Entire Fairness is Entirely Fair for De-SPAC Says Delaware Court

Siddharth Bahl


Since the beginning of the COVID-19 pandemic, the special purpose acquisition companies (“SPACs”) market has been red hot. With so much SPAC activity over the last 2+ years, it was only a matter of time before a contested breach of fiduciary duty claim in the context of a de-SPAC was brought. On January 3, 2022, the Delaware Court of Chancery issued its highly-anticipated first decision involving stockholder challenges to de-SPAC transactions (and, in particular, what standard of review should be applied to breach of fiduciary duty claims) in In re Multiplan Corp. Stockholders Litigation.

A SPAC is a company with no commercial operations that is formed solely to raise capital through an initial public offering for the purpose of merging with an existing company. A SPAC is often formed and controlled by an individual or management group that is referred to as the SPAC’s “sponsor.” The merger that takes place towards the end of a SPAC’s lifecycle is known as a “de-SPAC” transaction.

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, denied the defendants’ motion to dismiss, in part, and allowed the case to proceed against certain of the defendants. This standard, Delaware’s strictest standard of review, puts the burden on the defendants to demonstrate that the price and process of the challenged transaction were fair to the stockholders and requires the court to analyze, in detail, all aspects of the transaction. The court applied the entire fairness 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).

Ultimately, 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. In reaching its conclusion, it seemed to heavily rely on allegations that the stockholders were “robbed of their right to make a fully informed decision about whether to redeem their shares.” The court noted that “[i]f public stockholders, in possession of all material information about the target, had chosen to invest rather than redeem, one can imagine a different outcome.”

In re Multiplan Corp. Stockholders Litigation serves as an important reminder that robust disclosure, comprehensive due diligence, and structural protections in the merger process are critical in the de-SPAC context. Those protections could include forming a standing committee of the board to critically evaluate the entire transaction, obtaining a fairness opinion from an impartial investment bank, or implementing a heightened voting standard for approving the merger in the first place.

The decision is also another obstacle for the SPAC industry to deal with at a time when it faces potential regulatory headwinds. 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 simply by virtue of “founder shares” and the associated benefits. Without expressly saying so, the court intimated that SPACs invite the kind of fiduciary misconduct alleged here. It’s not immediately clear how other disputes brought under the same theory will be handled by courts. We anticipate that this decision will result in an increase in stockholder derivative actions. SPAC sponsors and targets should take that into consideration when structuring de-SPAC transactions.   

We will monitor the impact of the In re Multiplan Corp. Stockholders Litigation decision and other SPAC-related litigation and provide updates as appropriate. If you have any questions about this decision or SPACs, generally, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group at 585.232.6500 or 716.853.1616.

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