Earlier this week, in In re Multiplan Stockholders Litigation, (Del. Ch.; 1/22), the Delaware Chancery Court for the first time addressed fiduciary duty issues in the context of litigation arising out of a de-SPAC merger transaction. The case centered on issues arising out of the unique aspects of the SPAC structure – the ability of stockholders to compel the company to redeem their shares in connection with a de-SPAC merger, and potential conflicts between the interests of SPAC affiliates and public stockholders.
In this case, the plaintiffs alleged that the defendants breached their fiduciary duty of loyalty by prioritizing their personal interests over those of public stockholders in pursuing the merger and by issuing a false and misleading proxy statement, thus depriving stockholders of the ability to exercise their redemption rights on an informed basis.
The plaintiffs asserted that the entire fairness standard of review should apply to their fiduciary duty claims. The defendants argued that was inappropriate, because the de-SPAC merger did not result in the sponsor or the other defendants receiving per share consideration different in form or amount from that payable to any other stockholder. The plaintiffs contended that entire fairness should apply because the implications of the sponsor’s ownership of Class B founders’ shares and private placement warrants provided it with a “unique benefit” from the deal.
Vice Chancellor Will concluded that, at least for purposes of resolving a motion to dismiss, the plaintiffs had the better of the argument:
Both the Class B shares and the Private Placement Warrants held by the Sponsor would be worthless if Churchill did not complete a deal. As of the record date, the Private Placement Warrants were worth roughly $51 million and the founder shares were worth approximately $305 million, representing a 1,219,900% gain on the Sponsor’s $25,000 investment. These figures would have dropped to zero absent a deal.
Churchill’s public stockholders, on the other hand, would have received $10.04 per share if Churchill had failed to consummate a merger and liquidated. Instead, those that did not redeem received Public MultiPlan shares that were allegedly worth less. In brief, the merger had a value—sufficient to eschew redemption—to common stockholders if shares of the post-merger entity were worth $10.04. For Klein, given the (non-)value of his stock and warrants if no business combination resulted, the merger was valuable well below $10.04. This is a special benefit to Klein.
The Vice Chancellor also said that because of the sponsor’s ownership of the nominally priced founders’ shares, it was incentivized to discourage redemptions if the deal was expected to be value decreasing, as the plaintiffs alleged. Accordingly, she concluded that the entire fairness standard should apply to the plaintiffs’ fiduciary duty claims against the sponsor and the other company insiders.
Vice Chancellor Will also concluded that the plaintiffs’ allegations were sufficient to support unexculpated fiduciary duty claims against the SPAC’s directors, and that those were subject to review under the entire fairness standard as well.
– John Jenkins