In January of this year, when the Delaware Chancery Court sustained the Delaware state court direct action filed against the directors and officers of the SPAC that had acquired MultiPlan Corp., I speculated that the Court’s ruling would encourage other disgruntled SPAC investors to bring similar Delaware direct actions against SPAC management.
Consistent with my speculation, on March 18, 2022, a plaintiff shareholder filed a direct action for breach of fiduciary duty against certain former directors of officers of Decarbonization Plus Acquisition Corporation, a special purpose acquisition company (SPAC), that in July 2021 merged with Hyzon Motors USA to form Hyzon Motors Inc. The claim is brought on behalf of SPAC investors who were entitled to redeem their shares at the time of the merger. The plaintiff claims that the defendants’ misrepresentations about the merger deprived the plaintiff class of their right to make an informed redemption decision. The claims asserted on behalf of the investors are not only very similar to the allegations previously raised in the MultiPlan litigation, but the new complaint expressly quotes the dismissal motion denial ruling in the MultiPlan ruling. As discussed below, this latest lawsuit may indicate a likely future direction for SPAC related litigation. A copy of the complaint in the new Delaware state court direct action can be found here.
Decarbonization completed an IPO on October 26, 2020. On February 19, 2021, Decarbonization announced its plan to merge with Hyzon Motors USA, a commercial hydrogen fuel cell vehicle developer. The companies completed the merger on July 19, 2021, with Hyzon as the surviving publicly traded company operating under the new name, Hyzon Motors, Inc.
According to the subsequently filed complaint, during the period after the merger was announced and before it closed, the SPAC published a number of statements about the pending vehicle orders Hyzon had received from customers around the world. The proxy statement filed in connection with the proposed merger also included statements about vehicle orders and the expectation that the orders would be fulfilled during 2021. In public statements and financial releases after the merger, Hyzon also included statements about vehicle orders and anticipated 2021 vehicle shipments.
On September 28, 2021, Blue Orca Capital, an investment firm with a short position in Hyzon stock, issued a report raising a number of questions about Hyzon. Among other things, the Blue Orca report claimed that “Hyzon’s largest customer is a fake-looking Chinese shell entity formed 3 days before the deal was announced.” The report also stated that the company’s next largest customer is “not really a customer” but a “channel partner” assisting Hyzon in marketing vehicles to real customers in New Zealand. The report claimed that “phantom big name customers suggest overstated orders and financial projections.” The report stated that former executives had left the company because of concerns about “misrepresentations on customer contracts.” The company’s share price fell 28% on the news. These circumstances are the subject of a separate securities class action lawsuit filed in the Western District of New York in late September 2021, as discussed here.
The Delaware State Court Chancery Lawsuit
The latest complaint, filed in Delaware Chancery Court on March 18, 2022, is brought on behalf of all investors in the Decarbonization SPAC who were entitled to redeem their SPAC shares in connection with the merger. The complaint names as defendants not only certain directors and officers of the SPAC, but also the SPAC Sponsor, the investment firm that formed the sponsor, and other SPAC-related financial entities.
The complaint alleges that investors’ redemption rights were “unlawfully impaired due to Defendants’ misstatements and omissions about Hyzon’s true business metrics and financial prospects in connection with the Merger” and that the defendants’ false statements “deprived the Class …of their right to a fully informed decision whether to redeem their shares and induced stockholders to vote to approve the Merger to their detriment and the substantial benefit of Defendants.”
In alleged support of the position of the class, the complaint alleges that the defendant directors were conflicted in their consideration of prospective merger candidates. The director defendants, the complaint alleges, were compensated for their service in Founder’s Shares, as a result of which the defendants were highly financial motived to complete a deal, any deal, in order to reap alleged financial windfalls that were unavailable to the SPAC’s common shareholders. These circumstances, the complaint alleges, created a conflict of interest between the director defendants, on the one hand, and the public shareholders, on the other hand, such that the merger transaction should be reviewed by the court under the “fairness standard.” In support of its assertion that the entire fairness standard applies, the complaint expressly cites to the court’s dismissal motion ruling in the MultiPlan case.
