As readers of this blog know, one of the vestiges of the SPAC frenzy that peaked in 2021 is a large volume of SPAC-related securities class action litigation; indeed, as I have recently noted, SPAC-related securities class action lawsuits continue to be filed. In addition to these federal court securities suits, prospective claimants with SPAC-related grievances have also filed Delaware state court breach of fiduciary duty actions, a form of litigation often referred to as “MultiPlan actions,” in reference to the MultiPlan lawsuit, which, as discussed here, was the first of these Delaware court actions to survive a motion to dismiss. Since the ruling in the MultiPlan case, plaintiffs have largely been successful in surviving dismissal motions in these kinds of cases.

However, as discussed in a June 2024 memo from the Skadden law firm (here), in May 2024, the Delaware Court of Chancery granted the motion to dismiss in the SPAC-related direct action breach of fiduciary duty suit relating to Canoo Inc., a company that was the result of a 2020 merger with a publicly traded SPAC, Hennessy Capital Acquisition Corp. IV. According to the law firm memo, the Court’s ruling was the first opinion granting a motion to dismiss in a MultiPlan claim. As discussed below, the Court’s opinion reflects a number of interesting observations about the lawsuit and claims of this type. A copy of the Court’s May 31, 2024 opinion can be found here.

Background

Hennessy Capital Acquisition Corp. IV was a special purpose acquisition corporation (SPAC). Hennessey completed its IPO in March 2019. On August 18, 2020, Hennessey issued a press release in which it announced that it planned to merge with electric vehicle company Canoo Holdings Limited. Hennessey voted to approve the merger on December 21, 2020, with Canoo, Inc. as the surviving entity and as a publicly traded company.

On March 29, 2021, in Canoo’s first post-merger conference call as a publicly traded company, and just three months after the merger was completed, Tony Aquila, Canoo’s Executive Chairman (and Executive Chairman of Hennessey prior to the merger) announced that the company would “de-emphasize the originally stated contract services line”  and instead would emphasize a different strategy of selling its own vehicles to commercial operators (rather than to consumers through a subscription model). The company’s share price declined on this news. The company was hit with a securities class action lawsuit (as discussed here).

The company was also hit with a separate Delaware Chancery Court direct action breach of fiduciary duty lawsuit, largely based on the allegation that faulty proxy disclosures had undermined the shareholders’ right to make an informed decision on their redemption rights (that is, their right to redeem their shares in the SPAC rather than to become shareholders in the merged company). The defendants moved to dismiss.

The May 31, 2024, Opinion

In a detailed May 31, 2024, opinion, Vice Chancellor Lori Will granted the defendants’ motion to dismiss, holding that the plaintiff had failed to plead a “reasonably conceivable breach of fiduciary duty claim against the SPAC’s fiduciaries.”

VC Will began her analysis with an overview of “MultiPlan claims” – that is, lawsuits similar to the MultiPlan suit in that they are based on the understanding that SPAC shareholders’ exercise of their redemption rights must be both “freely exercisable and fully informed.” VC Will observed with reference to the denial of the motion to dismiss in the MultiPlan case and other similar cases that “the success of a few cases begat a host of others. Though the SPAC market has contracted, SPAC lawsuits are ubiquitous in Delaware. Remarkably similar complaints accuse SPAC directors of breaching their fiduciary duties base on flaws in years-old proxy statements that became problematic only when the combined company underperformed.”

With this lead-up suggesting that perhaps claimants may have over-used the MultiPlan playbook, VC Will then went on to assess the sufficiency of the plaintiff’s allegations. She found a “critical distinction” between the alleged disclosure deficiencies at issue in this case and the disclosures in MultiPlan.

The plaintiff in this case, she found, had failed to allege that the information supposedly omitted from the proxy was “known or knowable” by the SPAC executives prior to the closing of the merger. Specifically, VC Will found “no well pleaded facts supporting a reasonable inference that the changes to [Canoo’s] business model were known or knowable by [the SPAC’s] board before the merger closed. That is, no unfair dealing vis-à-vis the redemption right is pleaded. Plaintiff therefore failed to state a breach of fiduciary duty claim.”

VC Will concluded by saying that “It cannot be fairly inferred that the defendants withheld knowable information material to public stockholders deciding whether or not to redeem or invest in the combined company. To allow this faulty claim to proceed would fuel perverse incentives and invite strike suits.”

Discussion

Among the cases filed in Delaware in the wake of the denial of the motion to dismiss in MultiPlan was a similar lawsuit filed against GigCapital3 Inc., with respect to the SPAC’s merger with Lightning eMotors. The claimants in the Gig3 case also alleged that their ability to exercise their redemption rights had been impaired by faulty proxy disclosures. After VC Will denied the motion to dismiss in the Gig3 case (largely in reliance on her own prior holding in the MultiPlan case), news reports appeared expressing concerns that the court’s rulings in MultiPlan and Gig3 might “open the floodgates” to similar kinds of lawsuits. The concerns in this regard were further underscored by the fact that the MultiPlan case settled for $33.75 million.  

VC Will’s opinion in this case reflects a concern that, as the result of success in a few cases, the MulitPlan claims had indeed become “ubiquitous” in Delaware. That concern seems to have weighed on her as she assessed the allegations in this case. Fundamentally, this case failed to survive the motion to dismiss because, as VC Will found, the plaintiff had not plausibly alleged that the SPAC’s executives knew or could have know that three months after the merger the merged company would put in change of plans in place. VC Will also seemed concerned that to do anything other than dismiss this claim would introduce even further mischief; as she said, “to allow this faulty claim to proceed would fuel perverse incentives and invite strike suits.”

Just the same, the outcome of the dismissal motion here is both striking and noteworthy. As the Skadden law firm’s memo notes, since the denial of the motion to dismiss in MultiPlan, “the Court of Chancery has taken a negative view of de-SPAC transactions,” and, until the decision in this case, had “unanimously denied motions to dismiss in every de-SPAC case on the grounds that the redemption right was diminished because of faulty disclosures.”

The court’s ruling in this case “at a minimum … provides a possibility that future challenges to de-SPAC transactions may not always survive a motion to dismiss.” In order for a case to survive a motion to dismiss in a MultiPlan-type claim, there needs, the law firm memo states, “to be some level of interference with the stockholders’ redemption right, which usually takes the form of disclosure claims.”

There is a final important note here, which is that courts in general and this court in particular are skeptical of disclosure claims based on hindsight. VC Will seemed quite impatient with the allegations that the proxy supposedly failed to disclose the company’s later change in plans, in the absence of any allegation that the later change was know or knowable to the SPAC executives at the time of the proxy.

As VC Will herself noted, in recent months MultiPlan claims in Delaware courts have proliferated to the point that they have become “ubiquitous.” One can only hope that the grant of the dismissal motion here might signal to some prospective claimants that perhaps piling on one more SPAC-related lawsuit might not be the best approach.