Shareholder lawyers have apparently figured out how to cash in on the SPAC fad.
In the last seven months, lawyers from a handful of shareholder firms have filed more than 60 lawsuits in New York State Supreme Court in Manhattan against board members of special purpose acquisition companies, accusing SPAC directors of breaching their duty to investors by omitting important information from public filings about their proposed acquisitions.
The cases are not being litigated beyond initial pleadings, based on a review of the dockets. Instead, according to three big-firm lawyers who have represented SPAC defendants hit with breach-of-duty complaints, the suits are typically resolved with supplemental disclosures by the SPAC – and the payment of so-called mootness fees to plaintiffs lawyers.
These three defense lawyers, who asked to remain anonymous to shield their clients, also told me that the suits in New York state court are only part of the story. Their clients are also receiving “demand letters” from plaintiffs firms when SPAC acquisitions are announced, alleging disclosure violations and threatening to sue unless defendants issue supplemental disclosures and pay mootness fees. Many deals face disclosure demands, in and out of court, by multiple shareholder firms, the defense lawyers said.
Most SPAC defendants facing these disclosure demands, according to these lawyers, decide it's less expensive to issue additional disclosures and pay mootness fees than to litigate the breach-of-duty suits. In effect, they said, defendants are willing to pay a nuisance fee to shareholder firms to keep their deals on track.
“This is going to be another deal tax for a while,” one of the defense lawyers said.
SPACs, otherwise known as blank-check acquisition companies, attracted tens of billions of dollars from investors in 2020 and early 2021. SPACs typically acquire privately held businesses in so-called de-SPAC deals, allowing those businesses to go public without conducting an IPO.
Shareholder firms are basing their SPAC breach-of-duty suits and demand letters on the registration statements that the companies file with the U.S. Securities and Exchange Commission describing their de-SPAC deals.
Akin Gump Strauss Hauer & Feld noted the trend of SPAC disclosure suits in New York courts in a client alert that was subsequently posted last month at Harvard Law School's corporate governance website. The firm, according to article authors Douglas Rappaport, Jacqueline Yecies and Stephanie Lindemuth, compiled a list of cases by searching New York State Supreme Court records for suits citing SPAC deals.
As of the end of April, there were at least 62 cases on Akin Gump's list of New York SPAC disclosure suits. The firm shared that list with me, and I checked out the electronic case files.
The New York dockets show that all of the suits have been filed by just four plaintiffs firms: Rigrodsky Law, with 24 cases; Brodsky & Smith, with 22; Moore Kuehn with 13; and Weiss Law with 3. I sent detailed email queries on the suits, including questions about how the cases were resolved and whether firms received mootness fees to Seth Rigrodsky and Gina Serra of Rigrodsky, Evan Smith of Brodsky & Smith, Jacob Kuehn of Moore Kuehn and Richard Acocelli of Weiss Law. Kuehn declined to comment. None of the others responded.
The suits, generally speaking, assert that the litigation belongs in New York state court because the complaints assert a state-court cause of action and because the SPACs are based in New York or traded on New York-based exchanges.
All of the complaints included a demand to enjoin shareholders of the SPAC’s target company from voting on the proposed acquisition. But plaintiffs lawyers did not file separate motions for preliminary injunctions that would actually delay shareholder votes.
There is no evidence in the dockets of any judicial involvement in the suits. Plaintiffs lawyers filed voluntary dismissal notices in 23 cases. Dockets in the other cases do not indicate a resolution.
The boom in SPAC disclosure suits is reminiscent of the “deal tax” shareholder suits that used to be filed in Delaware Chancery Court after nearly every announcement of a big M&A transactions. At the 2013 peak of M&A disclosure suits, plaintiffs lawyers filed complaints challenging 94% of announced deals of more than $100 million.
Delaware, as you know, clamped down on disclosure-only settlements in 2016’s In re Trulia Inc (129 A.3d 884), which made clear that Chancery would not approve fees in most disclosure-only settlements. Shareholder lawyers responded to Trulia by reframing M&A challenges as federal securities violations and filing their suits in federal court.
When the 7th U.S. Circuit Court of Appeals reviewed the settlement of a shareholder class action challenge to Walgreen Co’s acquisition of Alliance Boots in 2016, the court refused to allow a $370,000 fee for plaintiffs lawyers who obtained additional disclosures. The appeals court described M&A disclosure class actions as “no better than a racket,” and said the suits “must end.”
Shareholder firms then shifted away from class action settlements, instead reaching deals in which name plaintiffs agreed to dismiss their suits after defendants mooted their demands by issuing supplemental disclosures and paying mootness fees to plaintiffs’ lawyers. Under the Federal Rules of Civil Procedure, those agreements do not require a judge’s approval as long as no class has been certified and the defendant has not submitted an answer to the complaint or a summary judgment motion.
Because mootness fees are not usually reviewed by judges, it’s hard to know how much plaintiffs lawyers are receiving – in old-school M&A challenges or in the new wave of SPAC suits. According to Mootness Fees, a 2019 Vanderbilt Law Review paper on mootness fees in shareholder M&A litigation, plaintiffs lawyers typically received between $50,000 and $300,000 in mootness fees for obtaining supplemental disclosures. The paper’s authors, law professors Matthew Cain, Jill Fisch, Steven Davidoff Solomon and Randall Thomas, called the fees “an inappropriate tax on the judicial system and corporations.”
SPAC defense lawyers told me some of their clients have been taken aback by mootness fee demands from shareholder lawyers. Experienced M&A players are usually familiar with “deal tax” litigation, they said, but companies being acquired by SPACs in de-SPAC deals are sometimes surprised.
SPAC deals have slowed in recent weeks after the SEC issued new accounting guidance and signaled tighter scrutiny of the deals. But if the market heats up again, there’s little reason to doubt that plaintiffs firms will resume their mootness fee demands, either through state-court breach-of-duty suits or letters threatening litigation over allegedly inadequate disclosures.
Until a SPAC defendant refuses to pay – and is willing to justify that refusal through litigation – the new deal tax is another cost of doing business.
(This piece has been updated to reflect that shareholder counsel Kuehn declined to comment.)
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(Reporting by Alison Frankel)
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