Regular readers know that I have been documenting on this blog the recent rise in securities class action lawsuit filings relating to SPAC entities and transactions (most recently here). Along the way, I have suggested that given the sheer amount of SPAC IPO activity during 2020 and 2021, the volume of this type of litigation is likely to increase. The latest evidence supporting this possibility is the securities class action lawsuit filed on February 24, 2021 against MultiPlan Corporation, a health services company that in October 2020 merged into a SPAC. As discussed below, this latest lawsuit has several features that could be recur in future SPAC-related securities lawsuits. A copy of the February 24, 2021 complaint against MultiPlan and other defendants can be found here.
Churchill Capital Corp. III (“Churchill III”) is a Special Purpose Acquisition Corporation (SPAC) that completed an IPO on February 14, 2020. The IPO was sponsored by M. Klein and Company, which the subsequent securities class action complaint describes as “one of the most prolific creators of blank check companies in the world, having launched at least seven such companies which have raise billions of dollars.”
On July 13, 2020, Churchill III announced that it had entered into an agreement, subject to shareholder approval, to merge with MultiPlan Corp. MultiPlan is a data analytics firm that provides cost management solutions to the U.S. healthcare industry. Its customers include, among others, large national insurance companies. The merger was to be funded with the proceeds of the IPO as well as new debt and equity issuances. At the completion of the transaction, the merged company was to be known as MultiPlan. In an October 7, 2020 vote, Churchill III shareholders approved the merger and related financing.
On November 11, 2020, short seller Muddy Waters Research published a report entitled “MultiPlan: Private Equity Necrophilia Meets The Great 2020 Money Grab” (here). Among other things, the Muddy Waters report claimed that at the time of the merger, MultiPlan was in the process of losing its largest client, UnitedHealthcare, which, the report claimed, could cost the company about 35% of the company’s revenues and 80% of its levered free cash flow in the next two years. The report further claimed that United Healthcare had launched a competitor, Naviguard, to reduce its business with MultiPlan. The report further claimed that MultiPlan had obscured its deteriorating financial position by manipulating cash reserves to show inflated earnings. The report also stated that the undisclosed pricing pressures had caused the company to cut its “take rate” from customers in half in some instances.
The report further claimed that MultiPlan’s four prior private equity owners had “looted the business” for cash in the lead-up to the merger, and that the prior private equity owners could not find anyone to buy the business after the cuts. The report further stated that the company sought to “buy” revenue growth by acquiring smaller, supposedly “inferior” companies, to mask eroding fundamentals. According to the subsequently filed securities class action lawsuit, MultiPlan’s share price fell to $6.12 per share, about 40% below the price at which shareholders could have redeemed their shares at the time of the shareholder vote on the merger.
On February 24, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against MultiPlan and several other defendants. The list of defendants named includes individuals who allegedly served as individual pre-merger board members of Churchill III; Churchill III’s pre-merger Chairman and CEO, Michael Klein, who also is the founder of the SPAC sponsor, M. Klein and Company; and Churchill III’s pre-merger CFO, who is also the CFO of M. Klein and Company.
In addition, the individual defendants also include the pre-merger “Operating Partner” of Churchill III, as well as the pre-merger Chairman and CEO of MultiPlan, who continued in that role at the post-acquisition company following the merger; and the pre-merger CFO of MultiPlan, who continued in that role at the post-acquisition company after the merger. The defendants also include the SPAC sponsor M. Klein and Company and certain other Klein-related entities.
The complaint purports to be filed on behalf of (i) all purchasers of Churchill III securities between July 12, 2020 (the date the parties entered the merger agreement) and November 10, 2020 (the date before the Muddy Waters report was published); and (ii) all holders of Churchill III Class A common stock entitled to vote on Churchill III’s merger with and acquisition of Polaris Parent Corp. and its consolidated subsidiaries (collectively “MultiPlan”) consummated in October 2020. The complaint alleges that the defendants violated Section 10(b), 14(a), and 20 (a) of the Securities Exchange Act of 1934.
The complaint quotes extensively from the proxy statement published prior to the merger; public statements by executives of Churchill III and of MultiPlan prior to the merger; and the Muddy Waters report. The complaint alleges that the defendants made false or misleading statements or failed to disclose
- that MultiPlan was losing tens of millions of dollars in sales and revenues to Naviguard, a competitor created by one of MultiPlan’s largest customers, UnitedHealthcare, which threatened up to 35% of the Company’s sales and 80% of its levered cash flows by 2022;
- that sales and revenue declines in the quarters leading up to the Merger were not due to “idiosyncratic” customer behaviors as represented, but rather due to the fundamental deterioration in demand for MultiPlan’s services and increased competition, as payors developed competing services and sought alternatives to eliminating successive healthcare costs;
- that MultiPlan was facing significant pricing pressures for its services and had been forced to materially reduce its take rate in the lead up to the Merger by insurers, who had expressed dissatisfaction with the price and quality of MultiPlan’s service and balanced billing practices, causing the Company to cut its take rate by up to half in some cases;
- that, as a result of (a)-(c) above, MultiPlan was set to continue from revenue and earning declines, increased competition and deteriorating pricing dynamics following the Merger;
- that, as a result of (a)-(d) above, MultiPlan was forced to seek continued revenue growth and to improve its competitive positioning through pricey acquisitions, including through the purchase of HST for $140 million at a premium price from a former MultiPlan executive only one month after the Merger; and
- that, as a result of (a)- (e) above, Churchill III investors had grossly overpaid for the acquisition of MulitPlan in the Merger, and MultiPlan’s business was worth far less than represented to investors.
