Delaware Court Of Chancery Sustains Class Action Claims For Breaches Of Fiduciary Duties And Aiding And Abetting Arising From Alleged Omissions In SPAC Merger Proxy
On January 3, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery largely denied a motion to dismiss a putative class action brought by the stockholders of Churchill Capital Corp. III, a special purpose acquisition company or “SPAC” (“Churchill”) alleging that the company’s controlling stockholder, officers, and directors (“the Company Defendants”) breached their fiduciary duties and the company’s financial advisor aided and abetted that breach in connection with the SPAC’s acquisition of MultiPlan, Inc. (“MultiPlan”). In re MultiPlan Corp. Stockholders Litig., C.A. No. 2021-0300-LWW (Del. Ch. Jan. 3, 2022). Plaintiffs alleged that defendants omitted to disclose that a large customer of MultiPlan would soon stop using MultiPlan’s services, allegedly causing stockholders to approve the merger based on faulty information. Defendants argued that the claim was derivative in nature, rather than one that could be asserted directly, and moved to dismiss for failure to plead demand futility and on the grounds that the business judgment rule applied. The Court held that plaintiffs’ claims were direct, rather than derivative, and that entire fairness applied because of what it found to be inherent conflicts of interest between defendants and the company’s public stockholders.
Churchill’s proxy disclosed that the merger target’s business depended on one customer for 35% of its revenue but did not disclose that that customer intended to create a platform to compete with the target and stop doing business with it. As with all SPACs, stockholders in Churchill had the right to decline to participate in the merger and redeem their shares at their original purchase price, plus interest. Fewer than 10% of Churchill stockholders exercised their redemption rights, however, and based on the disclosures in the proxy, voted overwhelmingly to approve the merger. Upon closing, the founder shares held by the SPAC’s directors and controlling stockholder converted to common shares worth some $305 million. The 35% customer’s alleged plan to establish a competing platform was allegedly publicly reported just one month after the merger closed, and a sharp decline in the stock price followed.
Plaintiffs alleged that the Company Defendants breached their fiduciary duties by prioritizing their interests over those of the stockholders and omitted material information about MultiPlan’s future prospects from the proxy so that stockholders would not exercise their redemption rights. Defendants first argued that the breach of duty claims should be treated by the Court as derivative, breach of contract, or “holder” claims. The Court disagreed. As to defendants’ assertion that plaintiffs were truly asserting derivative claims for overpayment and waste, the Court held that (i) the alleged harm was caused by the proxy and suffered directly by the stockholders, and (ii) any recovery of the redemption value of the shares would go the stockholders, not Churchill. The Court also ruled that plaintiffs’ claims did not turn on a breach of the stockholder agreement but rather on defendants’ breach of their duty to disclose, which impaired the stockholders’ rights under that agreement. Finally, the Court held that plaintiffs’ decision not to redeem their shares required an investment decision and thus was not analogous to the inaction of holding stock.
The Court found that plaintiffs adequately alleged that defendants’ conduct is subject to entire fairness review for two stated reasons. First, the Court found that plaintiffs adequately alleged that the merger was a conflicted controller transaction because the controlling stockholder stood to receive a unique benefit to the detriment of the stockholders. Whereas the merger was valuable to public stockholders only if the value of their shares post-merger exceeded their redemption value, the controlling stockholder stood to lose his original investment of $25,000 if a merger was not completed. Thus, the Court concluded, the merger benefited the controlling stockholder even if the post-merger shares were worth less than the SPAC’s IPO price and, the Court held, was a conflicted transaction. Second, the Court held that plaintiffs adequately alleged that a majority of the board was conflicted because they were either self-interested or lacked independence from the controlling stockholder. Most of the directors held founder shares that would be worthless unless a transaction was closed. While the Court held open the question of whether the value the directors obtained from the transaction was material, it nevertheless found it reasonable to infer that the directors were self-interested. The Court found that the directors were not independent from the controlling stockholder because they were (i) appointed by and could be removed by him, (ii) compensated from his founder shares, and (iii) directors of other SPACs that he controlled from which they stood to gain substantial compensation.
Finally, the Court found that plaintiffs adequately alleged a breach of the duty of loyalty, such that defendants were not protected by the charter’s exculpatory provision, and an aiding and abetting claim against the SPAC’s financial advisor. As to the financial advisor, the Court found that it was also controlled by the controlling stockholder and that his knowledge could be imputed to the firm, which the Court found satisfied the element of knowing participation. The Court dismissed the claim for breach of fiduciary duty against the SPAC’s CFO, who was not a director, because the complaint but did not allege any misconduct by him.