March 25, 2022

SPACs: D&O Implications of Del. Chancery’s Multiplan Decision

I’ve previously blogged about In re Multiplan Stockholders Litigation, (Del. Ch.; 1/22), the Chancery Court’s first decision addressing fiduciary duties in the SPAC context. That decision covered a fair amount of ground, and we’ve posted a bunch of memos on the case in our SPACs Practice Area. However, this recent Woodruff Sawyer blog addresses an aspect of the decision that I haven’t seen covered elsewhere – its potential implications for D&O insurance. This excerpt addresses the importance of the Court’s conclusion that the claims in Multiplan were direct, not derivative:

From a D&O insurance perspective, there is a real consequence to the direct versus derivative distinction because of the way the insurance agreements work. The “Side A” part of the ABC D&O insurance program responds on a first-dollar basis, but only to non-indemnifiable claims. Settlements of derivative suits are usually not indemnifiable under Delaware corporate law, while direct suits are indemnifiable. While many SPAC D&O insurance programs are structured as traditional “ABC” programs, some SPAC teams, as a cost-saving alternative, are choosing to structure their programs as “Side A” only.

To the extent that a SPAC purchased a Side A-only policy, and the lawsuit is determined, like in MultiPlan, to be a direct one, there may be no D&O insurance response for a settlement (outside of a corporate bankruptcy).

The blog covers several other topics, including issues concerning which D&O policy would apply to claims associated with a de-SPAC transaction, the problems with acquiring tail coverage from a different carrier than the one that provided coverage for the SPAC IPO, and the potential effects of the decision on the D&O market.

Speaking of SPACs, as Liz blogged yesterday on, the SEC has scheduled a meeting next week to propose some pretty dramatic changes to the regulatory landscape.

John Jenkins