Sidley Discusses SPAC Litigation in Delaware Courts

As commented on previously (here, here, and here), 2020 and the beginning of 2021 have seen an explosion in popularity of Special Purpose Acquisition Company (“SPAC”) deals.  As readers know, SPACs have become one of the predominant vehicles for raising funds outside of the traditional IPO.  Historically, SPACs have been the target of litigation relatively infrequently, but that trend is changing with the recent SPAC boom and the corresponding increase in public awareness and interest (including from regulators, short sellers, and the securities plaintiffs’ bar).  Along with the increase in federal securities suits filed against pre- and post-de-SPAC companies, a trend likewise may be emerging in the Delaware Court of Chancery: a handful of stockholder suits alleging breach of fiduciary duties have been filed against SPAC entities and/or their boards of directors recently.  We highlight a few below.

First, Laidlaw v. Acamar Partners Acquisition Corp. was filed in the Court of Chancery on January 7, 2021, against the board of directors of Acamar Partners Acquisition Corp., the pre-transaction SPAC or “blank check company” that was created (and went public) for the purpose of acquiring an existing target business.  Acamar Partners announced such a merger with used car company CarLotz in October 2020, and the Laidlaw lawsuit was filed several weeks prior to the January 20, 2021, stockholder vote on the merger.  The complaint alleged that Acamar’s board rushed into an agreement with CarLotz to meet the de-SPAC deadline (a set date, typically 24 to 36 months after the IPO, by which a SPAC must find a suitable target company for a transaction, or else must liquidate the IPO proceeds and return them to the investors) and haphazardly provided Acamar stockholders with a prospectus that omitted material information necessary to make an informed vote on the proposed transaction.  The complaint asserted claims for breach of fiduciary duties against Acamar’s board of directors, as well as the CEO of Acamar (based on breach of the duty of care).  The case was short lived, as the plaintiff stockholder voluntarily dismissed his claims after Acamar made additional disclosures prior to the stockholder vote.

Second, Pels v. Fintech Acquisition Corp. IV was filed in the Court of Chancery on March 2, 2021, against pre-transaction SPAC FinTech Acquisition Corp. IV, FinTech’s existing board of directors, and the “successor” directors for the post-transaction company, which included a group of individuals that control investment advisory firm Perella Weinberg.  Following the transaction, the combined company plans to operate as Perella Weinberg Partners and will be NASDAQ listed.  Like in Laidlaw, the Pels complaint alleges that FinTech “acted with lightning speed to find a business partner,” announcing a business combination with Perella Weinberg three months after going public. The complaint also alleges that, as part of the business combination, FinTech’s board agreed to a Stockholders’ Agreement that allegedly would deprive the post-merger board from exercising certain governance powers, such as raising cash, taking on new debt, and pursuing new business opportunities.  The Agreement allegedly also would have stockholders approve a waiver of the Corporate Opportunity Doctrine under DCGL §122(17), further limiting business opportunities for the newly formed company post-merger.  The complaint demands that FinTech’s board take remedial action regarding the terms of the Stockholders Agreement and supplement the preliminary proxy statement.  The complaint asserts claims for anticipatory breach of contract and injunctive relief, as well as enjoinment of the effectuation of the Corporate Opportunity Doctrine waiver and the business combination due to deficient proxy disclosures.  It also brings several derivative claims on behalf of FinTech to enjoin the Stockholders Agreement and the effectuation of the Corporate Opportunity Doctrine waiver.  This case is currently at the motion-to-dismiss phase.

Third, Amo v. Multiplan Corp. was filed in the Court of Chancery on March 25, 2021, against MultiPlan Corp., the post-merger entity following the de-SPAC combination of Churchill Capital Corp. III (“Churchill”) and its target MultiPlan, a company that provides technology and data analytics services to healthcare payers (MultiPlan had also been the target of several federal securities class actions in the Southern District of New York.).  The Amo complaint also asserts claims against Churchill’s pre-merger board of directors and the SPAC’s sponsors, Michael Klein and M. Klein & Co.  The complaint alleges that the structure of SPAC transactions generally is “conflict-laden and practically invites fiduciary misconduct,” and that courts must make clear that SPAC sponsors ought to “mitigate avoidable conflicts by structuring entities that better protect public stockholders.”  With respect to this deal, the complaint alleges that Churchill is the third recent SPAC by sponsor M. Klein, and that M. Klein thus structured Churchill to incentivize the board of directors to get a business transaction done quickly, specifically by granting large amounts of “founder shares” to the directors post-transaction.  The complaint also alleges that the merger process with MultiPlan would fail “any entire fairness review” because the board appointed M. Klein’s own vehicle, the Klein Group, as a financial advisor to the transaction, thereby transferring a large advisory fee to that entity in return.  According to the complaint, M. Klein and the board failed to perform adequate diligence on MultiPlan, did not disclose MultiPlan’s weak financial position in the proxy statement, and issued affirmatively false and misleading disclosures to stockholders about MultiPlan’s finances and otherwise.  As is not uncommon in recently filed SPAC lawsuits, a short seller has a role in the story.  Here, shortly after the merger closed, short seller Muddy Waters Research LLC issued a research report that purported to reveal MultiPlan’s precarious financial position, and the price of MultiPlan’s stock subsequently plummeted.  The Amo complaint asserts claims for breach of fiduciary duty against the board of directors, against the senior officers of Churchill, and against Churchill’s controlling stockholders who hold founder shares, as well as a claim for aiding and abetting fiduciary duty breaches against the Klein Group.

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In the authors’ views, these complaints likely portend an increase in filings in the Chancery Court asserting breach of fiduciary duty claims against SPAC directors and/or sponsors, particularly in any instance where a stockholder plaintiff can allege a hasty process to speedily complete a de-SPAC deal, where alleged conflicts of interest may be apparent, and/or where the company underperforms market expectations following the de-SPAC.

This post comes to us from Sidley Austin LLP. It is based on the firm’s memorandum, “SPAC Litigation Accelerates in Delaware Courts,” dated April 8, 2021, and available on Sidley Austin’s Enhanced Scrutiny blog here.

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