All is Entirely Fair in Love and de-SPACs

Siddharth Bahl


Special purpose acquisition companies (“SPACs”) were a hot topic in 2021 and it appears as though 2022 will be no different. On January 3, 2022, the Delaware Court of Chancery issued its highly-anticipated first decision involving stockholder challenges to de-SPAC transactions in In re Multiplan Corp. Stockholders Litigation.

The SPAC in In re Multiplan Corp. Stockholders Litigation, Churchill Capital Corp. III, was formed in October 2019. Churchill’s sponsor was Churchill Sponsor III, LLC, whose managing member was an entity wholly owned by Michael Klein. Churchill went public in a $1.1 billion initial public offering in February 2020. Churchill eventually identified Polaris Parent Corp., the parent company of MultiPlan, Inc. (“Multiplan”), as its acquisition target. MultiPlan is a healthcare industry-focused data analytics and cost management solutions provider.

In the proxy statement used to inform Churchill stockholders of the merger and to seek approval at a meeting of stockholders, Churchill disclosed that MultiPlan was dependent on a single customer for about 35% of its revenues. However, it did not disclose the name of the customer, UnitedHealth Group, Inc. (“UHC”), or that UHC was creating its own in-house data analytics platform that would directly compete with MultiPlan’s platform. Churchill’s stockholders overwhelmingly voted to approve the merger and “Public MultiPlan” was later formed. A few months later, after an equity research firm published a report about MultiPlan discussing UHC’s new platform, Public MultiPlan’s stock fell to a then-low closing share price of $6.27.

The consolidated action against Churchill, its sponsor, and other related parties alleges four causes of action, three of which are claims for breach of fiduciary duty against certain Churchill directors, officers, and its controlling stockholder, respectively. Plaintiffs allege that the merger was of significant value to Mr. Klein, who effectively controlled the sponsor, even if the Public MultiPlan’s share price fell below the redemption price after the merger; and that because of his control of the sponsor (and the founder shares it owned), Mr. Klein was competing with stockholders for funds being held in trust, creating an inherent conflict of interest. Plaintiffs further allege that Churchill’s directors were conflicted because they would benefit from virtually any merger result (even one that resulted in a reduction of value). Certain of the defendants moved to dismiss the consolidated action for failure to plead demand futility and for failure to state a claim upon which relief can be granted.

The court, applying an “entire fairness” standard of review (one that puts the burden on the defendants to demonstrate that the price and process of the challenged transaction were fair to the stockholders), denied the defendants’ motion to dismiss, in part, and allowed the case to proceed against certain of the defendants. The court applied the entire fairness standard, Delaware’s strictest standard, because of the inherent conflicts in this de-SPAC transaction (it hinted that it may apply more broadly to other de-SPAC transactions, as well). It held that plaintiffs’ claims were “reasonably conceivable” (the threshold needed to overcome defendants’ motion) because of the potential conflict between Churchill’s directors and Mr. Klein with the stockholders resulting from their different incentives in the ultimate outcome of the de-SPAC.

The court’s application of the entire fairness standard to the Churchill de-SPAC raises the possibility that it could be applied to other de-SPAC transactions. It’s also another obstacle for the SPAC industry to deal with at a time when it faces potential regulatory headwinds. For now, it should serve as another important reminder that robust disclosure, comprehensive diligence, and structural protections in the merger process are critical in the de-SPAC context.

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