On January 3, 2022, the Delaware Court of Chancery issued an opinion denying motions to dismiss in In re Multiplan Corp. Stockholders Litigation, a stockholder action arising out of the completed business combination for Churchill Capital Corp III ("Churchill"), a special purpose acquisition company ("SPAC"), and Multiplan Inc. ("MultiPlan"). The court's opinion has important implications for SPAC sponsors, directors, officers and other stakeholders because of its application of traditional Delaware corporate law concepts to a "deSPAC" business combination transaction. This Legal Update (i) summarizes the facts alleged by the plaintiffs in the case and the court's conclusions; and (ii) provides key takeaways and practical considerations.

Background

CHURCHILL'S IPO AND BUSINESS COMBINATION WITH MULTIPLAN
As with virtually all modern SPACs, Churchill consummated an initial public offering ("IPO") without any business operations of its own and instead was formed for the sole purpose of searching for, and consummating a business combination with, an operating company; a process it had two years to complete following its IPO. In exchange for a purchase price of $10.00 per unit, investors in Churchill's IPO received units comprised of one share of Class A common stock and one-fourth of a warrant to purchase one share of Class A common stock at a strike price of $11.50. Churchill deposited $10.00 per unit sold in the IPO into a trust account, and funds placed in the trust account generally could be released only (i) upon completion of a business combination or (ii) in the absence of a business combination having been completed within the two-year window, upon dissolution and, in such case, the funds, plus interest, would be returned to Class A stockholders.

In keeping with standard SPAC market practice, prior to consummating any business combination, Churchill was required to offer its Class A stockholders the opportunity to redeem their Class A shares in connection with the consummation of such business combination. The redemption price would equal the investor's original $10.00 investment plus such investor's pro rata share of any interest earned on the funds while held in the trust account.

Churchill's founders received a "sponsor promote" in the form of shares of Class B common stock (also known as "founder shares") and warrants sold in a private placement that closed concurrently with the SPAC's IPO. The founder shares were purchased for a nominal price (in aggregate, $25,000) and the private placement warrants were purchased for an aggregate purchase price of $23 million, or $1.00 per warrant. Upon completion of a business combination, the founders' Class B common stock would automatically convert into Class A common stock. Following the IPO, the founders' Class B common stock represented 20% of Churchill's total outstanding common stock. Churchill's founders were led by Michael Klein who effectively controlled voting power with respect to the Class B shares, and thus Churchill, through a series of holding companies. According to the court, each of Churchill's directors had prior connections to Klein or his affiliates and was compensated with membership interests in a sponsor holding company, indirectly receiving economic interests in Class B shares and private placement warrants. 

Churchill consummated its IPO in February 2020, raising $1.1 billion and began its search for a target operating company with which to combine.

In July 2020, Churchill signed a business combination agreement with MultiPlan, a provider of data analytics technology and cost management solutions platform for the U.S. healthcare industry (the "Business Combination"). The Business Combination would result in MultiPlan becoming a wholly owned subsidiary of Churchill and effectively a publicly traded company. The Business Combination would be funded by the following sources:

  • $1.1 billion released from Churchill's trust account, net of any funds removed as a result of redemptions from Class A stockholders; and

  • $2.6 billion of proceeds from a PIPE (private investment in public equity) transaction, in which investors were sold new shares of Class A common stock, warrants and convertible notes.

On the same day that Churchill's board of directors approved the Business Combination, Churchill formally retained The Klein Group LLC as a financial advisor. The Klein Group was affiliated with Klein and allegedly received $30.5 million for its advisory services.

Prior to the stockholder meeting to approve the Business Combination, Churchill sent stockholders a proxy statement describing, among other things, the terms of the proposed Business Combination and providing detailed disclosures about MultiPlan's business, financial condition, prospects and possible risks. The proxy statement further described the events leading up to the Business Combination, including the "extensive due diligence" conducted by Churchill on MultiPlan.

The proxy statement also described the redemption right afforded to Churchill's Class A stockholders and stated that the redemption price would be approximately $10.04 per share. As of the record date for the stockholder meeting, Class A shares were trading at $11.09 per share.

Finally, the proxy statement also disclosed MultiPlan's dependence on a single customer—its largest—for 35% of its revenues. Critically, however, the proxy statement did not disclose that the customer was UnitedHealth Group Inc. ("UHC") or that UHC intended to create an in-house data analytics platform called Naviguard. Naviguard would allegedly both compete with MultiPlan and cause UHC to move all of its key accounts from MultiPlan to Naviguard by the end of 2022. According to the plaintiffs, UHC had publicly discussed its plan for Naviguard in June 2020, one month before Churchill agreed to the Business Combination.

In October 2020, Churchill and MultiPlan consummated the Business Combination with the holders of approximately 8.7 million of the 110 million outstanding Class A shares electing to exercise their redemption rights and approximately 93% of the shares casting a vote doing so in favor of the Business Combination.

THE LITIGATION
On November 11, 2020, an equity research firm published a report about MultiPlan discussing, among other things, UHC's formation of Naviguard. MultiPlan's stock price declined to $6.27 the following day. Plaintiffs filed complaints for putative class actions in March and April 2021. The cases were consolidated and an operative consolidated complaint was filed against Klein, certain other Churchill directors, officers, various affiliated entities and Churchill (now renamed MultiPlan Corporation). The consolidated complaint alleged, among other things, claims of breach of fiduciary duty by the defendants when they issued a materially false and misleading proxy statement that effectively impaired Class A stockholders' informed exercise of their redemption and voting rights. In May 2020, the defendants moved to dismiss the complaint (i) for failure to plead demand futility and (ii) for failure to state a claim upon which relief can be granted.

On January 3, 2022, the court denied these motions except with respect to one officer (only as to one count) and with respect to MultiPlan Corporation itself.

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