Rule
89
Dkt. 8.
90
See Dkt. 31. This matter was reassigned to me on August 1, 2022. Dkt. 36.
91
Dkts. 38, 39.
92
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations omitted).
93
In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514, at *23 (Del. Ch.
May 21, 2013) (quoting Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27
A.3d 531, 536 (Del. 2011)).
19
12(b)(6) motion asks only “whether there is a ‘possibility’ of recovery.” 94 I “must
draw all reasonable inferences in favor” of the plaintiff but am “not required to
accept every strained interpretation of the [plaintiff’s] allegations.”95
The plaintiff’s breach of fiduciary duty claims are akin to those considered by
this court in In re MultiPlan Corp. Stockholders Litigation.96 There, the defendants
undertook a value-decreasing de-SPAC merger that allegedly benefitted them to the
detriment of public stockholders for whom liquidation would have been preferable.
The defendants were purportedly incentivized to minimize redemptions to secure
significant returns for themselves. The claim recognized in MultiPlan was that “the
defendants’ actions—principally in the form of misstatements and omissions—
impaired public stockholders’ redemption rights to the defendants’ benefit.” 97
The plaintiff here likewise alleges that the defendants breached their fiduciary
duties by “prioritizing their own financial, personal, and/or reputational interests [in]
approving the [m]erger, which was unfair to Gig3’s public stockholders.” 98 The
plaintiff also avers that the defendants acted on these conflicts by depriving
94
China Agritech, 2013 WL 2181514, at *24 (quoting Cent. Mortg., 27 A.3d at 537 n.13).
95
Gen. Motors (Hughes), 897 A.2d at 168.
96
268 A.3d 784 (Del. Ch. 2022).
97
Id. at 800. For the sake of brevity, I at times refer to a claim concerning the impairment
of stockholders’ redemption rights as a “MultiPlan claim.”
98
Compl. ¶ 111.
20
stockholders of information necessary to decide whether to redeem or to invest in
the combined company. 99 The essential difference between the present case and
MultiPlan lies in the manner in which stockholders’ redemption rights were
allegedly compromised.
The defendants moved to dismiss the Complaint for a panoply of reasons.
They assert, among other things, that the plaintiff’s claims are derivative and must
be dismissed under Rule 23.1 or are impermissible “holder” claims. Similar
positions were considered and rejected in MultiPlan. Still, I address them given the
defendants’ insistence that a different outcome is appropriate here. The defendants’
arguments fail.
I then consider the merits of the plaintiff’s claims and assess the applicable
standard of review. Applying the entire fairness standard, I determine that the
plaintiff has pleaded reasonably conceivable breach of fiduciary duty claims against
the Board and the Sponsor. The unjust enrichment claim also survives.
A. The Plaintiff’s Claims Concern Individually Compensable Harm.
As an initial matter, the plaintiff’s claims are direct rather than derivative. The
crux of the plaintiff’s fiduciary duty claims is that the defendants’ disloyal conduct
deprived Gig3 public stockholders of information needed to decide whether to
99
See id. ¶¶ 109, 112-13, 118, 122.
21
exercise their redemption rights.100 The unjust enrichment claim is based on the
Sponsor and Board being enriched because of that informational imbalance.101
These harms are individually compensable, separate and distinct from any potential
injury to Gig3 caused by the merger.
The defendants nonetheless characterize this case as an “overpayment” action
challenging a “bad deal.” 102 Their assessment is misplaced. In an overpayment
claim, “the corporation’s funds have been wrongfully depleted, which, though
harming the corporation directly, harms the stockholders only derivatively so far as
their stock loses value.”103 In a MultiPlan claim, by contrast, the funds being
depleted are held in trust for the SPAC’s public stockholders.104 If a stockholder’s
redemption right had not been manipulated and she chose to redeem her shares, she
would retrieve her pro rata portion of the trust. Any subsequent overpayment by
the SPAC—regardless of the amount—would be irrelevant. 105
100
Id. ¶¶ 113, 122.
101
Id. ¶¶ 126-27.
102
Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss Verified Class Action Compl.
(Dkt. 18) (“Defs.’ Opening Br.”) 25-30.
103
El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1261 (Del. 2016).
104
See MultiPlan, 268 A.3d at 802.
105
See id. at 804 n.118. Whether the SPAC overpaid for the target by $1 or $100 billion,
the damages available to the plaintiff for impairment of his redemption right would remain
the same.
22
Application of the two-pronged Tooley test, which considers “(1) who
suffered the alleged harm” and “(2) who would receive the benefit of any recovery
or other remedy,” confirms the direct nature of these claims.106
First, Gig3 public stockholders suffered the harm pleaded in the Complaint.
The plaintiff asserts that the defendants disloyally failed to provide stockholders
with the information necessary to decide whether to redeem and how to vote.
Because of a SPAC’s distinctive structure and the absence of a meaningful vote on
the merger,107 the redemption right is the central form of stockholder protection and
the focus of the harm alleged. Interference with that right produces an injury that
would not run to the corporation.
Second, the recovery would accrue only to stockholders who suffered a harm
to their redemption rights.108 Any restoration of value to the Company that indirectly
benefitted stockholders pro rata would be inapt for two reasons. The loss of value
involves the public stockholders’ funds held in trust, which do not belong to the
Company until after redemption requests are satisfied.109 And many stockholders
who would indirectly benefit from a derivative recovery lack a redemption right.
106
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
107
See infra notes 202-07 and accompanying text.
108
MultiPlan, 268 A.3d at 803-05.
109
See supra note 20 and accompanying text.
23
Although the redemption right was only carried by shares issued to the public in
Gig3’s IPO, a recovery to the corporation would be shared with various pre-merger
and PIPE investors as well as other stockholders of New Lightning.110
Furthermore, the remedy for a direct claim brought by public stockholders
would not lead to a double recovery if a derivative overpayment claim were brought
by the SPAC.111 The defendants acknowledge that this court previously recognized
as much.112 They nevertheless argue that the calculation of overpayment damages
and redemption damages in this case would be the same. By the defendants’ logic,
damages under either theory would address whether stockholders were harmed
110
Cf. El Paso, 152 A.3d at 1264 (“Were the [plaintiff] to recover directly for the alleged
decrease in the value of the Partnership’s assets, the damages would be proportionate to
his ownership interest. The necessity of a pro rata recovery to remedy the alleged harm
indicates that his claim is derivative.”).
111
Cf. In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 773 (Del. 2006) (“[I]f
the plaintiffs’ damages theory is valid, the directors of an acquiring corporation would be
liable to pay both the corporation and its shareholders the same compensatory damages for
the same injury. That simply cannot be.”); Lenois v. Lawal, 2017 WL 5289611, at *20
(Del. Ch. Nov. 7, 2017) (holding that plaintiff’s direct claims were disallowed to prevent
the defendants from paying identical damages to the company and to stockholders for the
same underlying behavior). The Delaware Supreme Court’s decision in J.P. Morgan
concerned an alleged disclosure violation for which no “quantifiable amount” of damages
could be inferred from stockholders “individually . . . being deprived of their right to cast
an informed vote.” 906 A.2d at 773 (emphasis omitted). The claim here presents a
different scenario: the disclosure violation is related to the stockholders’ right to redeem
their $10 per share investment plus interest.
112
Defs.’ Reply Br. in Supp. of Their Mot. to Dismiss Verified Class Action Compl. (Dkt.
24) (“Defs.’ Reply Br.”) 23; see MultiPlan, 268 A.3d at 804 n.118 (demonstrating the
separate calculations for overpayment and redemption damages with a numerical example).
24
because rather than receiving something worth $10 (either cash if redeeming or a
share in New Lighting if investing), they received something worth less.113 Not so.
In an overpayment case, damages would be based on the difference between
the amount the SPAC paid for the target and the target’s true value at the time of the
merger (i.e., if it had been valued correctly). 114 But the plaintiff’s recovery for
impairment of his redemption right would be based on the $10.10 redemption
price.115 In the hypothetical (and unlikely) scenario where a derivative overpayment
claim were brought in parallel with a MultiPlan claim, the corporation’s damages
would presumably be net of the amount owed to public stockholders in relation to
their redemption rights.
B. The Plaintiff Does Not Advance “Holder” Claims.
The defendants next insist that the plaintiff’s claims should be dismissed as
“holder” claims. A holder claim is “a cause of action by persons wrongfully induced
113
Notably, the plaintiff avers that the corporation had less than $10 per share to contribute
to the merger. See discussion infra Section II.C.2.a.
114
See MultiPlan, 268 A.3d at 804 n.118.
115
See id.
