Most of the recent shareholder litigation that has followed the current wave of Special Purpose Acquisition Company (SPAC) offerings and associated business combinations has been based on federal securities law claims. However, as a case filed in the Delaware Court of Chancery, Kwame Amo vs. MultiPlan Corp. et al., highlights, SPAC sponsors, directors and officers also face a risk of state law breach of fiduciary claims, in which plaintiff asserts that the defendants’ actions should be judged under the heightened scrutiny of the entire fairness standard. It bears emphasis that the present complaint represents only plaintiff’s allegations, that the defendants have not yet responded to the pleading, and that the legal assertions it makes have not been tested by a motion to dismiss or other motion practice. But those pursuing SPAC transactions and their advisors will want to consider the possibility of such claims in structuring transactions.
What Are SPACs?
In the first three months of 2021, almost 300 SPACs went public with an average IPO size of about $325 million, already surpassing the 248 SPAC offerings in all of 2020. More than 200 SPAC business combinations have been announced since the beginning of 2020. And with this surge, more than 40 lawsuits have been brought against SPACs in the first months of 2021.
As set forth in more detail in a previous Kramer Levin Naftalis & Frankel client alert, SPACs are entities that raise money in an initial public offering and then use those funds in conjunction with the acquisition and resulting public listing of a target company. SPAC sponsors have discretion to identify private companies for acquisition within predefined industry sectors. Importantly, the SPAC generally must choose a target company and combine with it through a reverse merger (known as a “de-SPAC transaction”), typically within 18 to 24 months from the IPO date. If it fails to do so, the SPAC liquidates and the funds are returned to the public shareholders.
Overview of SPAC Litigation
Lawsuits filed thus far against SPACs have included a variety of claims, generally arising at one of two stages of the process: (1) before the de-SPAC transaction, relating to the terms and conditions of the deal, or (2) after the de-SPAC transaction, alleging securities law and fiduciary duty violations. These cases for the most part have pleaded claims under Sections 14(a) and 10(b) of the Securities Exchange Act, the federal securities laws’ proxy and antifraud provisions, and allege that the SPAC, its officers and its directors made false or misleading statements in SEC proxy disclosures or other filings, and misrepresented to investors the strength and prospects of the target company and the diligence performed. Conversely, in the Kwame Amo case, a shareholder plaintiff has utilized state law to bring breach of fiduciary duty claims.
State Law Claims: Kwame Amo vs. MultiPlan Corp. et al.
In Kwame Amo, a stockholder of MultiPlan Corp., f/k/a Churchill Capital Corp III, asserts breach of fiduciary duty claims under Delaware state law stemming from the merger of the SPAC, Churchill Capital Corp III, with MultiPlan. The complaint alleges that the sponsor of the SPAC (Michael Klein), as well as its board members, had conflicts of interest that incentivized them to go forward with the merger, even though it was not in the investors’ best interests. These conflicts allegedly stemmed first from the need to complete a deal within the SPAC’s two-year expiry period, failing which the “sponsor” or “founder” shares that had been granted to both the sponsor and the outside directors (totaling 20% of the equity in the case of the sponsor) for minimal consideration would be forfeited if no deal occurred and the SPAC funds were returned to investors. Plaintiff also alleged that the board members had deep personal and financial ties to the sponsor, several of whom had also been on the boards of other SPACs he had sponsored. In addition, the SPAC retained an entity affiliated with the sponsor, rather than an independent third party, as its financial advisor. The plaintiff also contends that the defendants breached their fiduciary duties because the disclosures surrounding the merger were allegedly false and misleading in that they highlighted the “extensive due diligence” performed and projected MultiPlan’s financial success, while failing to disclose that one of MultiPlan’s main customers was abandoning the company to create a competing business. Importantly, the complaint asserts that the defendants’ conduct should be judged under the entire fairness standard rather than the business judgment rule, a level of heightened scrutiny that, if applicable, would require the defendants to demonstrate that the transaction was both procedurally and substantively fair.
