In Re Multiplan Corp. Stockholders Litigation

Facts

Churchill Capital Corp. III (D)-a special purpose acquisition company, or SPAC-was formed as a Delaware corporation in October 2019. The SPAC's primary purpose was to seek out and combine with a private operating company. The SPAC closed its $1.1 billion initial public offering in February 2020. The SPAC's sponsor, led by Michael Klein (D), was compensated for its anticipated efforts in the form of 'founder' shares constituting 20% of the SPAC's equity and purchased for a nominal price. The SPAC's directors were hand-picked by Klein (D) and given valuable economic interests in the sponsor. The stockholders purchased IPO units consisting of one common share and a fractional warrant for $10 per unit. Churchill (D) sold 110,000,000 units at $10 per unit in its IPO. Each unit consisted of one share of Churchill (D) Class A common stock and a quarter of a warrant with an exercise price of $11.50. Investors who purchased units in the IPO could trade their shares and warrants separately on the New York Stock Exchange after a set time. Class A shares composed 80% of the outstanding stock. Class B founder shares, purchased by the Sponsor for an upfront capital contribution of $25,000, made up the remaining 20%. The founder shares would convert into Class A shares at a one-to-one ratio (subject to adjustments) if Churchill (D) succeeded in consummating an initial business combination. The Sponsor was also compensated through an option to purchase warrants in the SPAC. Churchill (D) made a private placement of 23 million warrants to the Sponsor at $1. The Private Placement Warrants had an exercise price of $11.50. Churchill (D) had 24 months to find a merger partner. Klein (D), through his control of the Sponsor, had the exclusive power to appoint Churchill's (D) board of directors. The Board members were compensated with membership interests in the Sponsor, indirectly receiving economic interests in the founder shares and the warrants. The SPAC was structured around giving public stockholders the choice between redeeming their $10 investment from the trust and investing in the post-combination entity after an acquisition target was identified. If the SPAC merges with an operating company the founder shares would convert into common shares upon closing. If no transaction is completed, the SPAC liquidates, the founder shares are worthless, and the stockholders receive back the full value of their investment with interest. Ds approved the merger, and then formally retained The Klein Group LLC (D) as a financial advisor with respect to the merger. Ds and certain other parties entered into an Investor Rights Agreement. The Sponsor's converted Class A shares would become subject to an 18-month lock-up period. The SPAC selected MultiPlan, Inc and issued a proxy statement. MultiPlan would become a wholly owned subsidiary of Churchill (D) and Churchill (D) would rename itself MultiPlan Corporation. The Proxy disclosed that MultiPlan was dependent on a single customer-its largest-for 35% of its revenues. It 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 which was in direct competition with MultiPlan. Very few stockholders redeemed and the vote on the merger was overwhelmingly in favor. The transaction closed in October 2020 and the SPAC's non-redeeming stockholders became stockholders in the combined entity. On November 11, 2020, an equity research firm published a report about MultiPlan and UHC's formation of Naviguard. The stock fell to a then-closing low of $6.27 the following day. Of course, the founder shares, which converted into shares of the post-merger entity, were in the money. Ps sued Ds for issuing a false and misleading proxy that impaired Class A stockholders' informed exercise of their redemption and voting rights. Ds moved to dismiss Ps' claims under Chancery Rule 23.1 for failure to plead demand futility and under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Ds alleged that Ps failed to plead demand futility and that the business judgment rule applies. Ps assert that Klien (D) and Ds were interested in the transaction whereas the entire-fairness standard was applicable.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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