25
to hold stock instead of selling it.”116 It is predicated on circumstances where a
stockholder is not “forced” or “even asked” to make a decision.117
The plaintiff’s claims are not of that ilk. The Proxy expressly stated that
stockholders were being “provid[ed] . . . with the opportunity to redeem” and
instructed stockholders how to complete the redemption process.118 That the default
action was to invest—that is, no physical action need be taken—does not mean a
stockholder was “holding.” Instead, a stockholder who opted not to redeem chose
to invest her portion of the trust in the post-merger entity. This affirmative choice
is one that each SPAC public stockholder must make. There is no continuation of
the status quo.
The defendants argue that the Proxy did not seek stockholder action on the
redemption decision because public stockholders could redeem even if they did not
vote on the merger.119 But whether stockholders were also asked to make a voting
decision is of no moment. Irrespective of how they voted, Gig3’s public
stockholders were required “to decide whether to request that their cash be returned
116
Citigroup Inc. v. AHW Inv. P’ship, 140 A.3d 1125, 1132 (Del. 2016) (quoting Small v.
Fritz Cos., Inc., 65 P.3d 1255, 1256 (Cal. 2003) (emphasis in original)).
117
In re CBS Class Action & Deriv. Litig., 2021 WL 268779, at *23-24 (Del. Ch. Jan. 17,
2021).
118
Proxy at 23.
119
Cf. MultiPlan, 268 A.3d at 803 (noting that stockholders were “obligated” to vote on
the merger in order to redeem).
26
to them from the trust or to invest that cash in the proposed business combination.”120
This “investment decision” is comparable to those that the Delaware Supreme Court
has recognized as calls for “stockholder action,” including “purchasing and
tendering stock or making an appraisal election.”121
Further, the practical reasons that prevent holder claims from being pursued
on behalf of a class are not present here. Holder claims are grounded in common
law fraud or negligent misrepresentation, which require proof of reliance.122
Individual questions of justifiable reliance predominate over common questions of
law or fact, making class wide treatment inappropriate.
120
Id. at 807.
121
Dohmen v. Goodman, 234 A.3d 1161, 1168 (Del. 2020) (citing In re Wayport, Inc.
Litig., 76 A.3d 296, 314 (Del. Ch. 2013)). By way of imperfect analogy, a stockholder
seeking appraisal may opt not to vote on a merger and nonetheless perfect her appraisal
rights. See Roam-Tel P’rs v. AT&T Mobility Wireless Operations Hldgs. Inc., 2010 WL
5276991, at *13 (Del. Ch. Dec. 17, 2010) (“In order for a dissenting stockholder to perfect
his appraisal rights in the case of a long-form merger, he must either vote against the merger
or not vote at all . . . .”). In the tender offer context, of course, there is no vote. See Latesco
v. Wayport, 2009 WL 2246793, at *6 (Del. Ch. July 24, 2009) (discussing that a “call for
stockholder action” included the “collective action problem” of asking stockholders to
“tender their shares”).
122
See CBS, 2021 WL 268779, at *20 (discussing that holder claims cannot be brought as
class claims because “individual questions of law or fact, particularly as to the element of
justifiable reliance, will inevitably predominate over common questions of law or fact”);
Gaffin v. Teledyne, Inc., 611 A.2d 467, 474 (Del. 1992) (“A class action may not be
maintained in a purely common law or equitable fraud case since individual questions of
law or fact, particularly as to the element of justifiable reliance, will inevitably predominate
over common questions of law or fact.”).
27
The redemption right, though individual in nature, created a “collective action
problem” for stockholders such that it would be “impractical, if not impossible, for
each stockholder to ask and have answered by the corporation its own set of
questions regarding the decision presented for consideration.” 123 Stockholders must
choose to redeem or invest based upon the disclosures provided by the SPAC. “[A]
reasonable inference can be drawn that the stockholder relied upon the disclosure
and that, assuming it is ‘material,’ any harm flowing from the stockholder’s action
proximately resulted from such reliance.”124 Individual proof of reliance is
unnecessary.
C. The Fiduciary Duty Claims Are Reasonably Conceivable.
Directors of Delaware corporations owe duties of care and loyalty to the entity
and its stockholders.125 Those duties give rise to a duty of disclosure, the obligations
of which “are defined by the context in which the director communicates.” 126 A
controlling stockholder also “owes fiduciary duties to the corporation and its
123
Latesco, 2009 WL 2246793, at *6.
124
CBS, 2021 WL 268779, at *23; see Malone v. Brincat, 722 A.2d 5, 12 (Del. 2006)
(explaining that an action for a disclosure violation does not concern reliance, causation,
or quantifiable damages but rather includes “a connection to the request for shareholder
action”).
125
See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006).
126
Dohmen, 234 A.3d at 1168; see Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009)
(observing that the fiduciary duty of disclosure “is not an independent duty, but derives
from the duties of care and loyalty”).
28
minority stockholders, and it is ‘prohibited from exercising corporate power . . . so
as to advantage [itself] while disadvantaging the corporation.’”127 The duties owed
by the fiduciaries of a SPAC organized as a Delaware corporation are no different. 128
The plaintiff contends that the defendants breached their fiduciary duties by
disloyally interfering with Gig3 public stockholders’ redemption rights.129 But the
defendants refute that their duties of care and loyalty extend to the redemption right
in the first place. They insist that the plaintiff is limited to bringing a breach of
contract (or quasi-contract) claim because the redemption right is provided by
Gig3’s charter. In that case, the plaintiff’s claim would solely implicate the SPAC
as the contracting party, rather than the Sponsor or Board.130
The plaintiff is not asserting that Gig3 breached its obligation to provide him
with a redemption right. Rather, he is claiming that the defendants disloyally
hindered his ability to exercise it. Gig3’s charter does not speak to the actions that
its fiduciaries must undertake in connection with the right. Requiring the defendants
127
Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *22 (Del. Ch. Mar. 26, 2018)
(quoting Thorpe v. CERBCO, Inc., 1995 WL 478954, at *8 (Del. Ch. Aug. 9, 1995))
(emphasis omitted).
128
See infra notes 149-53 and accompanying text.
129
Compl. ¶¶ 111-13.
130
In the defendants’ view, the implied covenant of good faith and fair dealing would
provide the only recourse to the plaintiff. See Defs.’ Reply Br. 26-28.
29
to abide by their fiduciary duties would neither “rewrite the contract” 131 nor
“undermine the primacy of contract law.” 132
The right to redeem is the primary means protecting stockholders from a
forced investment in a transaction they believe is ill-conceived. It is a bespoke check
on the sponsor’s self-interest, which is intrinsic to the governance structure of a
SPAC. It follows that a SPAC’s fiduciaries must ensure that right is effective,
including by disclosing “fully and fairly all material information” that is reasonably
available about the merger and target to inform the redemption decision. 133 To hold
otherwise would lead to the illogical outcome that SPAC directors owe fiduciary
duties in connection with the “empty” vote on the merger, but not the redemption
choice that is of far greater consequence to stockholders.134
131
Nemec v. Shrader, 991 A.2d 1120, 1126, 1129 (Del. 2010) (addressing a claim where
the “nature and scope of the [d]irectors’ duties,” when causing the company to exercise a
right to redeem shares acquired under a stock plan agreement, were “defined solely by
reference to that contract”).
132
Gale v. Bershad, 1998 WL 118022, at *5 (Del. Ch. Mar. 4, 1998) (addressing a claim
regarding breach of a preferred stockholder’s explicit rights provided for in a charter).
133
Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143, 137 (Del. 1997); see
Alidina v. Internet.com Corp., 2002 WL 31584292, at *8 (Del. Ch. Nov. 6, 2002) (holding
that direct claims for breach of fiduciary duty arose in the context of a tender offer when it
was alleged that “defendants failed to disclose all material information to the shareholders
in the 14D-9 and Amended 14D-9”). Moreover, as discussed above, stockholders were
collectively called upon to make a redemption decision. See discussion supra Section II.B.
134
See generally infra notes 202-07 and accompanying text.
30
1. Standard of Review
The standard of review supplies the appropriate lens through which the court
evaluates whether the defendants complied with their fiduciary obligations. 135 The
business judgment rule, Delaware’s default standard of review, presumes “that in
making a business decision, the board of directors ‘acted on an informed basis, in
good faith and in the honest belief that the action was taken in the best interests of
the company.’”136 “[T]he judgment of a properly functioning board will not be
second-guessed and ‘[a]bsent an abuse of discretion, that judgment will be respected
by the courts.’”137
Where the presumption of the business judgment rule is rebutted, deference is
no longer afforded and a more exacting review is required. The corporate
fiduciaries’ actions are examined under the entire fairness standard.138
135
See In re Trados Inc. S’holder Litig., 73 A.3d 17, 35-36 (Del. Ch. 2013) (“The standard
of review is the test that a court applies when evaluating whether directors have met the
standard of conduct.”); Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 841 (Del. Ch.