The complaint alleges that because of these alleged conflict of interest “Defendants issued materially false and misleading statements in support of the Merger, which were designed to discourage stockholders from exercising their Redemption Rights. Instead, Defendants encouraged stockholders to approve the Merger.” Among other things, the complaint alleges, the defendants misrepresented the nature and extent of Hyzon’s customer demand and further that Hyzon’s financial projections were “grossly inflated and lacked a reasonable factual basis.”
The complaint seeks direct claims for breach of fiduciary duty claims both against the director defendants and against the Sponsor and related financial entities (the so-called “Controller Defendants”). The complaint seeks to recover damages on behalf of the plaintiff class. The complaint also seeks with respect to class members who had the right of redemption and still hold their shares, “equitably re-opening the redemption window to allow them to redeem their shares at the prior redemption price, as per the terms of the Company’s foundational documents.” The complaint seeks alternative “rescinding the Merger and returning the capital raised in Decarb’s IPO to the Company’s public stockholders, as well as all other rescissory damages.”
As I noted at the time of the dismissal motion denial in the MultiPlan case, Vice Chancellor Will’s conclusion that the “entire fairness” standard applied to the Court’s review of the transaction of that case had important implications. As Vice Chancellor Will herself noted, dismissal motions considered under the entire fairness standard are much less likely to be granted. The possibility that a transaction might be reviewed under this standard creates interesting possibilities for prospective claimants, as it raises the possibility that a claim to which that standard applied would be much less likely to be granted.
The plaintiff in this new case has taken great pains to establish that his claims are subject to the entire fairness standard. Indeed, the complaint is clearly intended to identify nearly an identical pattern of allegations to the one raised in the MultiPlan case; just in case the parallel between the two cases is missed, the complaint expressly quotes from Vice Chancellor Will’s statements concerning the reasons for the application of the entire fairness standard in the MultiPlan case.
Vice Chancellor Will expressly recognized in the MultiPlan case that the possibility of being able to plead a case to which the “entire fairness” standard would apply would be very attractive to prospective claimants, and she was very aware that certain features of SPACs create inherent tension and conflicts. She took great pains to emphasize that it was not simply these inherent tensions that gave rise to the need for application of the “entire fairness standard,” but rather the allegation in that case that the investors were “robbed of their right” to make a fully informed decision. The plaintiff in this case went to considerable lengths to show that these same conditions applied in this case and therefore that the entire fairness standard should apply.
I emphasize these latter points, because not every SPAC investor will be able to make the kind of “conflict of interest” allegations sufficient to satisfy a court that the “entire fairness” standard applied. That said, however, given the arguable advantages to plaintiffs’ lawyer’s in pleading this type of case in this way, there may be an attraction for plaintiffs’ lawyers to pursue these kinds of Delaware state court direct action cases, either in lieu of a securities class action, or is the case here, in parallel to a separately filed securities class action suit.
To put this another way, I have made quite a production on this site about tracking SPAC-related securities class action lawsuit; I suspect I will now need to track the state court direct breach of fiduciary duty actions to round out the litigation picture.
For those of us whose job it is to worry about directors’ and officers’ liability issues in general, or especially for those of us whose jobs are to worry about SPAC directors’ and officer’ liability issues in specific, the advent of these state court direct breach of fiduciary duty actions is troublesome. At a minimum, these kinds of lawsuits will increase potential defense costs, as companies like this one may find themselves called up to fight a two-front war. The parallel and potentially competing litigation can complicate settlement efforts, particularly with scarce and finite insurance resources to be used for that purpose.
The picture is even more complicated than that as the director defendants in this situation will look to the go-forward company for indemnification for amounts within the retention or for amounts in excess of available insurance. Obviously, the indemnification issues in those circumstances will be fraught. Just to complicate matters further, the so-called “Controller Defendants” (i.e., the Sponsor and the related financial entities) may each have their own insurance programs (although the Sponsor itself may have co-defendant coverage under SPAC’s runoff policy). The presence of multiple insurance program each with its own interests will add another layer of complexity.