The Court of Chancery found that the plaintiff stated legally-sufficient claims in connection with a merger transaction against the controller defendants and the members of the SPAC’s board, including the claim that the defendants breached their duty of loyalty by misinforming the stockholders of material information prior to the vote on the merger. Accordingly, the Court denied the defendants’ motion to dismiss under Rule 12(b)(6).
The plaintiff alleged direct claims for breach of fiduciary duty against all of the director defendants and against the alleged controllers. The plaintiff claimed that the board failed to disclose material information prior to the vote on the merger, i.e., the value of the entity in terms of cash per share. Instead, the proxy stated that the value per share was approximately the $10 redemption value. The controller did not have voting control, and interested directors only had a marginal, albeit tangible, interest in the merger transaction.
First, the defendants argued that the claims were derivative in nature and failed to satisfy demand futility under Rule 23.1. Applying the test set forth in Tooley, the Court found, however, that the claims were direct. The Court then analyzed the fiduciary duties breach claims applying the entire fairness standard of review, which is typical for cases concerning de-SPAC transactions and direct claims arising from impairment of stockholders’ redemption rights. The Court described the transaction as conflicted because the controller competed with the common stockholders for the merger consideration. The Court reasoned that the proxy misstated an investment value of $10 per share and failed to disclose that the actual amount of cash included in the merger was 25% less than disclosed. The Court ruled that at the pleading stage, it was proper to infer that such an omission was material. Accordingly, drawing reasonable inferences in favor of the plaintiff, the Court found that the claims satisfied the reasonable conceivability test, and denied the motion to dismiss.
