Delaware Redemption Actions—A New Frontier in SPAC Litigation?
The Delaware Court of Chancery's application of the "entire fairness" standard in In re MultiPlan Stockholders Litigation is an important development for SPACs incorporated in Delaware, and it could result in more SPAC-related suits being filed in that forum.
On January 3, 2022, the Delaware Court of Chancery allowed claims for breach of fiduciary duty to proceed against the board of directors, sponsor, and controlling stockholder of a special purpose acquisition company ("SPAC"). See In re Multiplan Corp. Stockholders Litig., C.A. No. 2021-0300-LWW. The investor-plaintiffs alleged that the defendants concealed material information about the SPAC's merger target and thereby impaired shareholders' redemption rights. In largely denying the defendants' motions to dismiss under the "plaintiff-friendly" Rule 12(b)(6) pleading standard, the court reached several conclusions that could be relevant to sponsors, officers, and directors of other SPACs incorporated in Delaware, including that: (i) the investors' claims were direct in nature (rather than derivative), and thus not subject to the pre-suit demand requirement; (ii) the investors' claims were not "holder" claims based on stockholder inaction, and therefore could be brought on a class-wide basis; and (iii) the onerous "entire fairness" standard of review (rather than the more deferential business judgment rule standard) applied due to "inherent conflicts between the SPAC's fiduciaries and public stockholders in the context of a value-decreasing transaction." The court also noted: "[t]hat this structure has been utilized by other SPACs does not cure it of conflicts."
As the court's Opinion acknowledged, this was a first-of-its-kind Delaware decision in the SPAC context and there is no guarantee that other courts will reach similar conclusions in SPAC-related cases. In addition, the de-SPAC transaction at issue in MultiPlan had some unique features that may limit broader applicability of the decision (and use of the entire fairness standard), including that certain members of the SPAC's board also served as directors for several other SPACs affiliated with the SPAC's CEO, and the SPAC allegedly paid more than $30 million for advisory services to an entity affiliated with its CEO. Nonetheless, this decision may result in the filing of additional Delaware suits seeking to vindicate SPAC shareholders' redemption rights (at least for Delaware-incorporated SPACs whose stock prices decline below their redemption price after their de-SPAC transactions). Market participants should continue to monitor the other redemption actions that are currently pending in the Chancery Court to see whether this decision is a canary in a coal mine or just a bump in the road.
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