2002) (“For the equitable tort, the court evaluates the question of breach through the lens
of one of several possible standards of review.”); Williams Cos., Inc. v. Energy Transfer
Equity, L.P., 159 A.3d 264, 275-76 (Del. 2017) (Strine, C.J., dissenting) (“[T]he lens that
a judge uses”—i.e., the “burden of proof” and “standard of review”—are “supposed to
influence how [s]he assesses the evidence before h[er].”).
136
Solomon v. Armstrong, 747 A.2d 1098, 1111 (Del. Ch. 1999) (quoting Aronson v. Lewis,
473 A.2d 805, 812 (Del. 1984)), aff’d, 746 A.2d 277 (Del. 2000) (TABLE).
137
Orman v. Cullman, 794 A.2d 5, 20 (Del. Ch. 2002) (quoting Aronson, 473 A.2d at 811).
138
See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1162 (Del. 1995) (stating that
where “the presumption of the business judgment rule has been rebutted, the board of
31
Here, the “entire fairness standard of review applies due to inherent conflicts
between the SPAC’s fiduciaries and public stockholders in the context of a value-
decreasing transaction.” 139 The plaintiff pleads facts supporting two independent
grounds for that conclusion. First, the de-SPAC merger with Lightning was a
conflicted controller transaction. Second, a majority of the Board was not
disinterested or independent.140
The defendants ask me to put the question of fairness to the side and focus
first on whether the plaintiff has shown that the Proxy informing the redemption
decision was materially false or misleading.141 That approach would be suitable if
the plaintiff had advanced a straightforward disclosure claim. But the plaintiff’s
allegations give rise to a single claim where the deficient disclosures are
“inextricably intertwined” with the disloyal behavior that caused them. 142
directors’ action is examined under the entire fairness standard” (citing Unitrin, Inc. v. Am.
Gen. Corp., 651 A.2d 1361, 1371 n.7 (Del. 1995))).
139
MultiPlan, 268 A.3d at 792.
140
See, e.g., Larkin v. Shah, 2016 WL 4485447, at *8 (Del. Ch. Aug. 25, 2016) (“Delaware
courts will apply the most stringent level of review, entire fairness, in circumstances where:
(1) properly reviewable facts reveal that the propriety of a board decision is in doubt
because the majority of the directors who approved it were grossly negligent, acting in bad
faith, or tainted by conflicts of interest; or (2) the plaintiff presents facts supporting a
reasonable inference that a transaction involved a controlling stockholder.”).
141
E.g., Defs.’ Reply Br. 5-11.
142
MultiPlan, 268 A.3d at 800 & n.92 (citing Jack B. Jacobs, The Fiduciary Duty of
Disclosure after Dabit, 2 J. Bus. & Tech. L. 391, 397 (2007)).
32
The core thesis of the Complaint is that the defendants were incentivized to
undertake a value-decreasing transaction because it led to colossal returns on the
Sponsor’s investment, without regard to whether public stockholders were better
served by liquidation. By providing inadequate disclosures about the merger, the
defendants could discourage redemptions and ensure greater deal certainty. These
“quintessential Delaware concerns” would go unresolved if the court’s analysis
began and ended with materiality.143
To view the disclosures in a vacuum would evade any meaningful assessment
of whether the redemption choice was manipulated to maximize the sponsor’s profits
at public stockholders’ expense. The SPAC’s fiduciaries, motivated to close a
de-SPAC transaction, would not be held to account for failing to undertake the
thorough and careful process their duties to stockholders require. This court cannot
wear blinders where conflicts are alleged to infect the decision-making of a board
majority or a transaction benefitting a controller to other stockholders’ detriment.
Instead, Delaware law mandates the application of entire fairness review.144
The defendants further argue that these misaligned economic incentives
should play no role in the court’s analysis because they were disclosed in the
143
In re Lordstown Motors Corp. S’holders Litig., 2022 WL 678597, at *4 (Del. Ch. Mar.
7, 2022) (describing similar allegations as “quintessential Delaware concerns” and not “a
rebranding of securities claims about material misstatements as fiduciary duty claims”).
144
See Weinberger v. UOP, Inc., 457 A.2d 701, 703 (Del. 1983).
33
prospectus when the plaintiff invested in Gig3 and again in the Proxy when he opted
not to redeem.145 In other words, they believe that the plaintiff is estopped from
invoking the duty of loyalty and a heightened standard of review because he
implicitly assented to the conflicts.
The sole decision cited in support of this estoppel theory held that a
stockholder plaintiff lacked standing to pursue derivative claims challenging an
insider transaction that was disclosed in the IPO prospectus.146 The court addressed
whether the plaintiff could demonstrate contemporaneous ownership because the
terms of the challenged transaction were set before the IPO in which the plaintiff
purchased stock.147 Nothing in that decision indicates that the plaintiff waived
loyalty claims by tacitly consenting to a conflicted arrangement when investing.148
Nor does it suggest that this court is barred from applying entire fairness if the
conflicts triggering that standard of review were disclosed.
145
Defs.’ Opening Br. 41-42 n.6.
146
In re SmileDirectClub, Inc. Deriv. Litig., 2021 WL 2182827, at *12 (Del. Ch. May 28,
2021) (“In view of the Prospectus’s thorough disclosures about the Company’s plans to
complete the Insider Transactions at the IPO price, ‘it would seem to follow that plaintiff
would be barred from suing by reason of its knowledge of the alleged wrong when it
purchased the stock.’” (quoting 7547 P’rs v. Beck, 1995 WL 106490, at *3 (Del. Ch. Feb.
24, 1995))).
147
Id.148
See MultiPlan, 268 A.2d at 812.
34
Such an approach would be inconsistent with the fundamental principles of
our law. Delaware corporate law “does not allow for a waiver of the directors’ duty
of loyalty.”149 And it does not exempt SPAC mergers from the application of entire
fairness review to enforce that obligation. 150 Neither the nature of the SPAC nor the
presence of the redemption right permits otherwise.
The Delaware General Assembly alone “has the authority to eliminate or
modify fiduciary duties and the standards that are applied by this court, or to
authorize their elimination or modification.”151 Whether it is wise to “create a
business entity in which the managers owe the investors no duties at all except as set
forth” by statute or the entity’s governing documents is a “policy judgment” left to
149
Schock v. Nash, 732 A.2d 217, 225 n.21 (Del. 1999).
150
Totta v. CCSB Fin. Corp., 2022 WL 1751741, at *2, *14-16 (Del. Ch. May 31, 2022)
(rejecting the defendants’ argument that enhanced scrutiny did not apply because the
company’s charter contained a provision stating that the board’s decisions made “in good
faith and on the basis of such information and assistance as was then reasonably available
for such purpose shall be conclusive and binding upon the Corporation and its
stockholders”; noting that such provisions could not “alter the directors’ fiduciary
obligations and the attendant equitable standards a court will apply when enforcing those
obligations”); cf. Glassman v. Unocal Expl. Corp., 777 A.2d 242, 243 (Del. 2001) (“By
enacting a statute [8 Del. C. § 253] that authorizes the elimination of the minority without
notice, vote, or other traditional indicia of procedural fairness, the General Assembly
effectively circumscribed the parent corporation’s obligations to the minority in a short-
form merger. The parent corporation does not have to establish entire fairness, and, absent
fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the
merger consideration is appraisal.”).
151
Totta, 2022 WL 1751741, at *15.
35
that legislative body. 152 Unless and until that occurs, a SPAC taking the Delaware
corporate form “promises investors that equity will provide the important default
protections it always has.”153 It is not for this court to grant an exemption.
a. The Conflicted Controller Allegations
The plaintiff alleges that a “chain of control” allowed Katz to dominate Gig3,
its Board, and the merger with Lightning. 154 Katz owned and controlled the Sponsor
which, in turn, controlled Gig3. The defendants reject the characterization of the
Sponsor as a controlling stockholder because it owned less than a majority of Gig3’s
pre-merger shares.155
A stockholder is deemed a “controlling stockholder” if “it owns a majority
interest in” the corporation or owns less than a majority but “exercises control over
152
Auriga Cap. Corp. v. Gatz Props., 40 A.3d 839, 856 (Del. Ch. 2012).
153
Id.; Minor Myers, The Corporate Law Reckoning for SPACs 1 (Aug. 2, 2022),
https://ssrn.com/abstract=4095220 (“For a SPAC that has elected to organize as a
corporation, in Delaware, and sold shares of common stock to the public, the core attributes
of the privately-ordered bargain are deceptively simple: (1) the mandatory loyalty
obligation for fiduciaries and (2) the limited ways to satisfy that obligation short of a
judicial inquiry.”).
154
Compl. ¶ 6.
