In re MultiPlan Corp. Stockholders Litigation

• Decision Date: 03 January 2022
• Docket Number: CONSOLIDATED C.A. No. 2021-0300-LWW
• Citation: 268 A.3d 784
• Parties: IN RE MULTIPLAN CORP. STOCKHOLDERS LITIGATION
• Court: Court of Chancery of Delaware

268 A.3d 784

IN RE MULTIPLAN CORP. STOCKHOLDERS LITIGATION

CONSOLIDATED C.A. No. 2021-0300-LWW

Court of Chancery of Delaware.

Date Submitted: September 20, 2021

Date Decided: January 3, 2022

Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Mark Lebovitch, Daniel E. Meyer, Margaret Sanborn-Lowing, and Joseph W. Caputo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Counsel for Plaintiffs Kwame Amo and Anthony Franchi

Raymond J. DiCamillo, Kevin M. Gallagher, and Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Jonathan K. Youngwood and Rachel S. Sparks Bradley, SIMPSON THACHER & BARTLETT LLP, New York, New York; Stephen P. Blake, SIMPSON THACHER & BARTLETT LLP, Palo Alto, California; Counsel for Defendant MultiPlan Corporation f/k/a Churchill Capital Corp. III

Bradley R. Aronstam and S. Michael Sirkin, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; John A. Neuwirth, Joshua S. Amsel, Evert J. Christensen, Jr., Matthew S. Connors, and Nicole E. Prunetti, WEIL, GOTSHAL & MANGES LLP, New York, New York; Counsel for Defendants Michael Klein, Jay Taragin, Jeremy Paul Abson, Glenn R. August, Mark Klein, Malcolm S. McDermid, Karen G. Mills, Michael Eck, M. Klein and Company, LLC, Churchill Sponsor III, LLC, and The Klein Group, LLC

WILL, Vice Chancellor

Churchill Capital Corp. III—a special purpose acquisition company, or SPAC—was formed as a Delaware corporation in October 2019. Lacking operations of its own, the SPAC's primary purpose was to seek out and combine with a private operating company. The SPAC closed its $1.1 billion initial public offering in February 2020.

The SPAC's sponsor, led by Michael Klein, was compensated for its anticipated efforts in the form of "founder" shares constituting 20% of the SPAC's equity and purchased for a nominal price. The SPAC's directors were hand-picked by Klein and given valuable economic interests in the sponsor.

The SPAC's initial public stockholders, on the other hand, purchased IPO units consisting of one common share and a fractional warrant for $10 per unit. The IPO proceeds were placed into a trust account. The SPAC was structured around giving public stockholders the choice between redeeming their $10 investment from the trust and investing in the post-combination entity after an acquisition target was identified.

If the SPAC entered into a business combination within its two-year completion window, the founder shares would convert into common shares upon closing. But if no transaction was completed, the SPAC would liquidate—leaving the founder shares worthless. Public stockholders, on the other hand, would receive back the full value of their investment with interest.

The SPAC's sponsor team selected MultiPlan, Inc. as its target. The SPAC issued a proxy statement that solicited stockholder votes on the deal and informed public stockholders’ redemption decisions. Few stockholders redeemed and the stockholder vote on the merger was overwhelmingly in favor. The business combination closed in October 2020 and the SPAC's non-redeeming stockholders became stockholders in the combined entity. After closing, these shares declined in value to several dollars below the $10 plus interest the public stockholders could have received had they chosen to redeem. By contrast, the founder shares, which converted into shares of the post-merger entity, were pure upside to the SPAC's insiders.

The plaintiffs allege that the SPAC's fiduciaries—motivated by financial incentives not shared with public stockholders—impaired the public stockholders’ right to divest their shares before the business combination occurred. According to the Complaint, material information indicating that MultiPlan's largest customer was building an in-house platform to compete with MultiPlan was withheld. The defendants have moved to dismiss the plaintiffs’ claims on several grounds—primarily, that the plaintiffs have alleged derivative claims but failed to plead demand futility and that the business judgment rule applies.

Many of the parties’ arguments center around the unique characteristics of a SPAC. Though SPACs are a popular vehicle for private companies to access the public markets, Delaware courts have not previously had an opportunity to consider the application of our law in the SPAC context. In this decision, well-worn fiduciary principles are applied to the plaintiffs’ claims despite the novel issues presented. Doing so leads to several conclusions.

The plaintiffs have pleaded direct claims that center around the purported impairment of their redemption rights. The entire fairness standard of review applies due to inherent conflicts between the SPAC's fiduciaries and public stockholders in the context of a value-decreasing transaction. And the plaintiffs have pleaded viable, non-exculpated claims against the SPAC's controlling stockholder and directors.

