Super Group founders facing SPAC lawsuit over investor dealing

The $4.75bn SPAC reverse merger deal which created sportsbook operator Super Group in April 2021 is now the subject of a lawsuit over alleged financial impropriety.

Filing a complaint with the Delaware Court of Chancery last week, Super Group investor Dylan Newman alleged that Sports Entertainment Acquisition Corp (SEAC) co-founders Eric Grubman, Chris Shumway, and John Collins deliberately structured the SPAC in order to financially benefit themselves at the expense of external investors.

SEAC went public in 2020, later announcing plans to undertake a SPAC merger with Super Group in April 2021 based on a valuation of $4.75bn for the combined business. It subsequently went public on the New York Stock Exchange in January 2022 via an initial public offering of its shares.

Co-founder and a chairman of SEAC, Grubman then went on to become the chairman of Super Group following the merger, while SEAC CEO Collins became a director and shareholder in the Super Group business.

According to the legal filing, in advance of the offering, Grubman, Shumway, and Collins each received 11.25 million common equity shares at a price of just $25,000, valuing the stock at just $0.023 per share.

These shares were later sold at a price of $10 each, generating a substantial profit for the founders. At the time, all redemption rights were waived.

Under typical practices, SPACs are legally required to find a merger partner within two years and will ultimately liquidate should they fail to meet the obligation and consequently return all cash to company shareholders. The practice is designed to ensure SPAC founders complete deals within the set timeframe.

As co-founders of the SPAC, the trio waived redemption rights on their respective shares, something which increased the value of their shares even in the event of a poor SPAC deal being agreed.

This, the complaint alleges came from a knowledge that by limiting the number of share redemptions, they could maximise the funds available to complete a SPAC merger, thus ensuring that they would receive value for money on their founders shares when sold.

“As a result, Defendants knew that any deal, even a bad one, that caused SEAC’s stock price to drop below the $10 per share IPO price was much better for them than no deal because it would still provide them with a windfall,” the complaint stated.

“They also knew that by limiting the number of redemptions, which deplete cash from the Trust, Defendants could maximize the Trust funds used to consummate a merger and ensure that Defendants would receive value for their Founder Shares.”

The complaint continues: “These incentives drove Defendants to encourage public Class A stockholders not to exercise their redemption rights and to vote in favor of a merger regardless of its merits.

“Notably, Class A stockholders could vote ‘for’ a potential transaction and nonetheless redeem their shares, decoupling their voting interests in a potential transaction from their economic interests.”

In addition to the allegations regarding the manipulation of the SPAC process, the complaint claims that SEAC’s founders published a proxy statement which overvalued the blank-check company’s shares.

According to this statement, the value of shares was $10, however this was actually closer to $6.72, falling on dilution and cash declines over the period.

“Moreover, Defendants knew there were likely to be substantial redemptions, as was becoming increasingly common in SPAC business combinations at this time. These redemptions would significantly reduce the per share cash contribution,” the complaint states.

Representatives acting on behalf of Newman argued that the Court of Chancery should award damages reflecting the differences between what Class A stockholders would have received had they redeemed their shares prior to the merger and the true value of the shares they actually received in the merger.

The case continues.