SPAC Redemption Rights'Panacea Or Achilles Heel? Delaware Court Denies Defendants' Motion To Dismiss In MultiPlan Litigation

• Published date: 15 February 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, M&A/Private Equity, Corporate and Company Law, Directors and Officers, Class Actions
• Law Firm: Arnold & Porter
• Author: Mr Alexander Gendzier, Jonathan E. Green, Nicholas O'Keefe and Elliot S. Rosenwald

On January 3, 2022, the Delaware Chancery Court declined to dismiss breach of fiduciary duty claims in In re MultiPlan Stockholders Litigation against a SPAC sponsor and its board of directors in connection with a de-SPAC transaction. The claims were brought by stockholders of the SPAC in a putative class action that centered on the alleged impairment of their redemption rights due to misstatements and omissions in the proxy statement for the de-SPAC transaction. In its ruling, the court drew two important conclusions:

• The court rejected the defendants' arguments that the claims were essentially derivative in nature. This was important both in this case, because plaintiffs failed to plead demand futility, which is a basis for dismissal of derivative claims, and as precedent for future de-SPAC transactions, because it set a lower bar for copy-cat litigation.
• The court held that the transaction was subject to the entire fairness standard of review, due to conflicts of the SPAC sponsor and the SPAC board, rather than the more lenient business judgment standard. This was important because all SPACs have conflicts similar to those at issue in MultiPlan, and these conflicts are typically fully disclosed before the SPAC goes public. The court rejected the argument that it would be inequitable to allow stockholders to challenge conflicts of which they were fully aware before they bought their shares. But the court was careful to limit its holding to the situation at hand where there was also an allegation of inadequate disclosure.

MultiPlan is the first significant decision to deal directly with fiduciary duties of sponsors, directors and officers in the SPAC context. In part because it involved a ruling on a motion to dismiss, it left a great many issues unresolved. However, unless limited by subsequent judicial guidance, it appears to have provided plaintiffs' firms with a roadmap on how to bring claims against SPACs, invoking the plaintiff-favorable entire fairness standard of review.

Background

Churchill Capital Corp. III (Churchill, or the SPAC) completed its IPO in February 2020, using essentially a standard SPAC structure, including providing redemption rights to stockholders in connection with a de-SPAC transaction. The SPAC entered into a merger agreement to acquire MultiPlan in July 2020. The transaction was structured as a merger and related steps in which MultiPlan became a wholly owned subsidiary of the SPAC, and MultiPlan's stockholders received mixed cash and stock consideration having an aggregate value of $5.678 billion. The SPAC's board retained an affiliate of the SPAC sponsor as its financial advisor for the transaction, and paid it a $30.5 million fee. The SPAC delivered a proxy statement to its stockholders providing information about the transaction and soliciting stockholder approval. The proxy statement disclosed that more than a third of MultiPlan's revenue came from a single customer, but did not disclose that this customer was likely to cease purchasing from MultiPlan because it intended to develop inhouse a competing product. The merger closed in October 2020, and fewer than 10% of Churchill's stockholders redeemed their shares. A month later, a short seller published a report discussing the customer's development of the competing product. MultiPlan's shares dropped significantly.

Stockholders filed putative class action suits in Delaware Chancery Court, which were consolidated in April 2021, alleging, in essence, that the defendants failed to disclose material information regarding MultiPlan for self-interested reasons and, as result, the stockholders' ability to make an informed decision regarding whether to exercise their redemption rights was impaired. For more background about the initial lawsuit, see our previous Advisory. Defendants moved to dismiss the complaint on several grounds.

Court Decision

The court first considered some critical threshold issues, and then turned to the fiduciary duty claims. It is important to remember that the court did not make conclusions on the merits of the underlying claims of the plaintiffs'meaning that the court did not find that the defendants, in fact, breached their fiduciary duties. Rather, in ruling on a motion to dismiss, the court accepted as true the factual allegations of the plaintiffs and determined that, as a matter of law, the claims could stand.

Defendants' Arguments That Plaintiffs Improperly Brought the Suit As a Direct Action, and Other Threshold Issues

Generally stated...