The complaint filed in
The Complaint
In
Directors Appointed by Sponsor Were Not Independent and Not Aligned with Public Stockholders
- Churchill, as the sponsor, received founders shares representing the right to purchase 20% of the equity of the SPAC for nominal consideration and the voting Class B stock, which gave it Board control. The sponsor gave the directors of the SPAC a portion of these founders shares and so-called private warrants. The complaint highlights that, if an acquisition was not completed within the two year window, then this equity would be worthless, but that if an acquisition closed within that period, then these parties would stand to gain mightily. The major thrust of the complaint is that the financial incentive created by these equity stakes put the interests of the sponsor and the Board on a different level than the public stockholders, with the sponsor favoring itself above the interests of the public shareholders. Thus, the complaint claims, these financial incentives gave rise to a clear conflict of interest with respect to any deal—the Board was “hopelessly conflicted”—which warranted a review by the Board of the proposed merger under the entire fairness standard as a matter of
Delaware law, which did not happen. - The complaint alleges that the Board was composed of individuals who were beholden to the sponsor and its CEO, one being his brother, several being officers of the sponsor, and others serving on the board of directors of other SPACs affiliated with the sponsor, thus eliminating their genuine independence.
Defective Disclosure
- The plaintiff claims that the disclosure in the proxy statement regarding the merger with
Multiplan Corp. was defective for reasons that the sponsor and management team should have known. The complaint suggests that the financial incentives and rush to get the deal done by the SPAC led to inadequate exercise by the Board and management of their duty of care regarding due diligence and related disclosure about the target and its risks.
Conflicted Financial Advisor
- The plaintiff notes that not only did the Board not engage an independent, third-party financial advisor to assess the proposed merger, but that the Board retained the financial advisor controlled by the Chairman and CEO of the SPAC for a
$30 million fee, representing another conflict of interest.
Unreasonable Projections
- The projections regarding the combined business contained in the proxy statement, which formed the basis of public stockholders' review of the merger, were unreasonably optimistic. There is also a suggestion, which is not clear, that the Board may have relied on a different set of projections in making their determination to proceed with the transaction.
Status & Observations
An answer to the complaint has not yet been filed, nor have the defendants filed any motion to dismiss the complaint. So, this litigation is still in the very early stages. But it raises a number of issues that are worth watching, such as whether:
- the fiduciary breach claims state a claim sufficient to withstand a motion to dismiss—meaning that, as a matter of law, if all of the facts pleaded are true, whether there is a colorable claim under
Delaware law as to a breach of fiduciary duties regarding conflicts of interest of the SPAC's Board. Cases under the entire fairness standard of review are typically difficult to dismiss at the motion to dismiss stage; - SPAC sponsors ensure that there are more independent and disinterested directors on the board of directors, and alter the compensation paid to them so that they are less vulnerable to duty of loyalty claims;
- there is an increased reluctance of people to serve on the boards of directors of SPACs, in light of the non-exculpable exposure they face in actions alleging breach of duty of loyalty;
- boards of directors of SPACs and targets adopt different review processes regarding merger decisions, including with respect to setting up special committees, documenting their due diligence in a different manner, retaining an independent financial advisor, receiving a fairness opinion and disclosing the contents of that fairness opinion in the proxy statement;
- the proxy statements contain enhanced disclosure regarding the assumptions and risks regarding projections, and whether to include more than one set of projections (such as downside, base case and upside sets of projections), about which there has been speculation in the market; and
- future SPAC structures alter the allocation of incentives compared to what has become a fairly standard 20% sponsor promote, among other things.
Of course, the complaint only tells one side of the story, and we do not have enough information to evaluate the strengths or merits of the claim, but it is noteworthy to see these claims being raised in the SPAC context and a potential harbinger of things to come.
Footnotes
1 Complaint,
2
Originally Published by The CLS Blue
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