155
Defs.’ Opening Br. 37-38 n.5; Oral Arg. Tr. (Dkt. 39) 13-14. By my calculation, the
Sponsor held 21.76% of the pre-merger shares (5,635,000 out of a total of 25,893,479
shares). See Proxy at 1, 5. The Sponsor held 4,985,000 Initial Stockholder Shares and
650,000 common shares from the private placement units.
36
the business affairs of the corporation.”156 Delaware courts have long been chary of
determining that minority stockholders—particularly those who are not significant
blockholders—have effective control.157 In cases where “soft” control has been
found, the controller generally possesses a potent “combination of stock voting
power and managerial authority that enables him to control the corporation, if he so
wishes.”158
Although the Sponsor held less than a quarter of Gig3’s voting power at the
time of the merger, the governance structure of the SPAC makes it reasonably
conceivable that the Sponsor was its controlling stockholder. 159 The sponsor of a
SPAC controls all aspects of the entity from its creation until the de-SPAC
transaction. In Gig3’s case, the Sponsor created the Company and incorporated it in
156
Kahn v. Lynch Commc’ns Sys, Inc., 638 A.2d 1110, 1113 (Del. 1994) (emphasis in
original); see also In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *12 (Del.
Ch. Mar. 28, 2018).
157
See In re Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656, 661 (Del. Ch. 2013)
(holding that the purported controller’s 27% stake and right to appoint two of ten directors
was insufficient to support an inference that it exercised control); In re W. Nat’l Corp.
S’holders Litig., 2000 WL 710192, at *6 (Del. Ch. May 22, 2000) (concluding that a
defendant owning 46% of the outstanding stock—and the ability to purchase an additional
20%—and with the right, albeit unexercised, to appoint two of eight directors was not a
controlling stockholder).
158
In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003); see Tesla, 2018
WL 1560293, at *19 (holding it was reasonably conceivable at the pleading stage that a
22% stockholder and CEO was a controlling stockholder where the purported controller
exercised substantial influence over the corporation and board).
159
It must be emphasized that the SPAC structure is central to this pleading-stage
conclusion.
37
Delaware. It selected the initial Board, which would remain in place until the merger
with Lightning closed.160 The Sponsor controlled the Board through Katz who, as
discussed below, had close ties to and influence over each of the directors. 161
The Sponsor also held unrivaled authority over Gig3’s business affairs.162
Like all SPACs, Gig3 had no substantive operations before the de-SPAC merger. Its
sole objective was to seek out a merger target—a process “dominated” by Katz
(Gig3’s Executive Chairman and CEO) and Dinu (his spouse).163 The Sponsor,
through its control of the Board, exercised power over the most crucial decision
facing the Company: merge or liquidate.164 Gig3’s SEC filings acknowledge that
160
Compl. ¶¶ 4, 6, 42; Prospectus at 42 (explaining that Gig3 did not “intend to hold an
annual meeting of stockholders [to elect directors] until after . . . consummat[ion] of a
business combination” even though this “may not be in compliance with Section 211(b) of
the DGCL”); see Voigt v. Metcalf, 2020 WL 614999, at *14 (Del. Ch. Feb. 10, 2020)
(explaining that “the ability of an alleged controller to designate directors . . . is an
indication of control”).
161
See discussion infra Section II.C.1.b.
162
Kahn, 638 A.2d at 1114 (describing the “threshold question” in assessing whether a
minority stockholder is a controlling stockholder to be whether it “exercised control over
[the company’s] business affairs”).
163
Compl. ¶ 51; see also Proxy at 147-57.
164
Compl. ¶ 45; see Prospectus at 31 (“[E]xcept as required by applicable law or stock
exchange rules, the decision as to whether we will seek stockholder approval of a proposed
business combination . . . will be made by us, solely in our discretion . . . . Accordingly,
we may consummate our initial business combination even if holders of a majority of the
issued and outstanding shares of Common Stock do not approve of the business
combination we consummate.”).
38
the Sponsor “may exert a substantial influence on actions requiring a stockholder
vote.”165
“Entire fairness is not triggered solely because a company has a controlling
stockholder. The controller also must engage in a conflicted transaction.” 166 Such
transactions include those where the controlling stockholder receives a “unique
benefit” by “extracting something uniquely valuable to the controller, even if the
controller nominally receives the same consideration as all other stockholders.”167
Here, it is reasonably conceivable that the Sponsor—and Katz through his ownership
of the Sponsor—received a “unique benefit” from its ownership of the Initial
Stockholder Shares and private placement units.168
As the defendants point out, the Sponsor was generally aligned with public
stockholders in seeking out a favorable merger target. The Sponsor and public
stockholders who did not redeem would receive the same stock in the post-de-SPAC
165
Prospectus at 31; see id. at 54 (“Our initial stockholders will control a substantial interest
in us and thus may influence certain actions requiring a stockholder vote.”); id. at 110
(“Because of [its] ownership block, [the Sponsor], acting alone, may be able to effectively
influence the outcome of all matters requiring approval by our stockholders.”); see also
Tesla, 2018 WL 1560293, at *19 (explaining that “public acknowledgements” of the
alleged controller’s “substantially outsized influence” was relevant to “the controlling
stockholder inquiry when coupled with the other well-pled allegations” of control).
166
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *12 (Del. Ch. Oct. 24,
2014).
167
Id. at *13.
168
See MultiPlan, 268 A.3d at 811.
39
entity. But the economic structure of the SPAC allowed the Sponsor to extract
something uniquely valuable, at the expense of public stockholders, in two ways.
First, the Sponsor’s interests diverged from public stockholders in the choice
between a bad deal and a liquidation. The Sponsor would realize enormous returns
on its $25,000 investment in a value-decreasing merger.169 For example, despite the
plunge in New Lightning’s stock price since the merger, the Initial Stockholder
Shares were worth nearly $32.7 million when this litigation was filed.170 But if Gig3
liquidated, the Initial Stockholder Shares would be worthless. Public stockholders,
by contrast, would receive their investment plus interest from the trust in a
liquidation. For those stockholders, no deal was preferable to one worth less than
the liquidation price.171
169
The defendants assert that a lock-up agreement, requiring the Sponsor to refrain from
selling its shares for twelve months or until the stock reached a particular target price,
incentivized the Sponsor to seek out a value-increasing merger. Defs.’ Opening Br. 40.
Even if the lock-up agreement could be considered at this stage, I would not reach a
different outcome on the motion to dismiss. It can be fairly inferred that unless Gig3 went
bankrupt within a year, the value the Sponsor would receive one year after the merger
would well exceed its $25,000 investment.
170
Compl. ¶¶ 94, 96. New Lightning’s stock price was $6.57 per share as of August 2,
2021. Id. ¶ 94.
171
The cases relied upon by the defendants do not involve this dynamic. See In re
BioClinica, Inc. S’holder Litig., 2013 WL 5631233, at *5 (Del. Ch. Oct. 16, 2013) (noting
that the vesting of stock options in a change of control transaction aligned directors’
interests with those of stockholders and both parties would remain in their status quo
positions if a transaction were not achieved); In re Micromet, Inc. S’holders Litig., 2012
WL 681785, at *13 n.64 (Del. Ch. Feb. 29, 2012) (same); Globis P’rs, L.P. v. Plumtree
Software, Inc., 2007 WL 4292024, at *8 (Del. Ch. Nov. 30, 2007) (same).
40
Additionally, the Sponsor had an interest in minimizing redemptions after the
merger agreement was signed. The merger with Lightning was conditioned on Gig3
contributing at least $150 million in cash, $50 million of which was required to come
from the trust account.172 By minimizing redemptions, the Sponsor reduced the risk
that the merger would fail and increased the value of the Sponsor’s interest if it
closed. Thus, the Sponsor “effectively competed with the public stockholders for
the funds held in trust and would be incentivized to discourage redemptions if the
deal was expected to be value decreasing.”173
These disparate incentives were not ameliorated by Gig3’s single-class
structure. The nature of the Sponsor’s promote incentivized it to complete a merger
with Lightning, even if the deal proved disastrous for non-redeeming public
stockholders. That Gig3 had 11 months left to consummate a transaction does not
support a conclusion otherwise.174 Drawing all inferences in the plaintiff’s favor,
the Sponsor might have desired to take the money in hand and focus on the next
“Gig” SPAC rather than continuing to seek a target for Gig3.
172
Proxy at 16; see also Compl. ¶ 87.
173
MultiPlan, 268 A.3d at 811; see Crimson Expl., 2014 WL 5449419, at *12.
174
See MultiPlan, 268 A.3d at 811 (“Time left in the completion window does not change
the potential for misaligned incentives.”).
