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On January 3, 2022, the Delaware Chancery Court entered an opinion in a direct action breach of fiduciary duty case (not a securities class action), by denying the defendants’ motion to dismiss. The case involves a novel application of traditional fiduciary duty principles in the special purpose acquisition company (SPAC) context and will generate much discussion.

In the MultiPlan1 action, Churchill III (the SPAC) merged with MultiPlan Corp, a data analytics firm. After the merger, a short-seller report claimed “… that at the time of the merger, MultiPlan was in the process of losing its largest client, UnitedHealthcare”, which the proxy statement disclosed accounted for about 35 percent2 of the company’s revenue. This was, among other things, the plaintiffs’ basis for the breach of fiduciary duty direct action.

The Delaware Chancellor, in deciding the defendants’ motion to dismiss, made the following findings: 1) plaintiffs’ claims were direct, not derivative; 2) the “entire fairness standard of review applies due to inherent conflicts between the SPAC’s fiduciaries and public stockholders in the context of a value-decreasing transaction”; 3) plaintiffs “pleaded viable, non-exculpated claims against the SPAC’s controlling stockholder and directors.”

In coming to these conclusions, the Delaware court commented on a number of the conflicts inherent in SPAC deals. For example, the court held that there were reasonably conceivable allegations that the SPAC board was conflicted because the SPAC’s directors (through their economic interests in the sponsor) “would benefit from virtually any merger — even one that was value diminishing for Class A (public) stockholders — because a merger would convert their otherwise valueless interests in Class B shares into shares of Public MultiPlan.”

The court also held that a majority of the board was conflicted, because they were not independent from Michael Klein (founder and controller of the SPAC).

This case:

  • Underscores that courts will parse proxy statements issued in connection with SPAC transactions; and,
  • Demonstrates the importance of robust disclosures in a context where a court could apply an entire fairness standard of review.

1 In re Multiplan Corp. Stockholders Litig., 2022 Del. Ch. LEXIS 1 (Del. Ch. January 2, 2022)
2 Churchill Cap. Corp. III, Definitive Proxy Statement (Schedule 14A) (Sept. 18, 2020)

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