In the wake of the special purpose acquisition company (“SPAC”) fad that recently gripped the financial world, the passage of time has shown that many, or even most, of these companies were ultimately value destructive for public investors.[1] In response, stockholders have pursued class actions alleging breaches of fiduciary duties by SPAC insiders, and the Delaware Court of Chancery handed down several decisions in 2022 and 2023 denying motions to dismiss filed by the SPAC controllers. Specifically, in a series of decisions starting with the Multiplan[2] case, the Delaware Court of Chancery has sided with stockholder plaintiffs and found that their claims for breach of fiduciary duty against the alleged controllers were legally sound.  

A key issue in these decisions was whether the “plaintiff-friendly” entire fairness standard of review applied to the Court’s pleading-stage review of the alleged controllers’ actions.[3] The applicability of the entire fairness standard of review is of major consequence for these and future SPAC cases. Indeed, the Delaware Supreme Court has emphasized that “the invocation of the entire fairness standard has a powerful pro-plaintiff effect against interested parties.”[4] This standard of review “intentionally puts strong pressure on the interested party and its affiliates to deal fairly before-the-fact when negotiating an interested transaction.”[5]

The Multiplan decision assessed claims arising from the SPAC merger of Churchill Capital Corp. III (“Churchill”).[6] Churchill was formed in October 2019 to serve as a SPAC.[7] It was a publicly traded company that raised capital through its initial public offering (“IPO”) to realize the goal of merging with a private company and taking it public.[8] Before the merger, Churchill had no operations and its assets were effectively limited to its IPO proceeds.[9] Michael Klein (“Klein”) incorporated Churchill as a Delaware corporation through Churchill Sponsor III, LLC (“Sponsor”).[10] Sponsor’s managing member was M. Klein Associates, Inc., and its sole stockholder was Klein.[11]

After its IPO, Churchill had two classes of common stock and warrants.[12] Specifically, Churchill sold 110,000,000 units at $10 per unit in its IPO, and each unit consisted of one share of Churchill Class A common stock and a quarter of a warrant with an exercise price of $11.50.[13] Class A shares composed 80% of Churchill's outstanding stock.[14] The Sponsor purchased millions of Class B founder shares an upfront capital contribution of $25,000 (the “Founder Shares”), which made up the remaining 20% of Churchill’s common stock.[15] The Founder Shares stood to convert into Class A shares at a one-to-one ratio (subject to adjustments) if Churchill consummated an initial business combination.[16] The Sponsor was also compensated through an option to purchase warrants in Churchill.[17] That is, Churchill made a private placement of 23 million warrants to the Sponsor at $1 each (the "Private Placement Warrants").[18] Like the warrants associated with the public IPO units, the Private Placement Warrants’ exercise price was $11.50.[19]

Churchill had 24 months after its IPO to find a private company target and complete a merger.[20] If no transaction was completed by then, Churchill would return the IPO proceeds plus interest to its stockholders, cease operations, and wind up.[21] In this scenario, both the Class B shares and Private Placement Warrants would expire worthless.[22]

Each of the Churchill’s Class A stock had a redemption right pursuant to Churchill’s certificate of incorporation.[23] This redemption right is a unique feature of a SPAC.[24] After the merger was disclosed but before the stockholder vote, Class A stockholders had an option to redeem their stock for the $10 IPO price plus any interest that accumulated in the trust that consisted of the IPO proceeds.[25] Such stockholders could redeem their shares regardless of whether they voted for or against the merger while retaining the warrants that were included in the IPO units at no cost.[26]

Churchill selected Polaris Parent Corp. ("MultiPlan"), the parent company of MultiPlan, Inc. as the target company to take public through its SPAC merger.[27] On October 7, 2020, Churchill stockholders voted to approve the merger with Multiplan.[28] Churchill completed the merger with MultiPlan on October 8, 2020.[29]

Shortly after Churchill’s merger closed, on November 11, 2020, an equity research firm published a report about MultiPlan discussing that, inter alia, Multiplan’s then largest client formed a company that was a likely MultiPlan competitor.[30] Public MultiPlan's stock fell to a then-closing low of $6.27 the following day, which was significantly below the redemption price.[31]

A key issue in the Multiplan decision was whether the entire fairness standard of review applied to the Court’s review of Klein’s actions as Churchill’s controller.[32] The Court of Chancery reasoned that the entire fairness standard of review applied because the merger was a conflicted controller transaction.[33] The parties agreed that Michael Klein, through his control of the Churchill’s Sponsor, was Churchill’s controller, so Klein’s controller status was not in dispute.[34] With respect to the issue of the Klein’s conflict, the Court of Chancery observed that a controller’s conflict triggers the entire fairness standard of review if the controller receives greater monetary consideration for its shares than the minority stockholders, takes a different form of consideration than the minority stockholders, or receives a unique benefit by extracting something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders to the detriment of the minority.[35] The Court of Chancery reasoned that Klein extracted a unique benefit because the SPAC merger was valuable to him regardless of whether the post-merger entity’s shares traded above the $10.04 redemption value.[36]

In pertinent part, the Court of Chancery observed that Klein’s purchase of Founder Shares for de minimis consideration contributed to how his risk-reward profile was mismatched from those of the minority stockholders[37]:

The well-pleaded allegations in the Complaint highlight a benefit unique to Klein at the point when Class A stockholders held redemption rights backed by a trust that Class B stockholders could not access, and Klein (who controlled the Sponsor) had an economic interest in 70% of the Class B shares. 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.