41
b. The Board-Level Conflicts
The standard of review also elevates to entire fairness when a complaint
“allege[s] facts supporting a reasonable inference that there were not enough
sufficiently informed, disinterested individuals who acted in good faith when taking
the challenged actions to comprise a board majority.”175 Here, the Board had six
members. The plaintiff must demonstrate that at least three of those directors were
interested or lacked independence to support the application of entire fairness on that
basis.176
The plaintiff adequately pleaded that Katz, through his ownership and control
of the Sponsor, had a material conflict regarding the transaction with Lightning. 177
As of the merger date, the Initial Stockholder Shares had an implied market value of
$39 million.178 That represents a 155,900% return on the Sponsor’s initial $25,000
investment. Irrespective of Katz’s personal wealth, a windfall of that magnitude
cannot easily be dismissed as inconsequential. 179
175
Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *26 (Del. Ch.
Apr. 14, 2017), as corrected (Apr. 25, 2017).
176
Id. (“If a board is evenly divided between compromised and non-compromised
directors, then the plaintiff has succeeded in rebutting the business judgment rule.”).
177
Compl. ¶ 6.
178
Id. ¶ 96.
179
See Orman, 794 A.2d at 31 (observing, in different circumstances, that “it would be
naïve to say, as a matter of law, that $3.3 million is immaterial”).
42
The remaining five members of the Board are Dinu, Miotto, Mikulsky,
Betti-Berutto, and Wang.
It can be fairly inferred that Dinu shared Katz’s interest in the merger.180 But
the Complaint lacks allegations of material self-interest for the other four directors.
The plaintiff asserts that the directors are conflicted because they held “direct or
indirect” interests in the Sponsor.181 But he did not plead the size of those interests
or any context for their materiality to the directors.182 According to the defendants,
the directors were compensated for their services in cash.183
Despite appearing to compensate the Board members in a way that could
reduce conflicts, the Sponsor appointed directors with close ties to Katz. Directors
may be found to lack independence where they are beholden to an interested party
or “so under [the interested party’s] influence that their discretion would be
180
Compl. ¶¶ 27-28.
181
Id. ¶ 43.
182
See DiRienzo v. Lichtenstein, 2013 WL 5503034, at *12 (Del. Ch. Sept. 30, 2013)
(holding that a plaintiff failed to allege a fiduciary was “financially interested” in a merger
based on an investment by the fiduciary’s company where the plaintiff did not make “any
allegations pertaining to the materiality of the . . . investment” to the fiduciary”); In re
Limited, Inc. S’holders Litig., 2002 WL 537692, at *5 (Del. Ch. Mar. 27, 2002) (concluding
that a plaintiff failed to plead a director was interested where the complaint referred to
aggregate revenue received by an entity in which the director had an interest but did not
allege how the director “may have benefited from any portion of those revenues”); cf.
MultiPlan, 268 A.3d at 813-14 (determining, at the pleading stage, that directors were
interested based on specific allegations showing the implied value of each independent
director’s interests in the sponsor).
183
See Defs.’ Opening Br. Ex. 11 (“May 27, 2020 Form 8-K”) at Item 5.02.
43
sterilized.”184 Here, the Board members are alleged to have held multiple positions
within Katz’s GigCapital Global enterprise of entities:
• Dinu is Katz’s spouse.185 She is a founding managing partner of
GigCapital Global.186 She was a director of GigCapital2, Inc. (a SPAC)
since March 2019 and continued in that position with UpHealth, Inc.
(the post-SPAC company), acting as its CEO from August 2019 until
June 2021. Dinu is also the CEO and a director of GigCapital4, Inc.,
GigCapital5, Inc., and GigInternational1, Inc.—all SPACs that had not
undergone a de-SPAC transaction as of the filing of the Complaint. She
was an executive at GigPeak, Inc.—a company Katz developed and
managed—from 2008 until it was sold in 2017.187
• Miotto is a GigCapital Global partner.188 He was a director of
GigCapital1, Inc. (a SPAC) and remains in that position with Kaleyra,
Inc. (the post-SPAC company).189 He was also a director of
GigCapital2, continuing in that position with UpHealth, and is a
director of GigCapital4 and GigCapital5. He served as a director of
GigPeak from its founding until its sale.190
184
Orman, 794 A.2d at 24 (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993));
see also In re BGC P’rs, Inc., 2021 WL 4271788, at *6 (Del. Ch. Sept. 20, 2021) (“A
director ‘subject to the interested party’s dominion or beholden to that interested party’
lacks independence.” (quoting Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1023
n.25 (Del. 2015))).
185
Compl. ¶ 27. That “[c]lose familial relationship[]” would alone “create a reasonable
doubt as to [her] impartiality.” Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 889 (Del. Ch.
1999); Sandys v. Pincus, 152 A.3d 124, 130 (Del. 2016) (noting that “family ties . . . would
[be] expect[ed] to heavily influence a human’s ability to exercise impartial judgment”).
186
Compl. ¶ 28.
187
Id.; see Proxy at 214-15.
188
Compl. ¶ 28.
189
Id. ¶ 29.
190
Id.
44
• Mikulsky, a GigCapital Global strategic advisor, was a director of
GigCapital1 and continues as a director of Kaleyra.191 Mikulsky was
the CEO and President of Endwave Corporation, a company purchased
by GigPeak in 2011, after which he served as a director of GigPeak
until it was sold. He was also a director of GigCapital2 until its
de-SPAC transaction with UpHealth in 2021.192
• Betti-Berutto is GigCapital Global’s Chief Technology Officer of
Hardware.193 He was a co-founder and CTO of GigPeak until its sale
in 2017. He is also a director of GigCapital4 and GigInternational1. 194
• Wang is GigCapital Global’s Chief Technology Officer of Software
and is a director of GigCapital6, Inc. and GigInternational1. 195 He was
also a director of GigCapital1 from November 2017 until its de-SPAC
merger with Kaleyra in 2021.196
It is reasonably inferable that these directors would “expect to be considered
for directorships” in companies—such as other SPACs—that Katz launches in the
future.197 It is also rational to presume that the directors received compensation for
191
Id. ¶ 30.
192
Id.
193
Id. ¶ 31.
194
Id.
195
Id. ¶ 32.
196
Id.
197
See Caspian Select Credit Master Fund Ltd. v. Gohl, 2015 WL 5718592, at *7 (Del.
Ch. Sept. 28, 2015) (considering allegations that the interested party had nominated
directors to current board and other boards and inferring that the directors could “expect to
be considered for directorships in companies the [interested party] acquire[s] in the
future”); see also BGC, 2019 WL 4745121, at *12 (remarking that “past benefits conferred
. . . may establish an obligation or debt (a sense of ‘owingness’) upon which a reasonable
doubt as to a director’s loyalty to a corporation may be premised” (quoting In re Ply Gem
Indus., Inc. S’holders Litig., 2001 WL 1192206, at *1 (Del. Ch. Oct. 3, 2001))).
45
these various roles, which would be accretive to their compensation in connection
with Gig3. The totality of these relationships provides ample reason to doubt at the
pleading stage that any of the Board members qualify as independent of Katz. 198
c. The Unavailability of Corwin Cleansing
The defendants contend that if entire fairness applies because of Board-level
conflicts, the stockholder vote approving the merger subjects the transaction to
business judgment review under Corwin v. KKR Financial Holdings LLC.199 My
assessment below that the Proxy was materially false and misleading renders that
argument meritless.200 It also fails, in my view, because the structure of the Gig3
stockholder vote is inconsistent with the principles animating Corwin.201
198
See In re New Valley Corp., 2001 WL 50212, at *7 (Del. Ch. Jan. 11, 2001) (“The facts
alleged in the complaint show that all the members of the current Board have current or
past business, personal, and employment relationships with each other and the entities
involved.”).
199
125 A.3d 304, 306 (Del. 2015) (holding that a fully informed, uncoerced majority
stockholder vote cleanses transactions other than self-dealing transactions involving
controlling stockholders); see Larkin, 2016 WL 4485447, at *8; Defs.’ Opening Br. 41
(arguing that “even if a majority of the members of the Board were interested or not
independent, the Acquisition would still be subject to business judgment rule review
because . . . more than 98% of Gig3 stockholders approved the Merger in a fully informed
vote based on the disclosures and the price proposed to the market”).
200
E.g., Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018) (describing the inquiry
regarding whether a stockholder vote is fully informed for purposes of triggering the
application of the business judgment rule under Corwin to be “whether the Company’s
disclosures apprised stockholders of all material information and did not materially mislead
them”); see discussion infra Section II.C.2.
201
The dual protections outlined in Kahn v. M&F Worldwide Corp. would also be an ill fit
for a de-SPAC transaction. 67 A.3d 496, 528 (Del. Ch. 2013), aff’d, 88 A.3d 635 (Del.
