A Victory for Investors Challenging a De-SPAC Transaction

July 25, 2023

By Amy Miller and Richard A. Speirs
Shareholder Advocate Summer 2023

On June 9, 2023, Chancellor Kathaleen St. J. McCormick of the Court of Chancery of the State of Delaware issued a telephonic ruling which largely denied Defendants’ motions to dismiss the complaint in the In re XL Fleet (Pivotal) Stockholder Litigation, C.A. No. 2021-0808-KSJM, allowing a class of investors to pursue claims related to the fairness of a de-SPAC transaction.

This class action arises from the merger between Legacy XL, a provider of electrification solutions for commercial vehicles in North America, and Pivotal II (“Pivotal”), a Delaware corporation formed as a special purpose acquisition company (SPAC).

Plaintiffs alleged that Defendants, including Pivotal’s board of directors, Pivotal Investment Holdings II LLC, and Pivotal’s sponsor, used Pivotal to enrich themselves by using funds held in trust for the benefit of the public stockholders to consummate a value-destroying merger with Legacy XL without disclosing information that was material to the stockholders’ decision to allow their funds to be invested in the merger. As a result of Defendants’ actions in pursuing the merger without disclosing material facts to stockholders, the stockholders sustained substantial financial losses.

The merger closed on December 21, 2020. Just ten weeks later, Muddy Waters Research issued a report revealing that the proxy statement, which Pivotal investors relied on when determining how to vote on the merger, contained false and misleading information, while also omitting material information about Legacy XL’s value. That news caused the company’s stock’s price to begin a steep downward decline from trading at nearly $17 per share to less than $2 per share a year later, when the company disclosed that it was under investigation by the Securities and Exchange Commission.

Significantly, the Court found that the de-SPAC transaction was subject to “Delaware’s most onerous standard of review”—entire fairness—because “the complaint sufficiently pleads it’s a conflicted controller transaction.” The Court rejected Defendants’ argument that the sponsor of the SPAC, which only held 20% of the company’s equity, was not a controlling stockholder. The Court highlighted that the sponsor was conflicted because of its interest in consummating “a bad deal over no deal at all,” which would cause the sponsor to lose its entire investment in Pivotal. In contrast, Pivotal investors would receive their $10 per share investment back if they had decided to vote against the merger.

Next, the Court found that Plaintiffs sufficiently pled breach of fiduciary duty claims against the Pivotal board by alleging that the proxy statement omitted material information, which fell into two categories: (1) the cash-per-share investment that Pivotal would make into the newly merged companies; and (2) the valuation of Legacy XL that stockholders would receive in exchange.

Finally, the Court upheld Plaintiffs’ claim that Pivotal breached the 80% requirement in its charter because Legacy XL was not worth at least $178.4 million at the time of the merger. As a result, the Court allowed claims to proceed against the Pivotal board for breaching the charter’s terms.