In In re MultiPlan Stockholders Litigation, the Delaware Court of Chancery reasoned that common special purpose acquisition company (SPAC) governance and compensation structures create potential conflicts between on the one hand, the sponsors holding founders’ shares—whose compensation is tied to, and who tended to profit greatly from, any de-SPAC transaction, however poor; and on the other hand, public stockholders—who could lose their investments in a poor de-SPAC merger, and who have redemption and liquidation rights permitting the return of their original investments without having to participate in one. See 268 A.3d 784 (Del. Ch. 2022). In the recent decision of In re Hennessy Capital Acquisition IV Shareholder Litigation, 2024 WL 2799044, at **1, 9 (Del. Ch. May 31, 2024), the Court of Chancery observed that the ensuing “abundance of SPAC fiduciary duty claims suggests that stockholder plaintiffs have taken notice,” and that SPAC litigation had become “ubiquitous” in the court. As the court explained, “remarkably similar complaints accuse SPAC directors of breaching their fiduciary duties based on flaws in years-old proxy statements that became problematic only when the combined company underperformed.”
Hennessy Capital concerned a SPAC that raised roughly $300 million from public stockholders and pursued an acquisition by a deadline set in its charter for 18 months later. Less than three months before the deadline, the SPAC was contacted by representatives of Canoo, an electric vehicle startup. The SPAC’s board of directors decided to pursue a transaction. The SPAC disseminated a proxy statement soliciting the public stockholders’ support, explaining that the board viewed as “positive factors” the potential growth in certain of Canoo’s business lines. After obtaining books and records, the stockholder plaintiff filed a class action lawsuit alleging those disclosures were materially misleading because Canoo had begun a process of transitioning away from two of those business lines. The alleged that, shortly before the proxy statement, Canoo hired McKinsey & Co. to assess Canoo’s performance and growth plans, and its new board chairman (who also was a significant investor) had also begun to consider changes in the business plan, which ultimately were undertaken.
Reviewing the allegations, the court reasoned that a viable Multiplan claim is “narrow,” and serves the purpose of “ensuring that a public stockholder’s decision to redeem shares or participate in the [de-SPAC] merger be freely exercisable and fully informed.” Hennessy Capital, 2024 WL 2799044, at **8-9. The court reasoned that, although “fiduciaries’ misaligned interests implicated the duty of loyalty, a claim premised solely on these conflicts would seemingly be non-viable if public stockholders had a fair opportunity to exercise their redemption rights.” “The deficient disclosures are viewed in the context of the disloyal behavior that caused them, through the lens of the relevant equitable standard of review.” Thus, although entire fairness applied, the court stated a complaint nonetheless must contain “well-pleaded allegations sufficient to establish the elements for a cause of action,” and that such pleading requirements were “enforced with special care in the context of representative litigation, … because in this sort of litigation the risk of strike suits means that too much turns on the mere survival of the complaint.” The court thus rejected the plaintiff’s assertion that the pleading standard was “relaxed” in SPAC cases.
Applying this standard, the court observed the plaintiff was “all in on his argument that Hennessy’s board and sponsor breached their fiduciary duties by failing to disclose McKinsey’s engagement and changes to [the company’s] business model.” Hennessy Capital, 2024 WL 2799044, at *11. The court found, however, that his position was “fatally flawed” for relying “on post-closing developments, strained inferences, and documents that contradict his theories.” The court reasoned that the plaintiff’s complaint at most supported “that McKinsey may have reached early recommendations about aspects of the company’s business in the fall i.e., around the time of the proxy statement, and that its work was ongoing when the merger closed in December 2020 … Delaware law does not, however, require the disclosure of preliminary analyses and discussions.” The court further reasoned that, even if it assumed that the “business shifted pre-closing, there are no facts from which I could fairly infer knowledge by Hennessy’s board. The assertion that an acquiror’s board ‘must have known’ about a target’s nascent internal analysis is strained.” Finally, the plaintiff’s reliance on a SEC cease-and-desist order critical of the company’s projections undercut the plaintiff’s complaint. Because it recited that pre-closing management “did not communicate” such problems to the SPAC, it did not support a claim that the disclosures in the SPAC’s proxy statement were materially misleading. In light of the foregoing, the Court of Chancery granted the defendants’ motions to dismiss.
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that SPAC litigation had become “ubiquitous” in the court,
Re: Multiplan: “The court’s focus was on the redemption right, which is a key protection so long as public stockholders can freely exercise it on an informed basis. These principles were confirmed in subsequent decisions where motions to dismiss were likewise denied under the entire fairness standard of review.”
Though the SPAC market has contracted, SPAC lawsuits are ubiquitous in Delaware. Remarkably similar complaints accuse SPAC directors of breaching their fiduciary duties based on flaws in years-old proxy statements that became problematic only when the combined company underperformed.
