The Delaware Court of Chancery addressed for the first time fundamental precepts of Delaware law in the context of a special purpose acquisition company (“SPAC”) on January 3, 2021. In In re MultiPlan Corp. Stockholders Litigation,1 Vice Chancellor Lori Will ruled on the disclosure obligations of the board of directors of a SPAC in connection with the decision of the SPAC’s public stockholders whether to redeem their shares before the closing of a merger between the SPAC and a private company target—i.e., a “de-SPAC merger.” In ruling on these claims, the Vice Chancellor also offered important insights on the potential conflicts between a SPAC’s sponsoring stockholder and management team, on the one hand, and the public stockholders, on the other. While the MultiPlan decision represents an important foray by the Delaware courts into the distinct issues presented by SPACs, the open questions left by the decision indicate that Delaware courts will have more to say at a later date.
The case arose out of the de-SPAC merger of Churchill Capital Corp. III (“Churchill”), a SPAC, and MultiPlan, Inc. (“MultiPlan”), a private company. The merger took MultiPlan public at an implied valuation of US$11 billion.
Generally, a SPAC is “a publicly traded company that raises capital through an initial public offering to realize a single goal: merge with a private company and take it public.”2 The funds raised from the public offering of the SPAC are held in trust for an anticipated de-SPAC merger. If the de-SPAC merger does not occur within a fixed period of time (typically 18 to 24 months), these funds, plus interest, are returned to the stockholders. Meanwhile, the SPAC’s sponsoring stockholder and management team (the “Sponsor”) purchase so-called “Founders’ Shares” that convert into common stock of the public company resulting from the de-SPAC merger—a benefit commonly called the “promote.” Directors of the SPAC, including independent directors, also may receive compensation in the form of Founders’ Shares. However, if a de-SPAC merger does not close and the SPAC is liquidated, these Founders’ Shares become worthless. Further, in a de-SPAC merger, the public stockholders have the option either to accept the common stock of the new public company, or to redeem their shares for the initial investment, plus interest, even if they voted in favor of the transaction.
The merger between Churchill and MultPlan closed in October 2020 after 93% of the votes cast at Churchill’s stockholder meeting voted to approve the merger, and fewer than 10% of Churchill’s public stockholders opted to exercise their redemption rights. After the merger closed, the market learned that MultiPlan’s largest customer was building an in-house platform to compete with MultiPlan. Following this news, the trading price of MultiPlan common stock dropped below the redemption price.
Plaintiffs, purported stockholders of Churchill, alleged that the board of directors of Churchill (the “Board”) materially mislead Churchill’s public stockholders by failing to disclose that MultiPlan was about to lose its largest customer. Plaintiffs further claimed that the de-SPAC merger was governed by entire fairness, owing to the Board’s and the Sponsor’s alleged incentive to close any merger to salvage their promote—a motive that the public stockholders did not share. Defendants, the Sponsor and named directors and officers, moved to dismiss.
The Court’s Decision
Accepting all allegations in the complaint as true, and after giving all reasonable inferences to Plaintiffs, the Court denied Defendants’ motion to dismiss. In so denying, the Court spoke to a number of issues of Delaware law that had yet to be addressed in the context of SPACs. This OnPoint summarizes the most pertinent of these issues.
Did Plaintiffs’ claims belong to Churchill or to its public stockholders? Reading the complaint in the light most favorable to Plaintiffs, the Court rejected Defendants’ argument that the complaint asserted overpayment or dilution claims belonging to Churchill. Instead, the Court held the complaint arose from Plaintiffs’ allegations that the Board impaired the public stockholders’ ability to make an informed decision whether to exercise their redemption right in the de-SPAC merger. This redemption right was an individual right belonging to the stockholders, and not to Churchill. Plaintiffs, and the other public stockholders, could therefore seek recovery for themselves of the difference between the value of their post-merger shares and the redemption price.
