In January 2022, the Delaware Court of Chancery issued a much-anticipated ruling that applied traditional fiduciary principles to a de-SPAC merger. The claims at issues arose from a business combination between Churchill Capital Corp. III (Churchill), a special purpose acquisition company (SPAC), and MultiPlan Inc., a healthcare cost management provider. Churchill was one of several SPACs founded by Michael Klein (Klein), who allegedly maintained unilateral control over the appointment of the SPAC’s board of directors and controlled the sole shareholder of the sponsor entity (the Sponsor).
Churchill’s 2020 initial public offering (IPO) offered units, with each unit consisting of one share of Class A common stock and a fractional warrant. The SPAC’s board and the Sponsor received Class B founder shares. If the SPAC struck a deal within 24 months, public shareholders could redeem their units for Class A shares and retain their warrants regardless of whether they voted for the deal. Class B shares would convert into Class A common stock at a one-to-one ratio. Absent a deal, the Class A shareholders would receive their pro rata share of the amount from the IPO in addition to interest, but the Class B shares would expire as worthless.
Five months after the IPO, Churchill’s board of directors approved a merger with MultiPlan, Inc. (MultiPlan), and subsequently the shareholders overwhelmingly approved the deal. However, after the merger closed, MultiPlan’s stock price dropped precipitously after a research report stated that MultiPlan’s largest customer was building an in-house platform to compete with MultiPlan. Two shareholders filed class action complaints alleging breaches of fiduciary duty by the SPAC’s directors, officers, and Klein (as controlling shareholder) for failing to disclose that MultiPlan’s biggest customer was poised to become MultiPlan’s biggest competitor.
In its analysis, the court rejected three of the defendants’ threshold arguments. First, the court found that the plaintiffs’ claims were direct rather than derivative, as the claims implicated harm arising out of the shareholders’ redemption right rather than a right belonging to the SPAC. Second, the court held that the obligation to disclose all material information about the proposed merger arose from the directors’ fiduciary duties, and was not a contractual obligation arising from the redemption right set forth in the SPAC’s certificate of incorporation. Third, the court rejected the argument that the shareholders’ claims were “holder claims,” finding instead that the shareholders had “an active and affirmative choice” to divest or remain invested in the post-merger entity.
Moving on to the substance of plaintiffs’ claims, the court concluded that the entire fairness standard, as opposed to the business judgement rule, applied. The court found that entire fairness was appropriate because the plaintiffs adequately alleged that: (i) Klein, as controller of the SPAC, received a unique benefit to the detriment of the minority shareholders; and (ii) a majority of the board of directors was conflicted. Klein’s conflict stemmed from the differing treatment of Class A and Class B shares if no deal were consummated: Class B shares “would benefit from virtually any merger” because such shares would otherwise be worthless, but Class A shares would only benefit from a deal if the share price increased post-merger. The court rejected arguments that entire fairness was inappropriate because the alleged conflicts were based on “structural feature[s]” of the SPAC structure. The court found that just because “this structure has been utilized by other SPACs does not cure it of conflicts.”
The board’s conflict, like Klein’s, stemmed from the difference in the treatment of Class A versus Class B shares. In addition, the court found the directors to lack independence because Klein appointed the SPAC directors and retained the exclusive power to remove them and because the plaintiffs adequately alleged that each director had a personal or employment relationship with Klein.
Applying entire fairness, the court found that the plaintiffs adequately pleaded that the MultiPlan deal involved neither a fair price nor a fair process because the directors failed to disclose all material information about MultiPlan’s largest customer’s plans to compete with MultiPlan.
