We have previously wrote about MultiPlan Corp. PSPC litigation relating to the Churchill Capital Corp.-SPAC merger. III (“Churchill”) and its target, MultiPlan Corp. On January 3, the Delaware Court of Chancery issued its decision on the defendants’ motion to dismiss, the first landmark motion to be informed and decided by Delaware courts in the wave of recent PSPC litigation. Below we highlight some key points to remember.
In the relevant part, the Multiplan the complaint alleged that Michael Klein, the majority shareholder of Churchill, had received “founding” shares constituting 20% of the shares of PSPC, which he had purchased for a nominal price. Klein’s founding shares would be converted into common stock following a de-SPAC transaction but, if no deal materialized, SPAC would be liquidated, leaving the founding shares worthless. The complaint also alleged that Churchill’s board members, including Klein’s brother and a close associate, were handpicked by Klein and received economic interests in the founder’s shares without diluting control over Klein on Churchill. Churchill also hired The Klein Group LLC (where Klein is the managing member / majority partner) as financial advisor to the merger; the Klein group was paid $ 30.5 million for its services. Finally, the complaint alleged that the board had not exercised sufficient diligence in proposing MultiPlan as a target company of de-SPAC and that the power of attorney contained material inaccuracies and omissions (that is to say, allegedly concealing the imminent departure of MultiPlan’s largest customer, which accounted for 35% of its revenue in 2019). Based on these essential facts, the complaint raised various allegations of breach of fiduciary duty. In MultiPlan’s motion to dismiss, the defendants argued that the business judgment rule applied to their actions regarding the de-PSPC transaction and, therefore, protected those actions from judicial review.
Court decision and points to remember
As a first step, Vice-Chancellor Will confirmed that “well-worn fiduciary principles” would be applied to plaintiffs’ claims, even if they concerned the “new” and non-traditional nature of a PSPC transaction. The Court noted that despite their unique structure, on certain issues PSPC parties will need to engage with traditional corporate law standards applicable to Delaware trustees.
In largely rejecting the defendants’ rejection arguments, the Court applied the generous “reasonably conceivable” standard that governs a motion to dismiss and agreed that the whole fairness standard applied because (1) the de-SPAC transaction, including the option for shareholders to repurchase, was both a conflicting controller transaction and a transaction in which shareholders were deprived of material information, and (2) a majority of the board d The administration was in conflict because they were either interested because of their interest in the founder’s actions, or somehow lacked independence from Klein. As regular readers know, the fairness standard set is Delaware’s “most onerous standard of review” and shifts the burden to the defendant trustees “of demonstrating that the impugned act or transaction was entirely fair. for the company and its shareholders ”. In doing so, defendants must prove that the transaction price and the transaction price (including structure, negotiations, disclosures and timing) were fair. The entire fairness investigation is factual, almost without exception, so the trial has survived beyond the motion to dismiss phase.
As for the “conflicting controller transaction” aspect, the Court recalled that the status of the limited partner as controlling shareholder was insufficient, on its own, to trigger full equity. A monitor must also either “stand on both sides” of the deal or “compete with common shareholders for consideration.” Here, the Court held that the alleged facts suggested that the sponsor / controller was obtaining a “unique advantage” to the detriment of the minority, in particular because the sponsor’s founding actions in this case offered an advantage even in the event of a transaction. which led to a drop in stock prices, different incentives than other common shareholders.
The court also ruled that a majority of the board of directors approving the transaction was interested because of their economic interest in the same class of founder’s shares. It was also found that a majority of the Board lacked independence from Klein due to important business and family ties, including (1) family relationships (the sponsor’s brother was a director), (2) labor relations (another director was a general manager of a Klein-controlled company), and (3) serve as a director on several PSPC boards sponsored by Klein, and receive founders’ shares with each.
It should be noted that the Court recognized that some PSPC entities “have tailor-made structures designed to resolve disputes”, implicitly rejecting the complainants’ contention that the very structure of PSPC transactions is “fraught with conflict”. The Court also pointed out that in addition to the various allegations of conflict of the plaintiffs, the Multiplan the plaintiffs argued viable disclosure requests, alleging that shareholders lacked important information necessary to fully assess their repurchase right. Specifically, the plaintiffs alleged that a customer responsible for 35% of MultiPlan’s revenue was designing a product to compete with MultiPlan, thereby avoiding its need to be a MultiPlan customer and increasing future competition.
This disclosure-related finding played a critical role in Multiplan due to a unique SPAC feature: the ability to swap. Unlike a traditional merger, where a shareholder is offered a choice of ‘agree or disagree’ via a voting right, a PSPC shareholder receives both a voting right as well as a separate choice of ( i) maintain its investment and hold shares in the de-SPAC entity Where (ii) redeem the shares for the initial investment value (typically, $ 10 / share), plus interest earned (here, $ 10.04 / share). Some, including the defendants here, have argued that this feature – whereby a shareholder affirmatively chooses to invest in the de-PSPC company or get their money back, regardless of voting for or against the transaction – may limit liability. for alleged violations. fiduciary obligations. This argument failed in Multiplan largely because of the disclosure claims—that is to say, the Court found that the shareholders of the company assessing their repurchase rights were not fully informed. As the Court said:
Critically, I note that the plaintiffs’ claims are viable not only because of the nature of the transaction or the resulting conflicts. They are reasonably conceivable because the complaint alleges that the defendant directors failed, in an unfair manner, to disclose the information necessary to the plaintiffs to knowingly exercise their redemption rights. This conclusion does not address the validity of a hypothetical claim where the disclosure is adequate and the allegations rest solely on the premise that the Trustees were necessarily interested given the structure of PSPC. The main direct damage presented in this case concerns the infringement of shareholders’ repurchase rights. If the public shareholders, in possession of all the material information on the target, had chosen to invest rather than buy back, one can imagine a different outcome.
The extreme nature of the alleged conflicts in Multiplan, where the board members as well as the financial adviser were closely linked to Klein, along with the allegations of substantial disclosure failures, likely means that this decision is not an indicator of future PSPC cases. It remains to be seen how a SPAC that has made adequate disclosures and / or put in place alternative “tailor-made structures” to mitigate conflicts between sponsors and / or administrators would fare in the face of litigation, and if the repurchase right of a shareholder of the SAVS will ultimately prove to be an important shield of liability.