SECURITIES CORNER

Delaware’s Vice Chancellor declined to dismiss a class action investor claim against a SPAC for breach of fiduciary duty in a merger where the sponsor and directors made large returns at the expense of the investors. After the SPAC completed its Initial Public Offering, stockholders were given the choice of redeeming their per-share investment or investing in the post-merger company. The lawsuit claimed that the SPAC transaction was replete with omissions regarding conflicts of interest as well as false and misleading proxy statements related to net-per-share SPAC contribution to the merger which impaired the stockholders’ ability to make an informed redemption decision. After closing, the deal lost more than half its value for stockholders while the sponsor and SPAC reaped the reward.

The court concluded that the stockholders pled a “reasonably conceivable” breach of fiduciary claim and there were grounds to infer that the SPAC, sponsor, and directors were incentivized to enter a value-destructive de-SPAC merger knowing it would profit them. In placing the burden on the SPAC, sponsor, and their director and officers to prove the price and process of the transaction was fair to stockholders, the court relied on a Delaware fairness standard that has been the subject of recent SPAC litigation in that state. 

A Tennessee District Court recently ruled in favor of an insurance carrier based on the applicability of a specific-entity exclusion. The lawsuit arose out of an SEC investigation into an investment advisory firm, its former broker-dealer, and certain members with shared interests in both entities. The allegations were that the investment advisory firm failed to disclose its shared interests with its broker-dealer to their advisory clients and failed to disclose a conflict of interests between the two members that had interests in both the advisory firm and the broker-dealer. Specifically, the defendants failed to disclose the economic incentive underlying their share class selections for clients such that the clients could decide whether to consent to a conflict that would result in them paying more for their mutual fund investments.

The investment advisory firm submitted the SEC complaint to its management liability carrier. That policy contained a specific entity exclusion, barring claims “by or against, or based upon, arising from, or in any way related to any of the following entity(ies), including, but not limited to, any, subsidiary, trustee, receiver, assignee, director, officer, employee, shareholder, or beneficiary thereof: [Broker-Dealer Entity].” The insurance carrier denied the claim, as both the insured advisory firm and the broker-dealer were named defendants, as were the two members that held interests in both entities. The advisory firm then filed suit against the carrier.

In assessing the carrier’s motion, the court found that the “in any way related to” language of the exclusion barred coverage, as the claim was “related to” the broker-dealer specifically excluded in the entity exclusion. The insured advisory firm argued that the exclusion intended to clarify that the policy did not provide coverage for the broker-dealer, but the court found that, based on the plain language of the exclusion, it applied more broadly. The insured also argued that the policy was ambiguous by the phrase “in any way related to,” which the court also found unpersuasive.