In re MultiPlan Corp. S’holders Litig., C.A. No. 2021-0300-LWW (Del. Ch. Jan. 3, 2022) (Will, V.C.)
In this memorandum opinion, the Court of Chancery largely denied motions to dismiss claims challenging a de-SPAC merger. That ruling was driven by two conclusions. First that the entire fairness standard of review applied, and second, that the claims were direct, not derivative. Noting that “[m]any of the features  consider[ed] in [the] opinion are common to SPACs,” the Court went to great lengths to focus on the alleged failure to disclose material information, stating that its “conclusion does not address the validity of a hypothetical claim where the disclosure is adequate and the allegations rest solely on the premise that fiduciaries were necessarily interested given the SPAC's structure” and that it “bears emphasizing that [its] conclusions stem from” the alleged materially misleading disclosures.
In October 2019, Churchill Capital Corp. III, a Delaware Corporation, was formed as a special purpose acquisition company (the “SPAC” or the “Company”). The SPAC was sponsored by Churchill Sponsor III, LLC (the “Sponsor”), an entity controlled by Michael Klein (“Klein”). The Sponsor paid $25,000 for its “founder” shares (representing 20% of the SPAC’s outstanding stock), and $1 a warrant for 23 million warrants (the “Private Placement Warrants”) with an exercise price of $11.50. In connection with the SPAC’s IPO, Klein, through his control of the Sponsor, selected the SPAC’s directors. The directors received economic interests in the Sponsor. Meanwhile, the SPAC’s initial public stockholders purchased IPO units consisting of one share of Class A common stock and a quarter of a warrant for $10 per unit. Upon the consummation of a business combination, the founder shares would convert into shares of Class A common stock at a one-to-one ratio. The SPAC had 24 months from its IPO to complete a business combination. If no business combination was consummated in the “completion window,” the founder shares and the Private Placement Warrants would be worthless. Collectively, the foregoing are distinctive features of a typical special purpose acquisition company.
The SPAC completed a de-SPAC merger with MultiPlan, Inc. (“MultiPlan” or “Target”) in October 2020 (the “Merger”). The public stockholders were entitled to (i) vote on the Merger and (ii) redeem their Class A shares of the SPAC for approximately $10.04 per share if the Merger was consummated (the “Redemption Right”). The public stockholders overwhelmingly voted in favor of the Merger and less than 10% elected to redeem their shares. The plaintiffs alleged that the SPAC’s fiduciaries impaired the public stockholders’ ability to make an informed decision regarding the exercise of the Redemption Right by withholding material information about Target’s business in its proxy statement. In particular, the SPAC failed to disclose information indicating that MultiPlan’s largest customer, UnitedHealth Group Inc. (“UHC”), which provided 35% of Target’s revenues in 2019, was building an in-house platform to compete with MultiPlan and would move all its key accounts in-house by the end of 2022. When an equity research firm later released that information, the market price of the post-deSPAC shares dropped to $6.27, a price significantly lower than the $10.04 per share for which the stockholders could have redeemed their shares.
The stockholder plaintiffs alleged the SPAC’s directors, officers, and its controlling stockholder, Klein, breached their fiduciary duties. Plaintiffs also brought an aiding and abetting claim against the SPAC’s financial advisor, The Klein Group, LLC (“The Klein Group”), an entity Klein controlled.
Defendants moved to dismiss all counts under both Rule 23.1 for failure to plead demand futility and under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Defendants first argued the claims were derivative and the plaintiffs failed to make a pre-suit demand or allege demand futility. The Court analyzed the Tooley factors and concluded that the SPAC’s board of directors (the “Board”) impaired the stockholders’ ability to exercise their Redemption Right in a fully informed manner. The stockholders, not the Company, suffered the harm from those acts, and the benefit that plaintiffs sought to recover existed independent of any injury to the Company. Plaintiffs’ claims were thus direct and not subject to the requirements of 23.1.
The Court also found unavailing defendants’ arguments that plaintiffs’ claims were purely contractual such that plaintiffs could not bootstrap breach of fiduciary duty claims to the underlying claims. Discarding defendants’ contention that the SPAC’s certificate of incorporation, which provided for the Redemption Right, governed plaintiffs’ claims regarding plaintiffs’ ability to exercise the Redemption Right, the Court found that plaintiffs’ claims were not about whether the public stockholders were provided with the opportunity to redeem their shares, but whether the defendants impaired that right through withholding or misrepresenting of key information. That information would have informed the stockholders’ decision whether to redeem their shares, and as fiduciaries the directors needed to ensure stockholders were fully informed when making that decision, just the same as, for example, if stockholders were faced with the decision of whether to tender stock or elect appraisal.
On defendants’ rule 12(b)(6) arguments and the relevant standard of review, the plaintiffs pled two independent bases for invoking entire fairness: (i) the Merger and opportunity to redeem were transactions where the controlling stockholder had conflicting interests and (ii) a majority of the Board was conflicted either due to self-interestedness or a lack of independence from Klein. As to the conflicts, Klein stood to receive a benefit from any business combination, even a value-decreasing transaction that would lead to a trading price below the $10.04 per share redemption value. Said differently, his founder shares and warrants would be worthless if the SPAC failed to complete a business combination. The public stockholders, however, could redeem their Class A shares for $10.04 per share. In total, the Merger was only valuable to the public stockholders if the post-Merger shares were worth $10.04 or more, but the Merger was valuable to Klein regardless of the price. Klein thus had an incentive to discourage redemptions because fewer redemptions increased the likelihood that the business combination would be consummated.
Though defendants argued that the founder shares could not trigger entire fairness because they are a structural feature of any de-SPAC transaction, the frequency of the use of a structure could not cure the alleged conflicts under Delaware law. The Court noted that, even if the de-SPAC mechanics were technically sound, Delaware law requires that corporate acts be “twice-tested,” once by the law and again in equity.
A separate basis for invoking entire fairness was the adequate pleading that each Board member was interested in the merger or lacked independence from Klein. In ruling that it was reasonably conceivable that the directors were self-interested, the Court cited the unique benefit the holders of Class B shares received and noted that the directors, through their economic ownership in the Sponsor, had the same conflict as Klein, as they too would benefit from any business combination regardless of price. The Court also accepted plaintiffs’ allegation that the majority of the Board lacked independence from Klein, citing that (i) Klein appointed and had the power to remove each director and the directors were compensated with interests in the Sponsor, (ii) many of the directors had also served as directors for Klein’s other SPACs, and (iii) each had personal or employment relationships or received lucrative business opportunities from Klein.
The Court found that plaintiffs stated a non-exculpated breach of fiduciary duty claim against Klein and the directors under both the duty of loyalty and the duty of disclosure given these conflicts. The failure to disclose relevant information about the development by UHC of an in-house alternative to MultiPlan was a material omission which the public stockholders would have been substantially likely to find important when deciding whether to redeem their shares.
Finally, the Court did not dismiss the aiding and abetting claim against The Klein Group, which served as a financial advisor with respect to the Merger. The Court imputed the knowledge of Klein to The Klein Group due to Klein’s control of that entity and found that it was reasonably conceivable that The Klein Group had participated in the Board’s decision or had otherwise caused the Board to approve the de-SPAC merger while withholding material information from the stockholders in the SPAC’s disclosures.