2014). The MFW process was designed to protect minority stockholders from the
46
“[W]hat legitimizes the stockholder vote as a decision-making mechanism is
the premise that stockholders with economic ownership are expressing their
collective view as to whether a particular course of action serves the corporate goal
of stockholder wealth maximization.” 202 A stockholder vote is afforded deference
under our law because stockholders are presumed to be “impartial decision-makers”
with an “actual economic stake in the outcome” of the merger.203
Unlike the vote on a typical merger or acquisition, however, the Gig3
stockholder vote on the de-SPAC merger could not reflect its investors’ collective
economic preferences. Stockholders’ voting interests were decoupled from their
economic interests.204 Gig3’s public stockholders could simultaneously divest
retribution of a controlling stockholder engaged in a self-dealing transaction—specifically,
a squeeze-out. Those fears are not realized in a SPAC merger; public stockholders can
simply redeem their shares. This fact highlights, once again, the importance of the
redemption right to a SPAC’s public stockholders.
202
Crown EMAK P’rs, LLC v. Kurz, 992 A.2d 377, 388 (Del. 2010)); In re CNX Gas Corp.
S’holders Litig., 4 A.3d 397, 416 (Del. Ch. 2010) (“Economic incentives matter,
particularly for the effectiveness of a legitimizing mechanism like a majority-of-the-
minority tender condition or a stockholder vote.”).
203
Corwin, 125 A.3d at 313-14.
204
See Usha Rodrigues & Mike Stegemoller, Redeeming SPACs 28 (U. Ga. Sch. L. Rsch.
Paper No. 2021-09, 2021), https://ssrn.com/abstract=3906196 (“[T]he vote is nearly
irrelevant, because SPACs have decoupled voting and economic interest in the de-SPAC.
This decoupling renders the SPAC shareholder vote—when it even occurs—a mere fig
leaf. A de-SPAC is a fait accompli.”); John C. Coates, SPAC Law and Myths 9 (Feb. 11,
2022), https://ssrn.com/abstract=4022809 (discussing the “possibility—often a reality—
that many voting shareholders will redeem and exit the SPAC shortly after they vote on a
deal, creating a close analogue of ‘empty voting’”).
47
themselves of an interest in New Lightning by redeeming and vote in favor of the
deal. Many did. Although 98% of all Gig3 stockholders (according to the
defendants) voted in favor of the merger, 29% of the public stockholders redeemed
their shares.205
Public stockholders had no reason to vote against a bad deal because they
could redeem. Moreover, redeeming stockholders remained incentivized to vote in
favor of a deal—regardless of its merits—to preserve the value of the warrants
included in SPAC IPO units.206 Because this vote was of no real consequence, its
effect on the standard of review is equivalently meaningless.207
205
Defs.’ Opening Br. 21 (citing April 21, 2021 Form 8-K at Item 5.07).
206
See Klausner, Ohlrogge & Ruan, Sober Look, supra note 4, at 241-46 (discussing
research reflecting that all stockholders who buy units in the IPO but sell or redeem their
shares retain free warrants); supra note 19 and accompanying text.
207
The vote could have held greater importance if stockholders’ voting and economic
interests had been “recoupled” by requiring redeeming stockholders to vote against the
deal. See Usha Rodrigues & Michael Stegemoller, Disclosure’s Limits, 40 Yale J. Reg.
37, 42-43 (2022) (proposing that stockholders must vote against a merger in order to
exercise their redemption right and arguing that “[r]ecoupling the vote with the redemption
right can help ensure that good deals go forward—and bad deals don’t”); Holger Spamann
& Hao Guo, The SPAC Trap: How SPACs Disable Indirect Investor Protection, 40 Yale J.
Reg. 75, 79 (2022) (recounting that the SPACs of the 1990s and early 2000s “required
investors to vote against the de-SPAC if they wanted to redeem,” which provided an
“indirect investor protection defense” because “the acquisition would not go through if it
was a bad deal for non-redeeming SPAC shareholders”). This, of course, assumes that the
vote otherwise satisfied Corwin, including the requirement that it be fully informed. But
in that case, it would seem that stockholders would also have been given a fair opportunity
to redeem and there would not be a reasonably conceivable MultiPlan claim.
48
2. The Fairness Analysis
Under the entire fairness standard, the defendant fiduciaries will bear the
burden “to demonstrate that the challenged act or transaction was entirely fair to the
corporation and its [stockholders].”208 “Although fairness has two component
parts—price and process—the court must make a ‘single judgment that considers
each of these aspects.’”209
The fact intensive nature of this inquiry “normally will preclude dismissal of
a complaint on a Rule 12(b)(6) motion to dismiss.”210 But “[e]ven in a self-interested
transaction,” a plaintiff “must allege some facts that tend to show that the transaction
was not fair.”211 Dismissal may be appropriate if the defendants demonstrate that
the challenged act “was entirely fair based solely on the allegations of the complaint
and the documents integral to it.”212
In Weinberger v. UOP, Inc., the Delaware Supreme Court explained that
compliance with the duty of disclosure is included within the fair dealing facet of
208
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52 (Del. 2006).
209
BGC, 2022 WL 3581641, at *42 (Del. Ch. Aug. 19, 2022) (quoting Cinerama, 663 A.2d
at 1139-40).
210
Orman, 794 A.2d at 21 n.36.
211
Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995),
aff’d, 672 A.2d 35 (Del. 1996).
212
Hamilton P’rs, L.P. v. Highland Cap. Mgmt., L.P., 2014 WL 1813340, at *12 (Del. Ch.
May 7, 2014).
49
the test.213 Because “[m]aterial information” was withheld from minority
stockholders “under circumstances amounting to a breach of fiduciary duty,” the
court concluded that the merger did “not meet the test of fairness.”214 The directors’
lack of candor was considered in the broader context of their unfair dealing,
including “the absence of any attempt to structure th[e] transaction on an arm’s
length basis” and the “obvious conflicts” involved. 215 The court viewed complete
disclosure as a means of ensuring fair play but assessed the adequacy of the
disclosures against the backdrop of the overall transaction.
In keeping with that guidance, this court held in MultiPlan that the plaintiffs
had stated viable claims under the entire fairness standard not only due to the
conflicts in the de-SPAC merger but also because the defendants “failed, disloyally,
to disclose information necessary for the plaintiffs to knowledgeably exercise their
redemption rights.”216 That opinion explicitly did not address “the validity of a
213
457 A.2d at 711 (describing “fair dealing” as including the question of “how the
approvals of the directors and the stockholders were obtained”).
214
Id. at 703; see also In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 29 (Del. Ch.
2014) (concluding that a “disclosure issue on which the plaintiffs received summary
judgment provide[d] some evidence of unfairness”); Rabkin v. Philip A. Hunt Chem. Corp.,
498 A.2d 1099, 1104-05 (Del. 1985) (overruling a “narrow interpretation” of Weinberger
focused solely on “allegations of non-disclosures or misrepresentations” because the
“mandate of fair dealing does not turn solely on issues of deception” but includes “broader
concerns respecting the matter of procedural fairness”).
215
Weinberger, 457 A.2d at 710-11.
216
268 A.3d at 816.
50
hypothetical claim” premised solely on the conflicts inherent in a SPAC structure if
public stockholders “in possession of all material information” had chosen “to invest
rather than redeem.”217 Rather, it evaluated the “core, direct harm” caused by the
action or inaction of conflicted fiduciaries that constrained the informed exercise of
the redemption right.218
The defendants argue that this case presents the theoretical scenario
contemplated in MultiPlan because the Proxy contained all material information.
Not so.
The plaintiff has provided “some facts” that public stockholders’ redemption
decisions were compromised by the defendants’ unfair dealing in two primary
ways.219 The first concerns the failure to disclose the cash per share that Gig3 would
invest in the combined company. The second relates to the incomplete disclosure of
the value that Gig3 and its non-redeeming stockholders could expect to receive in
exchange.
Both pieces of information would be essential to a stockholder deciding
whether it was preferable to redeem her funds from the trust or to invest them in
New Lightning. Gig3’s public stockholders knew that if they redeemed, they were
217
Id.
218
Id.
219
Solomon, 1995 WL 250374, at *5.
51
promised $10 per share plus interest. They were given incomplete information about
what they would receive if they instead opted to invest.
a. What Gig3 Was Investing
The Board was under an “affirmative duty” to provide “materially accurate
and complete” information to stockholders in connection with the redemption choice
and merger vote.220 The Proxy indicated that the merger consideration to be paid to
Lightning stockholders consisted solely of Gig3 stock valued at $10 per share.221 If
non-redeeming stockholders were exchanging Gig3 shares worth $10 each, they
could reasonably expect to receive equivalent value in return. 222
According to the Complaint, however, the amount of net cash per share to be
invested in New Lightning was not $10. 223 It was instead less than $6 per share after
220
Feldman v. Cutaia, 2006 WL 920420, at *8 (Del. Ch. Apr. 5, 2006).