It bears emphasizing that my conclusions stem from the fact that a reasonably conceivable impairment of public stockholders’ redemption rights—in the form of materially misleading disclosures—has been pleaded in this case. Many of the features that I consider in this opinion are common to SPACs, although some entities have more bespoke structures intended to address conflicts. The mismatched incentives relevant here were known to public stockholders who chose to invest in the SPAC. But those stockholders were allegedly robbed of their right to make a fully informed decision about whether to redeem their shares. Accordingly, and for the reasons discussed below, the defendants’ motions to dismiss are denied except as to two named defendants.

I. BACKGROUND

The following facts are drawn from the Verified Class Action Complaint for Breach of Fiduciary Duties (the "Complaint") and the documents it incorporates by reference.¹ Any additional facts discussed in this Opinion are subject to judicial notice.²

A. Churchill's Formation

Defendant Churchill Capital Corp. III ("Churchill" or the "Company") was formed in October 2019 to serve as a special purpose acquisition company.³ A SPAC—also called a blank check company—is a publicly traded company that raises capital through an initial public offering to realize a single goal: merge with a private company and take it public.⁴ Unlike most companies that go public, a SPAC has no operations and its assets are effectively limited to its IPO proceeds.⁵

SPACs are often formed and controlled by an individual or management group, referred to as the SPAC's "sponsor." The sponsor's primary job is to identify a target for a "de-SPAC" merger. Churchill was no different. Defendant Michael Klein, a former chairman of Citigroup's institutional clients group, incorporated Churchill as a Delaware corporation through defendant Churchill Sponsor III, LLC (the "Sponsor").⁶ The Sponsor's managing member is M. Klein Associates, Inc., whose sole stockholder is Klein.⁷

Churchill, Klein's third SPAC (of at least seven), was formed in the midst of a SPAC boom.⁸ In 2013, ten SPACs went public, raising a total of $1.4 billion. By 2019, SPAC IPOs numbered 59, with $13.6 billion raised. Those figures more than quadrupled and sextupled, respectively, in 2020, when 248 SPAC IPOs raised a total of $83.4 billion.⁹

B. Churchill's IPO

Churchill went public in a $1.1 billion IPO on February 19, 2020.¹⁰ Its prospectus explained that Churchill was a "newly incorporated blank check company formed as a Delaware corporation for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses."¹¹

Churchill sold 110,000,000 units at $10 per unit in its IPO.¹² 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 Both the unit price and composition were market standard. Public investors who purchased units in the IPO could trade their shares and warrants separately on the New York Stock Exchange after a set time.¹⁴

Churchill's Class A shares composed 80% of Churchill's outstanding stock. Class B founder shares, purchased by the Sponsor for an upfront capital contribution of $25,000, made up the remaining 20%.¹⁵ That 20% stake—a so-called "promote"—was the Sponsor's chosen form of compensation. The founder shares would convert into Class A shares at a one-to-one ratio (subject to adjustments) if Churchill succeeded in consummating an initial business combination.¹⁶

The Sponsor was also compensated through an option to purchase warrants in the SPAC. Churchill made a private placement of 23 million warrants to the Sponsor at $1 each (the "Private Placement Warrants").¹⁷ Like the warrants associated with the IPO units, the Private Placement Warrants had an exercise price of $11.50.¹⁸

Churchill's "completion window" for a business combination ended 24 months after the IPO—also market standard.¹⁹ If no transaction was completed by then, Churchill would return the IPO proceeds plus interest to its stockholders, cease operations, and wind up.²⁰ In this scenario, both the Class B shares and Private Placement Warrants would expire worthless.²¹

C. Churchill's Directors and Officers

Klein, through his control of the Sponsor, had the exclusive power to appoint Churchill's board of directors (the "Board").²² Klein initially appointed himself, along with defendants Jeremy Paul Abson, Glenn R. August, Mark Klein, Malcom S. McDermid, and Karen G. Mills, to the Board. He later added defendant Michael Eck and non-party Bonnie Jonas.²³ Klein served as Churchill's Chief Executive Officer and Chairman.²⁴ Defendant Jay Taragin served as Churchill's Chief Financial Officer.²⁵

The Board members (other than Klein's brother Mark Klein) were compensated with membership interests in the Sponsor, indirectly receiving economic interests in the founder shares and Private Placement Warrants without diluting Klein's control of Churchill.²⁶ Abson, Eck, and...