Chancery Splits Ruling On Truth Social Share Conversions

A founding sponsor of what became Donald Trump’s social media venture won a partial victory in Delaware’s Court of Chancery late Monday, with a vice chancellor’s finding that ARC Global Investments II LLC was shortchanged by 10.6% in a Digital World Acquisition Corp. share conversion.

Vice Chancellor Lori W. Will’s decision was worth more than $20 million at Monday’s closing price for Trump Media & Technology Group Corp. stock. But it fell well short of the 34.8% boost, potentially worth an extra $51 million, originally sought by attorneys for ARC controller and majority stockholder Patrick Orlando.

The value swings largely hinged on rulings by Vice Chancellor Will in a dispute over ratios for conversion of “preferred” Class B shares into regular shares of Digital World Acquisition, the special purpose acquisition company, or SPAC, that took Truth Social public in March.

Orlando has been tangled in litigation over several issues that surfaced before and after the company went public in multiple venues, including a U.S. Securities and Exchange Commission investigation and suits in the Court of Chancery, Florida state courts and, most recently, the U.S. District Court for the District of Columbia.

The decision Wednesday settled, for now, ARC’s holding and stake in the business, which has a more than $3 billion market capitalization, down from more than $7 billion in March. Trump owns more than half, with insider trading restrictions slated to lift this week.

“What should have been a straightforward exercise in contract interpretation and math was obscured by the parties’ injection of other issues,” Vice Chancellor Will wrote in a 44-page decision issued just ahead of this week’s termination of a ban on trading of Truth Social shares, in place since the company went public.

She continued, “ARC claims that the members of DWAC’s board of directors calculated the conversion ratio and made related disclosures in bad faith out of personal animus for ARC’s founder Patrick Orlando. In response, the defendants raise a series of affirmative defenses concerning unrelated and purported misconduct by Orlando. I reject these diversions as meritless, irrelevant, or untimely.”

According to the vice chancellor, ARC prevailed on a claim that Digital World breached the company’s charter by excluding some securities from its conversion ratio calculation. However, she rejected claims that Digital World directors breached their fiduciary duties by making false and misleading disclosures in a proxy statement.

Digital World’s interpretation, the vice chancellor wrote, “would significantly curtail” anti-dilution protections in the agreement, but the SPAC’s attorneys could not provide concrete examples of how the calculation and accounting world work.

ARC, in contrast, held to a reading of the agreement that required Class B preferred stockholders to receive one regular share of Digital World for every four shares issuable.

The vice chancellor ruled in Digital World’s favor on classification of some Trump Media noteholders whose notes were converted into stock before completion of the deal, transforming them from creditors into equity holders. ARC argued that deal terms should have kept the group as creditors.

Digital World’s agreement called for Trump Media to receive $875 million. The plan hit several speed bumps, including an SEC investigation into suggestions that the SPAC had identified Trump Media as its merger target from the outset.

Orlando was terminated as Digital World’s chairman and CEO in March 2023 as part of the SEC investigation.

Counsel for ARC and Digital World did not immediately respond to requests for comment.

Late last month, Vice Chancellor Morgan T. Zurn declined to find Trump Media in contempt for suing in Florida to block the release of two of its founders' shares, while the same founders are battling for the stock in a different Court of Chancery suit.

Vice Chancellor Zurn delivered the ruling while acknowledging "frustration" at the court's limitations in addressing concerns that prompted shareholder United Atlantic Ventures LLC's call for a court finding that Trump Media contemptuously interfered with an order for release of UAV's 8.6% stake in the social media business.

Attorneys for former "Apprentice" contestants Wesley Moss and Andrew Litinsky, who are also owners of Trump Media shares through UAV, told the vice chancellor that Trump Media sued in two separate Florida state courts to stop the handover of the shares. The suits followed Vice Chancellor Sam Glasscock III’s decision on March 15, which affirmed UAV's ownership of an 8.6% stake. The Delaware ruling followed UAV's filing of a suit in February accusing Trump Media of scheming to dilute its shares to less than 1%.

ARC Global Investments II LLC is represented by Matthew D. Perri, Daniel E. Kaprow, Elizabeth J. Freud, Alfred P. Dillione and Rae Ra of Richards Layton & Finger PA.

Digital World Acquisition Corp., Eric S. Swider, Frank J. Andrews, Edward J. Preble and Jeffrey A. Smith are represented by Kevin M. Coen and Jacob M. Perrone of Morris Nichols Arsht & Tunnell LLP, and Bradley J. Bondi, D. Scott Carlton and Nicholas J. Griepsma of Paul Hastings LLP.

The case is ARC Global Investments II LLC v. Digital World Acquisition Corp., et al, case number 2024-0186, in the Court of Chancery of the State of Delaware.

—Editing by Katie McNally and Michael Watanabe.