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Court of Chancery of Delaware: Applies Entire Fairness Standard to De-SPAC Merger

On January 3, 2022, the Court of Chancery of Delaware largely denied motions to dismiss in a class action for breach of fiduciary duties alleging that certain SPAC directors, officers, the SPAC’s sponsor, and the SPAC CEO/Chair who also ultimately controlled the SPAC sponsor (the “Controlling Stockholder”), withheld material information from the public stockholders, which allegedly impaired their informed exercise of their redemption and voting rights before the de-SPAC merger. In re MultiPlan S’holders Litig., 268 A.3d 784 (Del. Ch. Ct. 2022) (Will, V.C.).[1] Among other things, the court held that the entire fairness standard of review applied at the pleading stage.

The court determined that plaintiffs pleaded facts supporting a reasonable inference that the entire fairness standard of review—Delaware’s “most onerous standard of review”—applied rather than the more deferential business judgment rule. The court concluded that entire fairness applied on two independent bases because plaintiff alleged that: (i) the de-SPAC merger was a conflicted controller transaction; and (ii) a majority of the SPAC board was conflicted either because the directors were self-interested or because they lacked independence from the Controlling Stockholder.

The court explained that plaintiffs must adequately plead that the Controlling Stockholder engaged in a conflicted transaction, where either “the controller stands on both sides” (which did not apply because the court found that this was an arms-length transaction between two unaffiliated parties) or “the controller competes with the common stockholders for consideration.” The court explained that, among other things, a controller competes with the common stockholders when he “receives a unique benefit by extracting something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders to the detriment of the minority.” IRA Tr. FBO Bobbie Ahmed v. Crane, 2017 WL 7053964 (Del. Ch. 2017, revised 2018). The court determined that plaintiffs pleaded facts supporting a reasonable inference that there was a unique benefit to the Controlling Stockholder. The court pointed out that the merger had a value to the common stockholders if shares of the post-merger entity were worth $10.04, while the merger was valuable to the Controlling Stockholder “well below” $10.04 because the value of the Controlling Stockholder’s founder shares would drop to zero if no de-SPAC merger occurred.