This blog frequently has covered SPAC-related litigation (recently, here, here, and here), and the potential consequences of the Delaware Court of Chancery’s rulings in the MultiPlan and Gig3 cases. As discussed previously, the decisions in Multiplan and Gig3, among others, may portend increased litigation surrounding de-SPAC transactions, and particular focus by the plaintiffs’ bar on any actual or perceived conflicts of interest. A relatively recent complaint filed in the Court of Chancery targeting the Lottery.com SPAC deal may represent plaintiffs’ attorneys further widening the net of liability: the case targets not only the SPAC fiduciaries themselves but also the independent financial advisor that purportedly conducted due diligence in connection with the de-SPAC transaction. Financial advisors often are intimately involved in the SPAC process: they help screen which companies are attractive targets for a SPAC merger and, once a target is chosen, conduct diligence to determine that the target is a genuinely good merger partner. The Lottery.com complaint focuses on the financial advisors’ due diligence and on an allegedly conflict-prone compensation structure for those advisors, and alleges liability against an additional (and often deep-pocketed) class of defendant.
Trident Acquisition Corp. was a SPAC formed in 2016 that ultimately merged with AutoLotto, Inc. to become Lottery.com in 2021. According to the complaint, Trident utilized Chardan Capital Markets, LLC as its financial advisor to conduct due diligence on target company AutoLotto, which was designed to be a digital marketplace to purchase lottery tickets. Following the de-SPAC transaction, Lottery.com became embroiled in regulatory and financial accounting issues, resulting in a slew of terminations, board resignations, and a plummeting stock price. In April 2023, a complaint was filed in the Court of Chancery that named as defendants the sponsor, several of the directors and officers of Trident, and Chardan. The complaint alleges, among other things, that Trident and its sponsor violated their fiduciary duties in approving what due diligence should have revealed was a bad deal, and that Chardan aided and abetted those violations.
The Lottery.com complaint is, of course, not the first time financial advisors have been targeted in SPAC litigations. Notably, the MultiPlan action included a claim against a financial advisor for aiding and abetting fiduciary duty violations. (And, in a different context, some plaintiffs are attempting to impose federal securities law liability onto a SPAC financial advisor based on a theory that certain advisors acted as statutory underwriters, though it remains to be seen whether such a theory is viable.) And financial advisors relatively frequently have been the targets of suits for aiding and abetting violations of the fiduciary duties of their clients. But in the SPAC context at least, the Lottery.com case appears to be the first attempt to pursue claims against a SPAC advisor not directly controlled by the sponsor. The Court of Chancery has recognized that financial advisors may be liable for aiding and abetting fiduciary duty breaches of their clients if the plaintiff can show that the advisors had actual knowledge of those underlying breaches. The MultiPlan court found that actual knowledge was adequately alleged, at least at the pleading stage, where the financial advisor at issue was directly controlled by the SPAC sponsor.
The Lottery.com complaint attempts to expand this theory of liability to financial advisors, like Chardan, who are not sponsor-controlled. Instead, the plaintiffs attempt to demonstrate actual knowledge of Trident’s alleged breaches in two ways. First, the complaint alleges that the due diligence itself by Chardan indicates actual knowledge. The plaintiffs point to statements disclosed in the proxy that allegedly touted the Chardan’s due diligence of AutoLotto. They allege that Chardan, through its due diligence, must have known about the internal issues that eventually came to light.
Second, more prominently, the Lottery.com complaint focuses on Chardan’s compensation in connection with the transaction. The Court of Chancery in MultiPlan and Gig3 emphasized the conflicted financial interests inherent in SPACs – i.e., in simplified terms, that the sponsor’s compensation structure encourages the sponsor to choose any deal over no deal and their incentives therefore are not aligned with the common stockholders of the SPAC, who would prefer no deal to a bad one. The Lottery.com complaint attempts to extend that same scrutiny to the financial arrangements and incentives of SPAC financial advisors. In addition to the presence of what the complaint calls “underwriter units” that Chardan would receive if the de-SPAC transaction was consummated, the complaint highlights that any and all of Chardan’s more than US$5 million payment was contingent on the closing of the de-SPAC merger. Contingent fee arrangements are fairly common in the merger context and generally have been accepted by the Court. However, several decisions acknowledge that those arrangements can create conflicts of interest, depending on the facts. Indeed, the Court of Chancery in Gig3 highlighted the contingent fee arrangement for the financial advisors in that case as creating a conflict of interest, but the plaintiffs in that case did not bring a claim against the advisors directly. The Lottery.com complaint is the first in the Court of Chancery to seek damages directly from financial advisors themselves in connection with claims regarding an allegedly conflicted SPAC compensation structure.
It remains to be seen whether the Lottery.com complaint will be successful, or whether more pushing of the envelope targeting financial advisors will occur down the line. This blog will continue to watch this space closely.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.