221
Proxy at Cover Page, A-2 (defining “Aggregate Closing Merger Consideration” to mean
“a number of shares of GigCapital3 Common Stock equal to the quotient of (a) the
Aggregate Closing Merger Consideration Value divided by (b) $10.00”).
222
See Klausner, Ohlrogge & Ruan, Sober Look, supra note 4, at 287-88 (explaining that
in a de-SPAC transaction, the target negotiates an exchange in which its stockholders will
“give up a fraction of their company roughly equal to the value of the SPAC shares they
will receive, and the primary value of a SPAC is its cash”).
223
Compl. ¶¶ 19, 56; see In re P3 Health Grp. Hldgs., LLC, 2022 WL 16548567, at *19
(Del. Ch. Oct. 31, 2022) (finding it reasonably conceivable that a contractual party’s right
to a priority distribution was breached by the company valuing distributed SPAC shares at
$10, based on the observation that “the value of SPAC equity when a de-SPAC merger
takes place is materially less than $10 per share” (citing Klausner, Ohlrogge & Ruan, Sober
Look, supra note 4, at 232, 246, 253)).
52
accounting for considerable dilution.224 Because the Proxy allegedly misstated and
obfuscated the net cash—and thus the value—underlying Gig3’s shares, public
stockholders could not make an informed choice about whether to redeem or
invest.225
Gig3’s sole asset at the time of the Proxy—i.e., before redemptions—was
cash. That included funds in the trust account (about $202 million) and funds to be
received at closing in exchange for shares pursuant to the PIPE agreement ($25
million).226 To determine net cash per share, costs would be subtracted from that
total cash (about $227 million) before dividing by the number of pre-merger
shares.227
224
See Compl. ¶ 56.
225
See O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 920 (Del. Ch. 1999) (“To
state a claim for breach of the fiduciary duty of disclosure on the basis of a false statement
or representation, a plaintiff must identify (1) a material statement or representation in a
communication contemplating stockholder action (2) that is false.”).
226
Oral Arg. Tr. 82; see Proxy at 107. Redemptions would further dilute equity and
dissipate cash. The extent of that dilution was not, however, known at the time of the
Proxy.
227
See Oral Arg. Tr. 75-93; see also Michael Klausner, Michael Ohlrogge & Harold
Halbhuber, Net Cash Per Share: The Key to Disclosing SPAC Dilution, 40 Yale J. Reg. 18,
24-30 (2022) (describing that costs include cash expenses, the value of warrants, and the
value of other equity derivatives and that pre-merger shares include public shares, founder
shares, and PIPE shares).
53
The plaintiff asserts that the costs to be subtracted from the cash component
of the numerator would include: (1) transaction costs, including deferred underwriter
fees ($8 million) and financial advisory and other fees ($32 million); 228 (2) the
market value of public warrants at the time of the Proxy (about $38 million); 229
(3) the value of the warrants in the private placement units and given to Note holders;
and (4) the value of the Notes’ conversion feature.230 The denominator—pre-merger
shares—would consist of: (1) public shares issued in the IPO (20 million); (2) the
Initial Stockholder Shares (about 5 million); (3) the Insider Shares (15,000);
(4) shares to be issued at closing pursuant to the PIPE agreement (2.5 million); and
(5) shares issued as part of the private placement units (about 240,000).231 Using
these inputs and the above formula, the plaintiff calculates Gig3’s net cash per share
at the time the Proxy was filed to be about $5.25 per share.232
228
Oral Arg. Tr. 82.
229
This figure values the 15 million public warrants at $2.53 per warrant, which was the
average trading price the week before the Merger announcement. Id. at 78, 116. Per SEC
guidance, the public warrants are treated as a current liability. See Staff Statement on
Accounting and Reporting Considerations for Warrants Issued by Special Purpose
Acquisition Companies (“SPACs”), SEC (Apr. 12, 2021), https://www.sec.gov/news/
public-statement/accounting-reporting-warrants-issued-spacs.
230
Because the value of the third and fourth factors could not be determined based on the
information in the Proxy, the plaintiff was unable to calculate their dilutive effects. See
Oral Arg. Tr. 83-85. Accordingly, the plaintiff argues its calculated net cash per share
value is an overestimate. See id.
231
See id. at 75-76.
232
Id. at 83; Compl. ¶ 11. At this stage, I do not assess the accuracy of the plaintiff’s inputs
in reaching a figure of $5.25. For example, I accept the plaintiff’s assertion that the public
54
Accepting the plaintiff’s allegations as true, the sizeable difference between
the $10 of value per share Gig3 stockholders expected and Gig3’s net cash per share
after accounting for dilution and dissipation of cash is information “that a reasonable
shareholder would consider . . . important in deciding” whether to redeem or invest
in New Lightning.233 If Gig3 had less than $6 per share to contribute to the merger,
the Proxy’s statement that Gig3 shares were worth $10 each was false—or at least
materially misleading.234 Moreover, Gig3 stockholders could not logically expect to
receive $10 per share of value in exchange.235
warrants should be valued according to their market price and included in the numerator.
Cf. Oral Arg. Tr. 91-92 (acknowledging that the “costs [of the warrants] could be reflected
in the denominator of the fraction rather than the numerator”). I also am not endorsing a
specific formula or methodology for calculating net cash per share. The plaintiff concedes
that different companies could take different approaches. Using any reasonable method of
calculating net cash per share, however, this information was not fully or accurately
disclosed in the Proxy.
233
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985); see Zirn v. VLI Corp., 681
A.2d 1050, 1057 (Del. 1996) (discussing that, in the context of stockholders deciding
whether to tender or retain shares, “any misstatement . . . which misled the stockholders
concerning the value of the company would necessarily be material”).
234
Whether a SPAC has disclosed all material information regarding the cash per share it
would invest in the combined company is a fact dependent analysis. Each SPAC’s
potential dilution and dissipation of cash varies depending upon, among other factors, the
number of warrants, the size of the PIPE, and the amount of advisor and other fees. Here,
it is reasonably conceivable that the Proxy was materially misleading because the
Complaint alleges significant dilution and dissipation of cash that starkly contrasts with the
Proxy’s attribution of $10 to each Gig3 share. See Compl. ¶ 63.
235
See id. ¶ 57.
55
b. What Gig3 Was Receiving
The second category of alleged disclosure violations concerns the value that
stockholders would receive in a merger with Lightning. The plaintiff avers that
because Gig3 was not worth $10 per share, Lightning’s stated worth was
commensurately overstated.236 The value that Gig3 obtained in the merger would
be highly relevant to stockholders’ investment decisions. But according to the
Complaint, the Board “accepted” an “inflated valuation” for Lightning built on
unrealistic revenue and production projections and passed this misinformation along
to stockholders.237 The Proxy was silent as to Lightning’s true prospects.
Gig3’s Proxy reported that Lightning’s annual revenues were projected to
increase by over 22,100% in five years, from $9 million to over $2 billion. 238 It also
stated that Lightning’s annual gross profits were expected to rise from zero to more
than $500 million over the same time period.239 These projections assumed that
Lightning would ramp up its production capacity dramatically from fewer than 100
vehicles delivered in 2019 and 2020 combined to 20,000 vehicles a year by 2025. 240
236
E.g., id. ¶ 80.
237
Id. ¶ 63.
238
Id. ¶ 66.
239
Id.
240
Id. ¶¶ 68, 79.
56
The disclosure of the projections does not, by itself, imply that the defendants
failed to inform the exercise of stockholders’ redemption rights. They are obviously
forward-looking and qualified by cautionary language. 241 The Proxy explained that
the projections were prepared by Lightning management “for internal use and not
with a view toward public disclosure” and were disclosed “because they were made
available to [Gig3] and [its] Board in connection with their review of the proposed
[merger].”242
The problem is that Lightning’s lofty projections were not counterbalanced
by impartial information.243 Stockholders were kept in the dark about what they
could realistically expect from the combined company. Gig3 did not, for example,
tell investors that Lightning’s business would be difficult to scale because it built
highly customized vehicles in small batches.244 The Complaint alleges that the
241
Proxy at 162-63. The plaintiff is not asserting a fraud claim.
242
Id. at 162-63; see City of Miami Gen. Emps. v. Comstock, 2016 WL 4464156, at *12
(Del. Ch. Aug. 24, 2016) (rejecting a disclosure claim against directors concerning
financial estimates prepared by the merger counterparty because “[a]mending or
supplementing those figures with other estimates that were not presented to [the company]
would misstate the information that [the company] actually received from [the
counterparty]”).
243
See Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977) (holding that the
defendants violated their duty of disclosure when they disclosed a “floor value, but not an
equally reliable ‘ceiling’ value” because “full disclosure . . . was a prerequisite”); Maric
Cap. Master Fund, Ltd. v. Plato Learning, Inc., 11 A.3d 1175, 1177-78 (Del. Ch. 2010)
(“Because the proxy statement spoke on this subject, there was a duty to do so in a non-
misleading fashion.”).
