Delaware Court of Chancery Holds Buzzfeed Not Bound by Employment Agreements Prior to SPAC Merger – Shareholders

Delaware Court of Chancery Holds Buzzfeed Not Bound by Employment Agreements Prior to SPAC Merger – Shareholders

Delaware Court of Chancery Holds Buzzfeed Not Bound by Employment Agreements Prior to SPAC Merger; Mistrial Declared in Fannie Mae, Freddie Mac Net Worth Sweep Suit After Jury Deadlock; District of Massachusetts Joins Second Circuit on Hack-and-Trade Trading Scheme; Investor Damage Claims Advance in Delaware Chancery Court SPAC Suit; SEC Now Investigating Private Equity Firms’ Use of Messaging Apps as ‘Record Retention’ Expands

On October 28, 2022, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery ruled that the declaratory action brought by Buzzfeed Inc. against 91 current and former employees is not bound by arbitration provisions in pre-SPAC merger employment contracts.

The case arises from the employees’ March 2022 mass arbitration filing that claimed the Buzzfeed shares offered under the company’s pre-merger employment agreements could not be converted in time into tradable shares after Buzzfeed completed a SPAC merger in November 2021.

The court’s decision rests on its conclusion that, at the close of the merger, the post-closed Buzzfeed entity (New Buzzfeed) was a separate corporate entity from pre-merger Buzzfeed and, as such, was not bound by pre-merger employment. appointments. Specifically, under the merger agreement, a subsidiary of New Buzzfeed – not New Buzzfeed itself – was the successor to these employment agreements. For this reason, the court denied the employees’ motion to dismiss, which argued that the court lacked jurisdiction to hear disputes that should have been resolved in accordance with the employment agreements prior to the SPAC merger. Under the same reasoning, the court permanently ordered the arbitration to continue. However, the court declined to grant New Buzzfeed’s request for declaratory judgment that the employees must pursue their claims in the Court of Chancery under the forum selection clause because the controversy was not yet ripe, as the defendants (ie, the employees) had not brought claims. in the Chancery Court or elsewhere. It remains to be seen whether the defendants choose to pursue their claims in court following the anti-arbitration injunction.

This decision serves as a reminder that negotiators should be careful to understand the survivability of employee contracts — and consider providing repeated, clear disclosures to personnel to avoid triggering an unwanted lawsuit in a successful transaction.


On November 7, 2022, U.S. District Judge Royce C. Lamberth of the District of Columbia declared a mistrial in a lawsuit brought by shareholders of U.S. government-backed mortgage companies Fannie Mae and Freddie Mac when jurors failed to reach a verdict after a three-week trial and 19 hours of consultation.

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In 2013, a class of owners of preferred stock or common stock issued by Fannie Mae or Freddie Mac filed suit against the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac. Klassen argued that the FHFA caused the mortgage fund companies to write down their assets and then amend stock purchase agreements to allow the US Treasury Department to take the resulting profits, thereby violating the implied covenant of good faith and fair dealing. These changes, known as the “net worth sweep”, increased the US Treasury’s dividend from 10% of total investment to 100% of Fannie Mae and Freddie Mac’s current and future net worth. The shareholders argued that the net worth prevented them from receiving dividends and that the FHFA’s decision to amend the stock purchase agreements was arbitrary and unreasonable. The FHFA argued that the decision was reasonable after years of negative net worth and fallout from the mortgage crisis of 2008. Shareholders demanded $1.6 billion in damages, roughly the total decline in value of Fannie Mae and Freddie Mac stock upon the announcement of the net worth.

During the jury’s deliberations, the judge received several notes from the jury indicating that they were “deeply divided” and had widely differing interpretations of the evidence presented. Counsel for the shareholders moved for a mistrial twice because they believed that any judgment returned after such a difference of opinion would be “tainted.” Judge Lambert denied both motions. The eight-person jury then reported deadlocked for the third time, at which point Judge Lamberth issued an instruction against deadlock. When the jury still could not reach a verdict, Judge Lamberth declared a mistrial.

This rare class action for investors makes it clear that even the most complicated class actions can be defended at trial. While a mistrial is of course not a defense verdict—the case will be retried if it is not settled or dismissed—the fact that the jury is deadlocked should give securities fraud defendants confidence that these cases are difficult for plaintiffs to try to win ( i.e. fighting is an option).


On October 31, 2022, U.S. District Judge Patti B. Saris of the District of Massachusetts joined the Second Circuit in allowing the United States government to proceed with a securities fraud charge against an individual committing a “hack and trade” scheme, without any allegations of that the hacker had a duty to disclose or refrain.

