Tuesday, January 11, 2022

SPAC could not restrict CEO’s shares of acquired company

By Lene Powell, J.D.

A CEO’s shares in a company acquired by a special purpose acquisition company (SPAC) were not subject to a lockup restriction, the Delaware Court of Chancery held. The provision defined lockup shares as shares held “immediately” following the de-SPAC transaction, but under the logistics of the share transfer, the CEO was not actually issued shares until over 100 days later (Brown v. Matterport, Inc., January 10, 2022, Will, L.).

Disputed share restrictions. William J. Brown was the CEO of Matterport Operating, LLC (Legacy Matterport), a privately held spatial data company, from November 2013 to December 2018. Brown received equity compensation in the form of stock options granting him the right to purchase 1,350,000 shares of Legacy Matterport. He also purchased 37,000 restricted shares in 2014. Brown exercised all his options on October 6, 2020.

In February 2021, Legacy Matterport agreed to a business combination with Gores Holding VI, Inc., a SPAC. In the proposed de-SPAC merger, Gores would be the surviving entity and would be renamed Matterport, and Legacy Matterport would become a wholly owned subsidiary of Matterport. In July 2021, Gores adopted bylaws in anticipation of the business combination, which imposed transfer restrictions on certain shares of Matterport Class A common stock, referred to as “Lockup Shares.” The transaction was completed and the bylaws became effective.

Brown filed a complaint contending that the share trading restrictions were adopted without his consent in violation of Section 202(b) of the Delaware General Corporation Law. He sought a declaration that the lockup shares provision was unenforceable as to his shares and that he could freely transfer his shares and/or conduct derivative trading without restriction. Brown also brought fiduciary claims against Legacy Matterport’s former directors. The court bifurcated the claims and held an expedited trial on the limited issue of whether Brown was bound by the transfer restrictions.

CEO not bound by transfer restrictions. The court held that Brown’s shares were not Lockup Shares subject to the transfer restrictions in the bylaws. The ruling turned on the logistics of share transfer. In the bylaws, Lockup Shares were defined as “the shares of Class A common stock held by the Lock-up Holders immediately following the Business Combination Transaction.”

Significantly, in the de-SPAC transaction, Legacy Matterport stockholders did not automatically become Matterport stockholders. Instead, Matterport’s transfer agent would issue Matterport Class A common shares to Legacy Matterport stockholders upon receipt of a letter of transmittal surrendering their Legacy Matterport shares.

Brown argued that he held no Matterport shares “immediately following” the July 22, 2021 de-SPAC transaction’s closing. Instead, at that time he held only the right to receive Matterport Class A common shares. He was not actually issued Matterport shares until November 5 at the earliest, after he sent executed letters of transmittal to Matterport’s transfer agent. The court agreed, finding that obtaining shares over 100 days after closing was not “immediately” for purposes of the Lockup Shares provision.

The court rejected the defendants’ argument that Brown’s reading of the provision would “nullify” the transfer restrictions because no Legacy Matterport stockholder received Matterport shares” instantly after the transaction closed. The evidence demonstrated that some Legacy Matterport stockholders would have received their Matterport shares within a few days of closing. That timing could be viewed as consistent with a plain reading of the bylaw, said the court. As a result, Brown’s reading of the bylaws did not nullify the transfer restrictions.

Accordingly, the court found that Brown’s Matterport shares were not Lockup Shares under the bylaws and he was therefore permitted to freely trade his Matterport shares and enter into derivative transactions with respect to those shares, without restriction. The court reserved all other issues for the second phase of the litigation.

The case is No. 2021-0595-LWW.