It can also be reasonably inferred that Klein gained a unique benefit from the redemption offer itself—it brought him one step closer to consummating a transaction that allegedly benefitted him to the detriment of Class A stockholders. Further, in a value-decreasing deal where the post-merger entity is expected to be worth less than $10.04 per share, issuing a share at $10.04—the effective result of a stockholder choosing not to redeem a Churchill share—is value enhancing to the existing stockholders. It is also patently harmful to the ones giving up $10.04 for something less valuable. Because of his founder shares, Klein effectively competed with the public stockholders for the funds held in trust and would be incentivized to discourage redemptions if the deal was expected to be value decreasing, as the plaintiffs allege.

After deciding that the entire fairness standard of review applied, the Court of Chancery ultimately found that the minority-stockholder plaintiffs successfully pled a claim against Klein as a controlling stockholder.[38] In November 2022, the Multiplan action settled for $33.75 million to a certain class of Churchill’s unaffiliated stockholders.[39]

Mostly due to its decision to apply the “plaintiff-friendly” standard of review, the Multiplan decision has been described by commentators as having “made big headlines”[40] and as a “must-read for anyone focused on SPACs.”[41] Following the Multiplan decision, several similar cases have survived motions to dismiss, including Delman v. GigAcquisitions3, LLC,[42] Laidlaw v. GigAcquisitions2, LLC,[43] In re XL Fleet (Pivotal) Stockholder Litigation,[44] Malork v. Anderson,[45] and Newbold v. McCaw[46]. SPAC investors who have suffered losses should consider these developments in the law and consult qualified counsel to explore their legal options.

This memorandum is provided by Levi & Korsinsky, LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws. Prior results may not be predictive of future outcomes

[1]  Michael Klausner, Michael Ohlrogge & Emily Ruan, A Sober Look at SPACs, 39 Yale J. On Reg. 228, 292 (2022) (“By the second quarter of 2021, SPAC share prices came back roughly to where they were before the bubble, with mean pre-merger share prices approximately at $10.00. Furthermore, those SPACs that merged in Q4 2020 and Q1 2021 and appeared to be great deals for investors have now soured. As of December 2021, the mean and median prices for those SPACs have fallen to $9.01 and $7.09, respectively. If investors had redeemed their shares and invested the proceeds in a market index, they would now have roughly $12.35 in value.”).
[2] In re Multiplan Corp. Stockholders Litig., 268 A.3d 784 (Del. Ch. 2022).
[3] Multiplan, 268 A.3d. at 799.
[4] Leal v. Meeks, 115 A.3d 1173, 1180 (Del. 2015).
[5] Id.
[6] Multiplan, 268 A.3d, at 791-92.
[7] Id. at 793.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 794.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id. at 795.
[24] Id.
[25] Id.
[26] Id.
[27] Id. at 796.
[28] Id.
[29] Id. at 798
[30] Id.
[31] Id.
[32] Id. at 810.
[33] Id.
[34] Id.
[35] Id.
[36] Id. at 811.
[37] Id (internal citations omitted).
[38] Id. at 817.
[39] See, e.g., Multiplan Corporation Announces Settlement of Delaware Litigation, Businesswire (Nov. 17, 2022) (https://www.businesswire.com/news/home/20221117006191/en/MultiPlan-Corporation-Announces-Settlement-of-Delaware-Litigation).
[40] Alison Frankel, Multiplan SPAC's bid to kill shareholder suit? Blame Muddy Waters, Reuters (Feb. 23, 2022) (last accessed October 25, 2023) (https://www.reuters.com/legal/transactional/multiplan-spacs-bid-kill-shareholder-suit-blame-muddy-waters-2022-02-23/).
[41] Howard L. Ellin, et al., Court of Chancery Issues SPAC-Related Decision of First Impression, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates (Jan. 6, 2022) (last accessed October 25, 2023) (https://www.skadden.com/insights/publications/2022/01/court-of-chancery-issues-spac-related-decision).
[42] 288 A.3d 692, 713-20 (Del. Ch. Jan. 4, 2023).
[43] 2023 WL 2292488, at *7 (Del. Ch. Mar. 1, 2023).
[44] Consol. C.A. No. 2021-0808-KSJM, at 5, 23-28 (Del. Ch. June 9, 2023) (TRANSCRIPT).
[45] C.A. No. 2022-0260-PAF, at 30 (Del. Ch. July 7, 2023) (TRANSCRIPT).
[46] C.A. No. 2022-0439-LWW, at 17 (Del. Ch. July 21, 2023) (TRANSCRIPT).