244
Compl. ¶ 79.
57
Board had good reason to question Lightning’s future capabilities. 245 Yet the Proxy
was silent.246
“To state a claim for breach by omission of any duty to disclose, a plaintiff
must plead facts identifying (1) material, (2) reasonably available (3) information
that (4) was omitted from the proxy materials.”247 The phrase “reasonably available”
is not meaningless. It sets out a baseline expectation that directors have undertaken
a sufficient inquiry for material information. The Complaint alleges that this
standard was not met because the Board was incentivized to turn a blind eye to
Lightning’s problems and close the deal.248
The nature of Lightning’s business model was “knowable” through the sort of
diligence and analysis expected of the board of a Delaware corporation undertaking
a major transaction.249 It can be inferred that the defendants knew (and should have
disclosed) or should have known (but failed to investigate) that Lightning’s
245
Id. ¶ 64.
246
The Proxy cautioned, for example, that Lightning is “an early stage company with a
history of losses” that “expects to incur significant expenses and continuing losses for the
foreseeable future.” Proxy at 53-54. But the defendants “are not excused from disclosing
material facts” simply because general “risk factors” were listed. Pfeffer, 965 A.2d at
686-87; see Lynch, 383 A.2d at 281 (stating that the duty of disclosure is not fulfilled by
technically correct, generalized statements).
247
Pfeffer, 965 A.2d at 686 (quoting O’Reilly, 745 A.2d at 926).
248
Compl. ¶¶ 20, 23, 64, 66-72.
249
Pfeffer, 965 A.2d at 687 (quoting IOTEX Commc’ns, Inc. v. Defries, 1998 WL 914265,
at *4 (Del. Ch. 1998)).
58
production would be difficult to scale in the manner predicted. 250 In either event, it
is reasonably conceivable that the Board deprived Gig3’s public stockholders of an
accurate portrayal of Lightning’s financial health. As a result, public stockholders
could not fairly decide whether it was preferable to redeem for $10 plus interest or
to invest in a risky venture.
* * *
The plaintiff has sufficiently pleaded that the Proxy contained material
misstatements and omitted material, reasonably available information. I therefore
cannot conclude that the transaction was the product of fair dealing. 251
The Complaint provides additional grounds for that assessment. The merger
negotiations were directed by Katz and Dinu—the two individuals who arguably
stood to gain the most in a value-destructive deal.252 The Board’s advisors, Nomura
and Oppenheimer, had large stakes in 243,479 private placement shares that would
be worthless and $8 million of contingent compensation that would not be realized
if Gig3 failed to merge. 253 The Board did not obtain a fairness opinion or even an
250
Compl. ¶¶ 79-80.
251
See Weinberger, 457 A.2d at 710-11.
252
See Cinerama, 663 A.2d at 1173 (“The independence of the bargaining parties is a well-
recognized touchstone of fair dealing.”).
253
Compl. ¶ 52; see MultiPlan, 268 A.3d at 818.
59
informal presentation on the fairness of the transaction—not to mention one
considering the effect of the Sponsor promote. 254
Unfair price can be inferred from the allegation that public stockholders were
left with shares of New Lightning worth far less than the $10 per share redemption
price.255
These matters may ultimately not support a finding of unfairness. At present,
however, they provide some evidence that the Board failed to live up to the standard
254
Delaware courts have stated that there is no duty to obtain a fairness opinion. In
Crescent/Mach I Partners, L.P. v. Turner, for example, the court held that the director
defendants’ approval of a fairness opinion did not “rise[] to the level of grossly negligent
conduct that would deprive them of the benefit of the business judgment rule.” 846 A.2d
963, 985 (Del. Ch. 2000). The court remarked that “fairness opinions prepared by
independent investment bankers are generally not essential, as a matter of law, to support
an informed business judgment.” Id. at 984. Nevertheless, it observed that the directors
obtained an evaluation of the fairness of the merger consideration “from an investment
banking firm” that was not conflicted, relied on that fairness opinion “to make an informed
decision on whether or not to consummate the merger,” and disclosed it in the proxy
statement. Id. at 984-75.
In Houseman v. Sagerman, the plaintiffs relied on the failure to obtain a formal
fairness opinion in claiming that the board “knowingly and completely failed to undertake
a reasonable sales process” under Revlon. 2014 WL 1600724, at *7 (Del. Ch. Apr. 16,
2014). The board “considered the expense of obtaining a fairness opinion relative to the
overall transaction value” but chose to engage an independent financial advisor to aid in
diligence and provide “an informal opinion” that the merger price was within a range of
reasonableness. Id. The court concluded that the directors did not act in bad faith since
they undertook a reasonable process and determined “that, due to the relative expense, it
was not in the Company’s best interest to obtain a fairness opinion.” Id.In both Turner and Sagerman, the disinterestedness and independence of the
directors were not in dispute. The boards undertook some efforts to assess the fairness of
a transaction. They did so in reliance on independent advisors. The facts alleged here are
markedly different.
255
E.g., Compl. ¶¶ 21-22, 58, 95-96, 120.
60
of conduct demanded of it. The benefit of a developed factual record is needed to
make a definitive assessment of fairness. The defendants will bear that burden at
trial.
3. Exculpation
Gig3’s charter contains an exculpatory provision that eliminated director
liability for breaches of the duty of care.256 A plaintiff seeking monetary damages
from a director must state a claim for breach of the duty of loyalty, “regardless of
the underlying standard of review for the board’s conduct.”257 To do so, the plaintiff
must plead “facts supporting a rational inference that the director harbored
self-interest adverse to the stockholders’ interests, acted to advance the self-interest
of an interested party from whom they could not be presumed to act independently,
or acted in bad faith.”258
The Complaint sufficiently pleads that each of the Board members was either
self-interested in the merger or acted in a manner that advanced the interests of the
Sponsor and Katz to the public stockholders’ detriment. The plaintiff’s claims
256
Charter § 8.1.
257
In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1175-76 (Del.
2015).
258
Id. at 1179-80.
61
against the Board are also “inextricably intertwined with issues of loyalty.” 259 As a
result, those claims are not exculpated.
D. The Unjust Enrichment Claim Is Reasonably Conceivable.
Count Three is a claim for unjust enrichment against the Sponsor and the
Board. Unjust enrichment is “the unjust retention of a benefit to the loss of another,
or the retention of money or property of another against the fundamental principles
of justice or equity and good conscience.”260 The elements of unjust enrichment are
“(1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment
and impoverishment, (4) the absence of justification and (5) the absence of a remedy
provided by law.”261
The Complaint pleads adequate facts to satisfy these elements. It alleges that
the defendants were “unjustly enriched” by the disloyal conduct described in Counts
One and Two, which impoverished Gig3 public stockholders who were unable to
exercise their redemption rights with the benefit of all material information.262 The
enrichment and impoverishment described by the plaintiff are also related. By
providing inadequate disclosures about the amount of net cash available to Gig3 in
259
Emerald P’rs v. Berlin, 787 A.2d 85, 93 (Del. 2001).
260
Schock, 732 A.2d at 232 (quoting 66 Am. Jur. 2d Restitution and Implied Contracts § 3
(1973)).
261
Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 585 (Del. Ch. 1998).
262
Compl. ¶¶ 126-27.
62
the merger and Lightning’s prospects, the defendants could discourage redemptions
and ensure greater deal certainty. As a remedy, the plaintiff seeks disgorgement of
the unjust profits realized by the defendants to be recouped by the affected
stockholders.263
This claim turns, in large part, on the same allegations as the fiduciary duty
claims. If the plaintiff prevails on his fiduciary duty claims, he will similarly succeed
in proving unjust enrichment. Although he cannot obtain a double recovery, “[o]ne
can imagine . . . factual circumstances in which the proofs for a breach of fiduciary
duty claim and an unjust enrichment claim are not identical, so there is no bar to
bringing both claims” against the same defendants.264 The unjust enrichment claim
therefore survives along with the fiduciary duty claims.
III. CONCLUSION
The defendants’ motion to dismiss is denied. The Complaint states reasonably
conceivable claims against the defendants in Counts One, Two, and Three. The
standard of review is entire fairness with the defendants bearing the burden of
persuasion at trial.
263
Id. ¶ 128.
264
MCG Cap. Corp. v. Maginn, 2010 WL 1782271, at *25 n.147 (Del. Ch. May 5, 2010);
see Calma on Behalf of Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 592 (Del. 2015)
(concluding that it was reasonably conceivable the plaintiff could recover on an unjust
enrichment claim where it stated a claim for breach of fiduciary duty on the same,
“duplicative” allegations).
63