Dune (NASDAQ:DUNE) announced this morning that it has filed a lawsuit in Delaware court alleging that its combination target TradeZero “fraudulently induced” it into entering the merger and has “materially breached” that agreement, causing “irreparable injury” to Dune. But, in a twist, it is also continuing to work to close the deal and intends to call a special meeting to vote on the transaction soon.
Several things are unusual about this situation starting with the fact that SPACs have been the target of litigation themselves, but rarely are they the plaintiffs of such suits. The act of a SPAC suing its target for fraud but still trying to complete the deal also appears at odds with itself. The suit asserts it is necessary to protect Dune and its investors, but if TradeZero misled it into a bad deal, then wouldn’t the best thing for investors be to terminate the deal rather than force it through?
A quick review of the conditions to termination filed in the Super 8-K shows Dune can terminate this combination if, among other things, “… by Dune if TradeZero’s audited combined financial statements materially deviate from its unaudited financial statements.” And while most of the public information on this suit has been heavily redacted and we don’t have access to the financials, “duping Dune” into this transaction with misleading financial information is at the heart of the allegations of this lawsuit. If the current allegations are true, it does seem like Dune would have cause to terminate.
Additionally, Dune and TradeZero have an outside date of July 12, 2022, which is just slightly longer than their current completion deadline of June 22, 2022. Which means they can’t just run out the clock to terminate without having to extend their deadline in order to find a new target. Plus, any extension would require a shareholder vote, which, unfortunately in today’s climate, would require an additional contribution of funds to trust. That can get expensive if a team needs a lot of additional time.
The choices are therefore threefold:
- Terminate the combination, extend and find a new target company
- Terminate the combination and liquidate the trust
- Put this to a shareholder vote and close or liquidate (if there’s a majority “no vote”)
But, in a liquidation, investor capital would be returned with interest and is therefore already protected in this case, and it would certainly appear to be better protected than if this deal were to close and be turned into shares of a company the SPAC now finds untrustworthy.
In the meantime, the slow tempo of the US legal process makes it likely that this litigation will be hanging over the deal though the vote unless it is summarily dismissed. And, that same speed may mean that investors and the public may not be privy to many details of the complaint until the deal is already done.
All told, this is a very unusual situation and if this deal does actually go to a vote, shareholders should be given all of the facts, no matter how ugly.