SPAC Litigation: A Review Of Recent Developments

• Jurisdiction: United States,Federal,Delaware
• Law Firm: Jones Day
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Commodities/Derivatives/Stock Exchanges, Directors and Officers, Securities, Shareholders
• Author: Ms Randi Lesnick, Andrew Levine, Ozan Akyurek, Ryan J. Andreoli, Marjorie Duffy, Evan Singer, John Tang and Nicholas C.E. Walter
• Published date: 30 May 2023

In Short

SPAC Deals: Special purpose acquisition companies ("SPACs") boomed in 2020 as a means of taking early-stage private companies public. Following enhanced scrutiny from the Securities and Exchange Commission and the poor post-merger performance of many SPACs, the SPAC bubble burst in early 2021 as investors and dealmakers turned their attention elsewhere.

Litigation: While interest in SPACs has cooled over the last two years, litigation regarding SPACs has continued to heat up, with shareholders challenging a significant percentage of de-SPAC transactions in Delaware and federal courts. Many high-profile suits have recently survived motions to dismiss (at least in part), and at least one has been resolved through a significant settlement.

Going Forward: SPAC-related disputes have thus far focused on alleged conflicts of interest and the accuracy of disclosures regarding targets' business prospects, and those issues are likely to continue to play a leading role as more motions to dismiss are decided. While only a few decisions have been issued by the Delaware Court of Chancery so far, the standard of review applied in those cases is likely to have a significant impact on outcomes if adopted in other cases.

Delaware Fiduciary Suits

The Delaware Court of Chancery has denied motions to dismiss in three important SPAC cases, one of which has been resolved.

The first decision came in MultiPlan in January 2022. In re MultiPlan Corp. S'holders Litig., 268 A.3d 784 (Del. Ch. 2022). MultiPlan was a healthcare data analytics firm that merged with a SPAC in October 2020. Shortly after the merger'in which the vast majority of the SPAC's stockholders chose to invest in MultiPlan, rather than redeeming their shares'a short-seller research firm published a report claiming that MultiPlan would soon lose its largest client, and the company's stock price plunged. In March 2021, the first stockholder plaintiff filed suit in the Delaware Court of Chancery, bringing claims against the SPAC's directors and officers, its controllers, and its financial advisor. The complaint alleged that the stockholders had been deceived by a misleading proxy statement and sought to reopen the redemption window to allow MultiPlan's public stockholders to redeem their stock at or around the $10 per-share redemption price.

The court denied the defendants' motion to dismiss almost entirely. As threshold issues, the court ruled that the stockholders' claims: (i) were direct, not derivative; (ii) were not governed by contract rather than fiduciary duty; and (iii) were not subject to dismissal on the ground that the SPAC stockholders had chosen to hold on to their stock rather than take further action. The court then held that the plaintiffs had adequately alleged that the SPAC's directors and controlling stockholder were conflicted (triggering the "entire fairness" standard of review) and had breached their fiduciary duties to the stockholders. The court noted that its decision stemmed from the fact that the stockholders had adequately pled that they had been asked to choose whether to invest in MultiPlan, or redeem their stock in the SPAC, based on a materially misleading proxy statement.

In October 2022, the parties agreed to settle the case for $33.75 million, and the court approved the settlement in February 2023. This was a substantial settlement'but a far cry from the redemption value of the shares.

In the...