Poor performance is not, however, indicative of a breach of fiduciary duty. Conflicts are not a cause of action. And pleading requirements exist even where entire fairness applies.
It cannot fairly be inferred that the defendants withheld knowable information material to public stockholders deciding whether to redeem or invest in the combined company. To allow this faulty claim to proceed would fuel perverse incentives and invite strike suits.
In In re MultiPlan Stockholders Litigation, this court recognized that an impairment of public stockholders’ redemption rights may give rise to a direct breach of fiduciary duty claim.
The decision observed that features of founder shares compensating the SPAC’s sponsors and fiduciaries—namely, the lack of liquidation and redemption rights—created an inherent conflict of interest. Holders of founder shares received a unique benefit even from a value-destructive deal since they stood to make vast profits on a nominal investment. Public stockholders, by contrast, stood to gain only if their returns from investing in the combined entity exceeded the $10 liquidation (and redemption) price. As such, the entire fairness standard of review applied.
The linchpin of MultiPlan was ensuring that a public stockholder’s decision to redeem shares or participate in the merger be freely exercisable and fully informed. Although the fiduciaries’ misaligned interests implicated the duty of loyalty, a claim premised solely on these conflicts would seemingly be nonviable if public stockholders had a fair opportunity to exercise their redemption rights. The alleged unfairness of the de-SPAC transaction itself also could not support a direct claim, since corporate overpayment claims are classically derivative.
Given these considerations, a MultiPlan claim is narrow. Breach of fiduciary duty claims against SPAC fiduciaries have nevertheless proliferated in the Court of Chancery while SPACs have languished. Because many SPACs utilized the governance and compensation structure considered in MultiPlan, the court has consistently applied entire fairness to similar claims. The abundance of SPAC fiduciary duty claims suggests that stockholder plaintiffs have taken notice.
Even under the entire fairness standard, a complaint devoid of well-pleaded allegations sufficient to establish the elements for a cause of action will be dismissed. These pleading requirements are enforced with “special care” in the context of representative litigation. “The court cannot be satisfied with mere conclusions, as it might, for example, in an auto-accident case, because in this sort of litigation the risk of strike suits means that too much turns on the mere survival of the complaint.” SPAC suits are no exception.
The plaintiff nonetheless insists that the pleading standard is “relaxed” in the context of SPAC claims. This misperception of his burden may explain the flaws in his claims. He cites a single impairment of the redemption right: allegedly false disclosures about Legacy Canoo’s engineering services and subscription-based revenue streams. But no well-pleaded facts support a reasonable inference that changes to Legacy Canoo’s business model were known or knowable by Hennessy’s board before the merger closed. That is, no unfair dealing vis-à-vis the redemption right is pleaded. He has therefore failed to state a breach of fiduciary duty claim.
The plaintiff relies on post-closing developments, strained inferences, and documents that contradict his theories.
(“The complaint instead addresses actions by Canoo’s post-closing board—a body made up of directors who were (with one exception) not on Hennessy’s board. It cannot reasonably be inferred that Hennessy’s directors were aware that Legacy Canoo’s business model would change in the future.”)
(“Taken together and as true, these allegations indicate that McKinsey may have reached early recommendations about aspects of the company’s business in the fall, that its work was ongoing when the merger closed in December 2020, and that Aquila—at some point—developed concerns about the business. Delaware law does not, however, require the disclosure of preliminary analyses and discussions. For good reason. To require an unadopted, interim analysis to be disclosed would invite speculation about matters that may never solidify. To the extent the plaintiff claims that the proxy needed to disclose McKinsey’s retention, he cites no law suggesting that the ongoing engagement of a target’s outside advisor is material to an acquiror’s stockholders.”)
But there is more. Even if I credited the bare allegation that Legacy Canoo’s business shifted pre-closing, there are no facts from which I could fairly infer knowledge by Hennessy’s board. The assertion that an acquiror’s board “must have known” about a target’s nascent internal analysis is strained,
The SEC documents could perhaps support an inference that Legacy Canoo officers misrepresented the strength of the company’s projected contract engineering revenue. But the documents make it unreasonable to infer that Hennessy’s directors and officers knew or could have known about these issues. The plaintiff quotes the SEC’s allegation that Legacy Canoo and its officers were obligated to but “did not communicate the negative engineering updates or their associated negative impact on 2021 and 2022 projected revenue to Hennessy.” The cease and desist order goes further, concluding that Legacy Canoo actively “concealed material information from Hennessy” about engineering services prospects by presenting it with false revenue projections. I cannot conclude that the plaintiff has stated a claim for breach of fiduciary duty against Hennessy fiduciaries for failing to disclose information that was kept from them.
His conclusory assertion that the transaction was conflicted is also insufficient to show unfairness concerning the right to redeem. To allow these claims to proceed would serve only to launch “an extensive, litigious fishing expedition for facts through discovery in the hope of finding something to support them.”