Some early items to note from consideration of the Kwame Amo complaint:
- In contrast to federal securities claims, which turn on whether there have been material misstatements or omissions, if entire fairness were found applicable, the complaint would put the burden on the defendants to defend not just the material truth of the disclosures (given parallel state law fiduciary disclosure claims) but also the fairness of the transaction. Entire fairness includes not only duties of fair process but also duties of fair price. The latter raises questions as to whether the measure of damages could be different in a federal securities action as opposed to a state law breach of fiduciary case.
- The allegations as to conflicts of interest extending to the outside directors and breach of loyalty claims against them raise the specter of non-exculpated claims under Delaware corporate law. In both federal and state actions, careful attention to the material disclosures remains, of course, paramount. However, it is relevant to the claims here, not just as to the substantive disclosure allegations themselves but also as to the possibility that shareholder approval of a transaction, based upon full disclosure, would potentially restore to the directors the protections of the business judgment rule as to these state law claims.
Given the proliferation of SPACs and SPAC litigation, it is possible that more state law fiduciary lawsuits will follow. As they structure transactions, conduct the related due diligence process, make disclosures and determine transaction valuations going forward, SPAC sponsors and directors should thus consider how best to avoid such claims.
 Some earlier cases, prior to the recent SPAC boom, had also alleged state law breach of fiduciary duty claims following de-SPAC transactions. See, e.g., AP Services v. Lobell, No. 651613/12, 2015 WL 3858818 (N.Y. Sup. June 19, 2015) (alleging breaches of fiduciary duty under SPAC structure in which a majority of SPAC directors held stock and warrants that would be rendered worthless absent a de-SPAC transaction).
 SPAC IPO Transactions, SpacInsider (last updated Mar. 31, 2021), available at https://spacinsider.com/stats/.
 Patrick Smith, Deal Watch: 2021’s Two Biggest Deals So Far, and It’s Already a Record Year for SPACs, Law.com (Mar. 15, 2021), available at https://www.law.com/americanlawyer/2021/03/15/deal-watch-2021s-two-biggest-deals-so-far-and-its-already-a-record-year-for-spacs/.
 Stephen Blake, Along Came SPACs, and Then SPAC Litigation, Law.com (Mar. 2, 2021), available at https://www.law.com/therecorder/2021/03/02/along-came-spacs-and-then-spac-litigation/.
 See, e.g., Welch v. Meaux et al, No. 19-cv-01260 (W.D. La. Sept. 26, 2019) (Shareholders of a SPAC that took Waitr Inc. public sued the SPAC sponsors under Sections 10(b) and 14(a) of the Exchange Act, among other provisions, for misleading them about the risks of Waitr’s business plan and causing them to lose money when Waitr’s shares plunged.).
 The “business judgment rule” is the default rule where the plaintiff has the burden of proof in challenging an officer’s or director’s business decisions which are presumed to be made in good faith. Where a majority of the directors approving the transaction are interested or where a majority stockholder stands on both sides of the transaction, the “entire fairness standard” is triggered. Under entire fairness review, the burden is on the defendants to prove that the transaction was fair in both process and price.
 See Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) (holding that merger between a limited partnership and limited liability company, where the board had allegedly failed to conduct a sale process compliant with Revlon v. MacAndrews & Forbes Holdings, Inc. 506 A. 2d 173 (Del. 1986), was nonetheless subject to business judgment rule review because the limited partnership was not a controlling stockholder of the LLC and the merger was approved by the fully-informed, un-coerced vote of the disinterested stockholders of the LLC.); see also In re Merge Healthcare., No. 11388-VCG, 2017 WL 395981 (Del. Ch. Jan. 30, 2017) (applying Corwin and the business judgment rule, notwithstanding allegations that the board had breached duties of loyalty, where the transaction had been approved by a fully informed, uncoerced stockholder vote and a controller did not sit on both sides of the transaction or compete with the common stockholders for consideration).