Is a Landmark SPAC Court Case on the Horizon?

By Jake Rickman​

What do you need to know this week?

Michael Klein, a lead sponsor for the disappointing SPAC deal involving the acquisition of MultiPlan, will have to defend himself in a Delaware court claim alleging he and others failed to uphold their fiduciary duties to SPAC investors. This comes after the Delaware court refused Klein’s motion to dismiss the case, which will now move into the fact-finding stage.

In 2020, Klein created a “blank cheque” public company called Churchill, in which investors could buy shares worth $10 each. In exchange for managing the process, Klein received 20% of Churchill’s shares.

At the point Klein nominated MultiPlan as the SPAC’s target, investors had the option to either redeem their shares for the amount they paid or combine their shares with MultiPlan. Most shareholders opted for the latter, hoping that the value of their shares would increase following the merger.

In fact, the opposite happened: following the merger, the shares sunk to $5, largely because MultiPlan lost a key customer. The shareholders allege Klein knew this and did not disclose it to the shareholders.

Why is this important for your interviews?

We have discussed previously how SPACs operate and why regulators are scrutinising them. The dispute between Klein and Churchill shareholders could be a landmark test case that clarifies to what extent, if any, SPAC sponsors owe unique duties of care to their investors.

If you can summarise the key commercial and legal uncertainties surrounding SPACs, you will show interviewers your understanding of the interplay between both fields.

SPACs are unique legal creatures because the way they are commonly structured arguably creates perverse incentives for the individuals responsible for managing the SPAC (the sponsors).

Churchill shareholders argue that Klein breached the fiduciary duties he owed them by not disclosing that he knew MultiPlan was losing a key customer because, given he received his shares for free, he was motivated to finalise the merger at any price — rather than a price competitive for shareholders.

Klein argues he acted in good faith and is relying on the “business judgment rule”, which is a common law principle that limits a court’s ability to question company directors’ decisions made in good faith.

The legal position is entirely unclear: but it might be that the judge rules SPAC sponsors must take steps to ensure the integrity of their decisions, such as by appointing an independent board of directors. This could further disrupt the market for SPACs.

How is this topic relevant to law firms?

As this case demonstrates, SPACs raise potentially novel issues related to corporate governance. This case could change the legal and commercial landscape surrounding SPACs and require sponsors to obtain additional advice that ensures they are protecting the interest of shareholders.

The shareholders claiming against Churchill and Klein are represented by Richards, Layton & Finger and Simpson Thacher & Bartlett. Klein is represented by Weil, Gotshal & Manges and Ross Aronstam & Moritz. MultiPlan is represented by Bernsteil Litowitz Berger & Grossmann.
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