The complaint also contains certain allegations pertaining to the structure of the SPAC itself and to its administration. Thus, the complaint alleges that as the SPAC was structured, the SPAC sponsor and insiders “would be richly rewarded” if the SPAC completed the projected business combination in the initial two year time frame. The sponsor company defendants were issued founder shares equal to 20% of the Churchill III’s outstanding common shares after the IPO, but only if Churchill III completed the projected business combination. The sponsor defendants also purchased 23 million private placement warrants that would expire worthless if the business combination was not achieved. As a result, the complaint alleges, the sponsor defendants and the Churchill III individual defendants “were highly incentivized to complete an initial business combination and to convince shareholders to approve the Merger.”
In Count II of the complaint, alleging violations of Section 14(a), and in which the plaintiff seeks damages for alleged material misrepresentations and omissions in Churchill III’s pre-merger proxy statement, the complaint alleges that “as a direct result of defendants’ negligent preparation, review, and dissemination of the false and/or misleading Proxy, plaintiff and the Class were precluded from exercising their right to seek redemption of their Churchill III shares prior to the Merger on a fully informed basis and were induced to vote their shares and accept inadequate consideration in connection with the Merger.”
UPDATE: On March 25, 2021, a plaintiff shareholder filed a class action lawsuit in Delaware Chancery Court against MultiPlan, certain of its directors and officer, and a number of the former directors and officers of Churchill. The Delaware complaint seeks to recover damages on behalf of investors who purchased shares in Churchill between the record date and the closing data. The Delaware court asserts claims based on the defendants’ alleged breaches of fiduciary duty and alleged breaches of other common law duties. The Delaware complaint can be found here.
By my count, this lawsuit represents the fourth SPAC-related securities class action lawsuit to be filed so far this year – and the second SPAC-related lawsuit to be filed just in the past week. In addition to these securities class action lawsuits seeking damages and alleging violations of Section 10(b), there have also been a number of pre-transaction merger objection lawsuits filed against SPAC companies, typically alleging violations of Section 14(a), and typically filed individually rather than on behalf of a plaintiff class.
As I have noted in connection with several of the prior SPAC-related securities class action lawsuits, it is important to note that the defendants named in the post-deSPAC transaction lawsuit include not only individual directors and officers of the go-forward operating company, but also individual directors and officers of the pre-transaction SPAC company. Indeed, it appears that the list of the individual defendants in this lawsuit includes all of the individual SPAC company directors. Interestingly, the list of defendants also includes the SPAC sponsor and affiliated entities.
The allegations in the complaint are also noteworthy because of their extensive reference to the financial incentives of the SPAC sponsor and of the SPAC insiders to complete an acquisition in the specified investment period. The allegations are also noteworthy because of the specific reference to the SPAC investors’ right to redeem their shares at the time of de-SPAC transaction. The complaint alleges that the investors were induced to forbear from redeeming their shares based on the alleged financial misrepresentations about the target company.
The complaint’s reference to the investors’ redemption rights are interesting to me because of the attention Stanford Law Professor Michael Klausner has drawn to these redemption rights in his academic publications and also in a January 6, 2021 Wall Street Journal op-ed article entitled “The SPAC Bubble May Burst – and Not a Day Too Soon”(here). Klausner’s commentary is more focused on the dilutive impact the investors’ exercise of their rights could have on a SPAC company’s cash position, but it is focused in the redemption rights as a source of tension in the SPAC structure and operation.
I emphasize here the allegations in the complaint about the SPAC structure and administration because many of the SPAC-related lawsuits have been focused on the company acquired in the deSPAC transaction and its post-deSPAC operations. To be sure, the crux of this lawsuit is the financial health of MultiPlan, both before and after the merger. However, at noted, there are also allegations about the SPAC itself. This seems important to me, as I suspect that in future SPAC-related lawsuits we may see more allegations relating to the SPAC itself.
The complaint is also noteworthy for its focus on one of the successful, serial SPAC sponsor firms. As Professor Klausner’s op-ed article notes, there is a SPAC industry at work, that accounts for the over 400 SPAC IPOs that have been completed since January 1, 2020. This SPAC industry has to hum along in 2021, as there have already been (as of February 25, 2021) 176 completed SPAC IPOs this year, with many more in the pipeline. Given these dynamics, it arguably is unsurprising that the SPAC industry might itself become a focus of attention.
All of the foregoing notwithstanding, it is also important to note that this complaint depends heavily on the highly incentivized report of short-seller Muddy Waters. For that reason, there is reason to be skeptical, both of the report and of the complaint. It remains to be seen how the complaint will fare.
While I am wary of predicting anything about this particular lawsuit, I do feel comfortable that we will be seeing further SPAC-relates securities class action litigation in the weeks and months ahead. The sheer volume of SPAC-relates financial activity virtually guarantees it.