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In March 2021, federal prosecutors in Massachusetts charged Vladislav Klyushin, the owner of the Russian cybersecurity firm M-13, and two co-conspirators with computer hacking, wire fraud and securities fraud charges for perpetrating an $82 million “hack and trade” scheme. – trading on the basis of information obtained through unauthorized intrusions into a company’s computer network. Klyushin then moved to dismiss the securities fraud charge from his case, arguing that he could not be criminally liable for stock fraud under federal securities laws because he did not owe a fiduciary duty to the hacked agents, nor to the open markets where the securities is traded. Since this is a question of first impression in the First Circuit, the government opposed the motion by asking the court to rely SEC v. Dorozhko, precedent involving a similar “hack and trade” decided by the Second Circuit. IN Dorozhko, the Second Circuit upheld a securities fraud claim against a hacker charged with trading on information stolen from the servers of a securities firm, finding that even in the absence of a fiduciary duty to disclose or refrain from trading, the hacker had an affirmative duty not to to mislead the public. The act of hacking was a “deceptive” device or contrivance under Section 10(b) of the Securities Exchange Act of 1934, and the hacker had affirmatively misrepresented himself to gain access to non-public information.

The court rejected Klyushin’s arguments that he owed no fiduciary duty to the hacked companies, based on
Dorozhko to determine that the government had sufficiently alleged that Klyushin’s misrepresentations and hacking were themselves “deceptive” devices or inventions under § 10(b).


On October 26, 2022, Delaware Court of Chancery Vice Chancellor J. Travis Laster denied a motion to dismiss fraud claims against P3 Health Group Holdings LLC (P3 Health) and its co-founders in connection with the company’s 2021 public merger. The case rests on allegations by Hudson Vegas Investments SVP LLC (Hudson) that P3 Health and other defendants fraudulently induced its $50 million investment in what Hudson claimed was actually a harmless and unprofitable health care management company.

Vice Chancellor Laster found that Hudson presented “the bare minimum of allegations” needed to support the fraud claim against P3 Health and its co-founders. In its complaint, Hudson claims it was induced by P3 Health’s directors and key executives to invest in P3 Health’s 2021 public offering while depriving Hudson of $100 million in options and other rights.

The court found that “the complaint’s allegations—though few—clear the bar for pleading a fraud claim. At a later stage in the case, the claim may fail. But Hudson may move past the pleading stage.” One of Hudson’s main allegations was that P3 Health projected earnings of $12.7 million, when it actually reported a loss of $40 million that year. “The fact that a projection is not realized, standing alone, will often be” legally insufficient to support a fraudulent claim. … But at least one possible conclusion is that the short-term forecast was deliberately false. At the trial stage, Hudson is entitled to the inference favorable to his claim.”

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On November 8, 2022, private equity firms Apollo Global Management (Apollo), Carlyle Group and KKR & Co. reported (KKR) each involved in SEC investigations into the firm’s record-keeping practices — specifically business use of WhatsApp and other messaging applications for personal devices.

Apollo, Carlyle Group and KKR are all facing similar inquiries about whether exchanges via text messages or common messaging applications such as WhatsApp and WeChat, used for business-related communications, have been properly preserved under SEC requirements. Each firm disclosed that it was cooperating with SEC requests for information and documents.

The requests arise in connection with the SEC’s ongoing work to scrutinize the use of messaging applications such as WhatsApp and WeChat for business-related communications, and to ensure that financial firms comply with their regulatory record-keeping obligations. The inquiries come on the heels of recently negotiated regulatory settlements with sixteen financial firms, totaling $1.8 billion, all of which had conducted business via text and messaging apps and were investigated by the SEC and the Commodity Futures Trading Commission for alleged record-keeping violations. SEC Chairman Gary Gensler stated in recent comments that the SEC will continue to use “sweeps, initiatives and commitments to shape market behavior” and to prevent future violations of regulatory record-keeping requirements. Financial firms should continue to ensure that their employees and managers comply with record retention requirements, including by preventing the use of text messages, personal email and messaging applications to conduct business.

The message is clear: Registrants should assume that the SEC will take enforcement action for perceived organizational failure to take ownership of business communications conducted on personal devices and likely resolve the vast majority of them with outsized settlements. Now may be the time for registrants to review their practices, which will not preclude any SEC inquiry in the past, but may significantly reduce the risk should regulators come knocking.

The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.

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