Tuesday, August 17, 2021

SPAC stockholder balks at proposed vote on Topps acquisition

By Anne Sherry, J.D.

Calling out the SPAC business model as inherently conflicted, an investor in a blank-check company brought a class-action lawsuit in the Delaware Court of Chancery to enjoin an upcoming vote that he says violates Delaware corporate governance law. The SPAC is looking to amend its charter to issue more shares so it can acquire the baseball card maker Topps. However, the plaintiff says that the planned vote on the amendment violates the Delaware General Corporation Law by requiring Class A (public) stockholders to vote together with the SPAC’s sponsor, which owns Class B stock (Bass v. Mudrick Capital Acquisition Corporation II, August 10, 2021).

The SPAC, Mudrick Capital Acquisition Corporation II, scheduled a special stockholders’ meeting for August 25. The purpose of the meeting is to seek stockholder approval of both the Topps acquisition and the amended certificate of incorporation. The charter amendment would authorize the issuance of an additional 250 million shares of Class A stock and add a provision permitting a combined vote for future increases in shares.

According to the proxy for the meeting, "The approval of the business combination proposal requires the affirmative vote of a majority of the votes cast by holders of MUDS’ outstanding shares of common stock," while approval of the charter amendment "requires (i) the affirmative vote or written consent of holders of a majority of the shares of Class B common stock then outstanding and (ii) the affirmative vote of holders of a majority of the outstanding shares of common stock." According to the complaint, these combined votes violate the DGCL’s provision for a separate class vote.

Specifically, Section 242(b)(2) provides that holders of shares of a class "shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class." The section permits the corporation to opt out of this requirement, but Mudrick has not done so, according to the complaint. Instead, that would be part of the charter amendment up for vote at the August 25 meeting.

The plaintiff submits that the protection the DGCL affords to public stockholders is paramount given the conflicts of interest inherent in the SPAC structure. The Topps acquisition will necessarily dilute the public stockholders, meaning that they only gain if the merger is sufficiently valuable to make up for that dilution. But the sponsor’s incentive is to get a deal done, even if the price and terms aren’t the best, because its class B shares will be entirely worthless if Mudrick fails to complete an acquisition within 21 months of its December 2020 IPO.

A proper vote would allow the share increase and charter amendment only if a majority of Class A shares agreed, the complaint argues. However, the combined vote that Mudrick is proposing would allow the proposals to be approved with just 37.5 percent support from Class A stockholders. The plaintiff also states that he made a pre-suit demand before the special meeting date was established, but due to the board’s interestedness—all five members allegedly are executives of, or hold a direct or indirect interest in, the sponsor—the board scheduled the vote anyway "to cram down the [amendments] and secure the sponsor’s payday."

The case is No. 2021-0690.