Delaware Chancery Court Takes First Look At De-SPAC Deal Claims In Recent MultiPlan Decision – Corporate/Commercial Law

Executive Summary

Our Securities Litigation and Securities Groups take a closer
look at a technical, fact-specific decision addressing claims
brought in connection with a special purpose acquisition
company’s de-SPAC merger transaction. The decision could
provide a roadmap for future challenges to de-SPAC
transactions.

• Claims being asserted against the SPAC were direct, rather than
  derivative, in nature




• The applicable standard of review for this particular de-SPAC
  transaction was entire fairness, not business judgment




• SPACs and their operators should consider adopting safety
  measures to reduce potential exposure to entire fairness
  review

Earlier this week, the Delaware Court of Chancery released a
highly anticipated decision in In re MultiPlan Corp.
Stockholders Litigation, C.A. No. 2021-0300-LWW, addressing
the viability of fiduciary duty claims brought against special
purpose acquisition company (SPAC) directors and organizers in
connection with de-SPAC merger transactions. The decision from Vice
Chancellor Lori Will marks the first time the Chancery Court has
examined fiduciary duty claims in this context. In the 61-page
opinion, Vice Chancellor Will held that claims being asserted by
the SPAC’s stockholders were direct, rather than derivative, in
nature—preempting the defendants’ demand futility
arguments—and that the entire fairness standard of review
governed the court’s analysis of those claims. The court also
weighed in on the plaintiffs’ aiding and abetting claim against
the SPAC’s financial advisor, holding that the complaint
adequately alleged knowing participation on behalf of the advisor.
All claims except one—against the SPAC’s CFO—were
upheld. Although SPAC-related litigation was already expected to
increase in 2022, the MultiPlan decision is likely to
further embolden the plaintiffs’ bar. 

The MultiPlan lawsuit challenges SPAC Churchill
Capital’s October 2020 acquisition of MultiPlan Inc., a health
care data analytics and cost management company. Shortly after the
transaction closed, news of a competing data analytics/cost
management offering from one of MultiPlan’s largest customers
caused the company’s stock price to decline by nearly 50
percent. Claims for breach of fiduciary duty against the SPAC’s
directors and organizers were brought shortly thereafter. 

The lawsuit alleges that Churchill’s financial
structure—which purportedly allowed the SPAC’s organizers
to “profit immensely” upon completion of a business
combination through super-equity “founder” shares, even
if the deal resulted in a loss for the SPAC’s public
stockholders—incentivized the organizers to withhold material
information from Churchill’s stockholders and push forward with
the “unfair” MultiPlan deal. According to the plaintiffs,
this not only impaired the stockholders’ ability to vote
against the deal and redeem their shares but also led to economic
damages stemming from MultiPlan’s subsequent stock price drop.
The plaintiffs also claim that Churchill’s financial advisor
aided and abetted these fiduciary breaches through its preparation
of MultiPlan valuation analyses and its knowledge of various
alleged conflicts of interest. 

In their motion to dismiss, the defendants pushed two primary
arguments: (1) that the plaintiffs were asserting improper
derivative claims that were preempted due to a failure to allege
demand futility; and (2) that the claims were barred by
Delaware’s business judgment rule. The court examined both
issues extensively: 

• On the first issue, the court found that the plaintiffs’
  fiduciary claims were properly pleaded as direct, rather than
  derivative, claims. The court reasoned that while
  “overpayment” claims such as those asserted here
  typically would be viewed as “exclusively derivative,”
  the plaintiffs’ disclosure-based claims would, if proven,
  result in a “personal” injury to the SPAC’s
  stockholders and were therefore direct in nature. Consistent with
  this, the court also noted that any recovery from the claims would
  go directly to the stockholders themselves, rather than to the
  company. 




• On the second issue, the court found that the plaintiffs had
  successfully rebutted the presumption that business judgment review
  should apply. The court confirmed that entire fairness instead
  applied for two independent reasons: (1) Churchill’s purported
  financial structure allowed the SPAC’s organizers to receive
  unique benefits from the transaction not shared by the SPAC’s
  public stockholders; and (2) Churchill’s directors were
  self-interested due to the material benefits they stood to receive
  from the transaction. 

Having concluded that the plaintiffs’ claims were direct in
nature and subject to entire fairness review, the court next turned
to the viability of the claims themselves, confirming in short
order that the plaintiffs had adequately alleged—through
purported conflicts of interest and disclosure
violations—reasonably conceivable, non-exculpated claims
against all but one of the defendants. Finally, on the aiding and
abetting claim, the court found that allegations of a close
alignment between Churchill and its financial advisor supported a
finding that the advisor knowingly participated in the fiduciary
breach. 

While the standard imposed by the Chancery Court in
MultiPlan is certainly an onerous one, it is too soon to
tell how this might impact de-SPAC deals challenged in the
future—i.e., whether, absent modifications in typical SPAC
governance and/or structure, this will result in virtually all
de-SPAC transactions being subject to entire fairness
review—since the legal analysis in MultiPlan is
highly fact-specific and based heavily on Churchill’s alleged
disclosure violations. Vice Chancellor Will confirmed this early on
in the ruling, emphasizing that many of her conclusions
“stem[med] from the fact that a reasonably conceivable
impairment of public stockholders’ redemption rights—in
the form of materially misleading disclosures—ha[d] been
pleaded.” 

Nevertheless, the decision creates a potential roadmap for
plaintiffs moving forward, particularly for those targeting SPACs
with financial structures similar to Churchill’s, which are not
uncommon. As the court cautioned: “That this structure has
been utilized by other SPACs does not cure it of conflicts.”
Future lawsuits are likely to target SPACs with these types of
purported structural conflicts and focus on “material”
disclosure violations, which, with 20/20 hindsight, are relatively
easy to manufacture in the wake of a stock price drop. 

Although the MultiPlan decision may have come too late
for SPACs that have already completed a de-SPAC transaction, SPACs
looking to avoid entire fairness review in the future should, if
feasible and not offset by negative variables such as increased
deal uncertainty, consider adopting procedural deal process
safeguards that have long been used in the traditional merger
context, including independent special committees, independent
financial and legal advisors, and majority-of-the-minority votes.
Beyond that, SPACs and their sponsors should take extra care to
avoid any disclosure slipups. Though difficult to adjust to on the
fly, well-advised SPACs might be able to adopt sufficient processes
and safety measures to reduce exposure and stave off entire
fairness review for de-SPAC deals going forward.

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