June 10, 2024

SPAC Litigation: Del. Chancery Hands DeSPAC Defendants a Win

Armed with favorable precedent generated the MultiPlan and GigAcquisition3 lawsuits and supported by a boatload of negative publicity about SPAC insiders leaving the public holding the bag, plaintiffs in deSPAC lawsuits have had the benefit of a prevailing wind in recent years.  However, the Chancery Court’s recent decision in In re Hennessy Capital Acquisition Corp. IV Stockholder Litigation, (Del. Ch.; 5/24), dismissing fiduciary duty claims arising out of a deSPAC may have taken a little bit of that wind out of their sails.

The case arose out of a deSPAC merger in which Hennessey Capital merged with Canoo Holdings, a electronic vehicle startup.  Approximately three months following the closing of the merger, the company’s board determined to make significant changes to its business model based on input received from management and McKinsey.  Those changes were announced during a quarterly earnings call and went over like a lead balloon, with the company’s stock price declining by more than 20% following the announcement.  The plaintiff, a public stockholder who elected not to have shares redeemed in the deSPAC, alleged that the SPAC’s board and its sponsor breached their fiduciary duties by failing to disclose that McKinsey had been engaged and the ensuing changes to Canoo’s business model.

In dismissing those claims, Vice Chancellor Will first noted that following the MultiPlan decision, deSPAC litigation has become “ubiquitous” in Delaware.  She observed that these cases shared “remarkably similiar complaints” alleging breaches of fiduciary duty “based on flaws in years-old proxy statements that became problematic only when the combined company underperformed.” The Vice Chancellor went on to say that the plaintiff had lost sight of some fundamental principles – namely that “[p]oor performance is not. . . indicative of a breach of fiduciary duty. Conflicts are not a cause of action. And pleading requirements exist even where entire fairness applies.”  This excerpt from a King & Spalding memo on the case summarizes the reasoning behind VC Will’s decision to dismiss the complaint:

Examining the complaint’s allegations, the Chancery Court found them wanting, as the disclosure claims relied entirely on “post-closing developments”—namely, the presentations at the post-merger Canoo board meeting and ensuing changes to the company’s business model. The Court contrasted plaintiff’s allegations with those in MultiPlan and other SPAC cases denying motions to dismiss, noting that the complaints in those cases pled “concrete facts about the merger target’s prospects” that were “known or knowable” by the defendants prior to stockholders’ approval of the challenged mergers. The Court found that “[n]o such material facts that were known or knowable by the defendants” were pled in the Hennessy complaint, which “instead addresses actions by Canoo’s post-closing board.” In so finding, the Chancery Court rejected plaintiff’s arguments that “use of the past tense” in some portions of the cited board presentations supported an inference that the decision to revamp Canoo’s business model preceded the merger.

The Court cited the Executive Chairman’s statement on the post-merger earnings call that the decision to “deemphasize the originally stated contract engineering services lines” was made with the input of Canoo’s board, which input presumably was supplied at or following the post-merger board meeting. While plaintiff’s allegations, taken as true, supported an inference that “McKinsey may have reached early recommendations about aspects of the company’s business” prior to the stockholder meeting, the Court noted that “Delaware law does not . . . require the disclosure of preliminary analyses and discussions” and that “[t]o require an unadopted, interim analysis to be disclosed would invite speculation about matters that may never solidify.” The Court also held that plaintiff’s claim that Hennessy’s engagement of McKinsey was material information that defendants were required to disclose lacked support in Delaware law.

The memo goes on to say that since the case represents the first complete pleading stage win for defendants in SPAC litigation subject to the entire fairness standard, it’s a big deal. The memo also notes that the Vice Chancellor’s clear message to plaintiffs that they must plead material facts that were “known or knowable” by the defendants prior to the deSPAC provides the targets of these lawsuits with a potential arrow in their quiver.

John Jenkins