Was the merger entitled to the presumptions of the business judgment rule, or should the Court review the merger for entire fairness? The Court held that, as alleged, the de-SPAC merger was a conflicted controller transaction and entire fairness review applied. The parties did not dispute that the Sponsor was a controlling stockholder of Churchill. As to the presence of conflicting interests, the Court held that, on the one hand, the Sponsor obtained a special benefit not shared with the public stockholders because the Founder Shares and other warrants held by the Sponsor “would be worthless if Churchill did not complete a deal.” On the other hand, Churchill’s public stockholders would have received US$10.04 per share if Churchill had failed to consummate a transaction and liquidated. This alleged difference in economics created a conflict between the Sponsor and the public stockholders meriting entire fairness review.
Was a majority of the Board conflicted? The Court concluded that Plaintiffs adequately alleged such conflicts. The Court accepted Plaintiffs’ allegations that Board members holding shares in the Sponsor worth millions of dollars were conflicted for the same reasons the Sponsor was: their shares had greater value if the de-SPAC merger closed than if it did not. The Court further held the Complaint sufficiently pled that a majority of the Board was beholden to the Sponsor because they were appointed by the Sponsor, could be unilaterally removed by the Sponsor, and had been appointed by the Sponsor’s controller to serve on the boards of five other SPACs and to receive Founders’ Shares in those SPACs worth millions of dollars.
Did Plaintiffs allege a breach of fiduciary duty? Because of the redemption right, the Court held the Board owed a direct duty to the public stockholders to disclose material information related to the exercise of that right. The Court further held Plaintiffs adequately pled a fiduciary breach because of the alleged failure to disclose that MultiPlan would soon lose its largest customer, who would also become a future competitor. Without this information, the Court held the Plaintiffs alleged the public stockholders could not make an informed decision about whether to redeem their shares.
Did the alleged conflicts between the Sponsor and the public stockholders give rise to a claim over price and process independent of the disclosure breach? Vice Chancellor Will flagged, but did not decide, this issue. The Vice Chancellor acknowledged, however, that the unique interests of the Sponsor were known to Churchill’s public stockholders. Notwithstanding this knowledge, the Court held the public stockholders did not agree that material information about the de-SPAC merger candidate could be withheld when it was time for the stockholders to make their redemption decision. The Court thus left for another day whether adequate disclosures about a de-SPAC merger would be sufficient to defeat a claim that a Sponsor and the board had a unique interest in the transaction. In so deferring, the Vice Chancellor noted: “If public stockholders, in possession of all material information about the target, had chosen to invest rather than redeem, one can imagine a different outcome.”3
The MultiPlan decision demonstrates that Delaware courts will not hesitate to apply fundamental principles of Delaware law to SPAC transactions. It remains unclear, however, whether the Delaware courts will apply entire fairness review to every de-SPAC merger in which the Sponsor has the benefit of a promote, or if the courts will entertain arguments by defendants that entire fairness review is not appropriate in every de-SPAC transaction. Consideration should be given to steps that could be taken to qualify a de-SPAC transaction to be reviewed under the business judgment rule. Regardless, the decision identifies matters that SPACs, their Sponsors, and their boards should consider in the de-SPAC process:
- The prophylactic role that disclosures play in a de-SPAC merger, including both the interest of the Sponsor and the board of directors in the merger, and the suitability of the target private company as a merger candidate.
- Whether, in a future decision, a Delaware court will require additional process protections for public stockholders to address a claim that the Sponsor and the SPAC’s board of directors had interests divergent from the public stockholders in a de-SPAC merger.
- Providing tenure protection for directors and altering their compensation (e.g., by providing them with purchased ordinary common shares eligible to participate in the trust liquidation) could potentially provide sufficient process protections to enable review under the business judgment rule.
- If a de-SPAC merger is reviewed under the entire fairness standard, defendants may have the burden of showing fair process and fair price. That burden underscores the benefits of running an exploratory process to identify merger candidates, vetting the due diligence conducted by third-parties, and obtaining a fairness opinion. And even if entire fairness does not apply, these process steps will increase the difficulty for plaintiffs in overcoming the presumption of the business judgment rule.
The MultiPlan decision will not be the final word on the developing area of corporate governance in de-SPAC mergers. SPACs, their Sponsors, their boards, and their counsel will need to monitor, consider, and anticipate these developments as they navigate future transactions.
1) C.A. No. 2021-0300-LWW, 2022 WL 24060 (Del. Ch. Jan. 3, 2022).
2) Id. at *2.
3) Id. at *22.