RICHARD DELMAN v. GIGACQUISITIONS3, LLC, AVI KATZ, RALUCA DINU, NEIL MIOTTO, JOHN MIKULSKY, ANDREA BETTI-BERUTTO, and PETER WANG
C.A. No. 2021-0679-LWW
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
January 4, 2023
Date Submitted: September 23, 2022
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
OPINION
WILL, Vice Chancellor
Over the latter half of the 2010s, special purpose acquisition companies (or SPACs)
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 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
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,
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 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.
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
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
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 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
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 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 Stockholder Shares, the Insider Shares lacked redemption and liquidation rights and were subject to a lock-up
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 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 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
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 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
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
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | |
|---|---|---|---|---|---|---|
| Revenue | $9 | $63 | $354 | $640 | $1,165 | $2,012 |
| Gross Growth | NM | NM | 462% | 81% | 82% | 73% |
| Gross Profit | $0 | $9 | $68 | $140 | $296 | $528 |
| Gross Margin | 3% | 14% | 19% | 22% | 25% | 26% |
| EBITDA | ($11) | ($17) | $15 | $50 | $155 | $315 |
| EBITDA Margin | (122%) | (27%) | 4% | 8% | 13% | 16% |
$ values are in millions.
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 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
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 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
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
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
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
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 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
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 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
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
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 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
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 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.
The redemption right, though individual in nature, created a “collective action problem”
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 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 to abide by their fiduciary duties would neither “rewrite the contract”131 nor “undermine the
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
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
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
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
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 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
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 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.
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 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 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
“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 the Sponsor “may exert a substantial influence on actions requiring a stockholder vote.”165
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
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.
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
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 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
- 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
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
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
“[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 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
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
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 the test.213 Because “[m]aterial information” was withheld from minority stockholders “under circumstances amounting to a
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 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 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
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 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
Net Cash per Share = (Cash - Costs) / Pre-Merger Shares
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
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
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
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
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
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
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 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 informal presentation on the fairness of the transaction—not to mention one considering the effect of the Sponsor promote.254
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 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 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
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.