Delman v. GigAcquisitions3, LLC

• Decision Date: 04 January 2023
• Docket Number: C.A. No. 2021-0679-LWW
• Parties: Richard DELMAN, Plaintiff, v. GIGACQUISITIONS3, LLC, Avi Katz, Raluca Dinu, Neil Miotto, John Mikulsky, Andrea Betti-Berutto, and Peter Wang, Defendants.
• Court: Court of Chancery of Delaware

288 A.3d 692

Richard DELMAN, Plaintiff,
v.
GIGACQUISITIONS3, LLC, Avi Katz, Raluca Dinu, Neil Miotto, John Mikulsky, Andrea Betti-Berutto, and Peter Wang, Defendants.

C.A. No. 2021-0679-LWW

Court of Chancery of Delaware.

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)

288 A.3d 700

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 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,

288 A.3d 701

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 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.¹⁰

288 A.3d 702

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

288 A.3d 703

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

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...