The court denied the defendants’ motion to dismiss, finding a conflicted transaction triggering the entire fairness standard of review. The conflict was rooted in the asymmetry of incentives between the SPAC Sponsor and the Sponsor-affiliated Board and the public stockholders during the pre-merger redemption process. In this context, the Court found that the plaintiffs adequately alleged that the defendants breached their fiduciary duties of loyalty, disclosure, and candor by failing to disclose – allegedly to prioritize their own personal and financial interests – material information necessary for the public stockholders to make an informed choice on redeeming their stock.
A SPAC is a publicly traded company that is created for one purpose: to raise capital through an initial public offering and then merge with a private company and take it public. Unlike most companies that go public, a SPAC has no operations of its own. SPACs are often created and controlled by an individual or management group known as the SPAC “sponsor.”
The SPAC in this case, Churchill Capital Corp. III (Churchill), was formed as a Delaware corporation in October 2019. Churchill’s $1.1 billion initial public offering closed in February 2020. Churchill’s Sponsor was compensated in the form of “founder” shares. The founder shares constituted 20 percent of the SPAC’s equity and were purchased for a nominal price ($25,000 for the entire 20 percent of the equity). The Sponsor was also compensated in the form of an option to purchase warrants in the SPAC, and Churchill made a private placement of 23 million warrants to the Sponsor at $1 each.
The Sponsor was led by defendant Michael Klein, who hand-picked the directors of the SPAC. The directors, in turn, were given valuable economic interests in the Sponsor. In contrast, the initial public stockholders purchased IPO units at $10 per unit, each of which consisted of one common share plus a fractional warrant. The proceeds of the IPO were placed into a trust account.
Once a potential merger was disclosed, but before the stockholder vote, the public stockholders would choose between (i) cashing out and receiving their $10 per unit back from the trust account plus interest, or (ii) investing in the post-combination entity. The public stockholders could choose to redeem their shares regardless of whether they voted for or against the merger. They would also retain their warrants at no cost. If the business combination occurred within a two-year completion window, the founder shares would convert into common stock upon closing. On the other hand, if the SPAC failed to close a transaction within that time, the SPAC would liquidate. The consequence of liquidation would be that the founder shares and the Sponsor’s warrants would be rendered worthless, but the public stockholders would receive a refund of their full investment plus interest.
Churchill’s Sponsor team selected MultiPlan, Inc., “a healthcare industry-focused data analytics and cost management solutions provider,” as their acquisition target. On September 18, 2020, Churchill issued its definitive proxy statement, containing information about the deal and soliciting stockholder votes. In response, the vast majority of the stockholders voted to approve the merger, and fewer than 10 percent of the public stockholders chose to cash out. The merger closed in October 2020, and the non-redeeming public stockholders became common stockholders in the new entity. The founder shares were likewise converted into common stock in the new entity.
After closing, the NewCo stock declined in value to “several dollars below” the $10 plus interest that the public stockholders would have received if they had chosen to cash out. However, the value of the post-closing shares in NewCo was pure upside to the Sponsor, whose original shares were purchased for a nominal price.