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In a federal court ruling from earlier this year, Vogel v. Boris, the New York federal court refused to toss out a claim by an LLC member, Vogel, against his two other business partners, alleging that they violated a restrictive covenant in the LLC’s operating agreement prohibiting any member from forming a new SPAC aside from the existing SPAC they had explicitly agreed to be working for: their violation consisted of forming a sponsor for a second SPAC and closing a $250 million IPO, all while squeezing Vogel out of the new SPAC.  The court ruled that the allegations sufficiently stated a legal claim to allow the case to proceed further, without deciding the substance of those claims.

First off, in the course of its analysis the court provided a succinct summary of the SPAC process:

The first step of the typical SPAC process, according to Vogel, is for those managing the SPAC to create a company to control it, usually a limited liability company, referred to as the “sponsor.” The sponsor receives a percentage of the shares raised in the IPO as a fee and puts the shares aside in escrow or trust pending consummation of a potential merger. Once a successful merger has occurred, the sponsor will distribute the shares to the SPAC’s managers and/or members based on certain contractual triggers such as, for example, termination of a lockout period or the reaching of a particular share price.

Second, however unusual this set of facts may be, it makes the point that some of the background activity underlying a SPAC transaction is often a creature of contract.  Here in Vogel, that contract was an LLC operating agreement, while in other situations, the operative contract may be a subscription agreement underlying a PIPE transaction relating to the SPAC deal.  In all events, investors considering their rights in connection with a SPAC transaction should be sure to consider any contractual remedies in addition to any federal securities fraud or state fiduciary duty and common law claims.