Cooley Sued for ‘Tricking’ Biote Founder in SPAC Deal Gone South

Law firm Cooley LLP is being sued over a blank-check deal that a family trust says diluted its holdings in a medical company in favor of corporate insiders.

The lawsuit, filed Wednesday in Delaware Chancery Court, relates to the 2022 merger of hormone therapy company Biote Holdings with Haymaker Acquisition Corp. III. Haymaker is a special purpose acquisition company that raised more than $315 million to pursue a merger.

The suit alleges Cooley lawyers and other defendants, including the SPAC’s founders and company insiders, failed to disclose material aspects of the deal as it deteriorated. The law firm conspired in “tricking” the company’s founder to waive a clause that allowed him to scrap the deal if it didn’t deliver enough cash to the company, according to the complaint.

A trust representing the ex-wife of Biote’s founder, Dr. Gary Donovitz, filed the suit. Donovitz in April settled a similar dispute with Biote agreeing to purchase his shares for roughly $77 million. Marci Donovitz, his ex-wife, says in the new suit that the trust owned 45% of the company prior to the SPAC, which diluted the ownership to 34.5%.

The SPAC market has all but evaporated after an explosion of blank-check deals in 2020 and 2021. A growing number of deals have resulted in litigation alleging they benefited insiders rather than providing cash to help companies grow.

The trust accuses Cooley of conspiring to have Gary Donovitz sign away his right to end the deal if it did not deliver at least $5 million in net cash. When it became clear that the majority of SPAC investors would redeem their shares at face value, rather than contribute to the merger, Cooley partner Ryan Sansom allegedly threatened Donovitz he could incur up to $70 million in personal liability if the merger failed to close.

Donovitz was then presented a waiver purportedly allowing him to keep his position at the company after the merger, according to the complaint. He signed the document, “unwittingly” waiving the $5 million closing condition.

After 98% of shareholders in the blank-check vehicle redeemed their shares, the SPAC was left with “negative tangible assets” to complete the deal, the suit says. The company received “almost no cash consideration at all” from the acquisition, the suit says.

The myriad defendants named in the complaint received about $135 million in cash and stock from closing the deal, the trust alleges. The trust incurred significant debt related to the transaction, in addition to having its ownership stake watered down.

The trust is asking the court to award money damages against “disloyal fiduciaries and those who aided them.”

“The lawsuit reveals the inner workings of a scheme to enrich a few – at the expense of the owner who built the company,” William A. Brewer III, a partner at Brewer, Attorneys & Counselors, and counsel to Marci Donovitz, said in a statement. “Our client believes a handful of insiders conspired to secure lucrative benefits to which they were not entitled.”

The Brewer law firm also represented Gary Donovitz in the case that settled.

Sansom and a spokesman for Cooley did not immediately respond to requests for comment on the lawsuit.

The case is: The Donovitz Family Irrevocable Trust v. Weber, Del. Ch., 2024 0617, 6/5/24.