As I have noted in numerous posts on this site (most recently here), SPAC-related litigation has been a significant factor in the overall volume of corporate and securities litigation filings in recent years. But while I have been attentive to noting the lawsuits as they have been filed, it could be argued that I have not been as dutiful in noting how these cases are being resolved. One recent case resolution – the settlement of the various SPAC-related litigation involving ATI Physical Therapy – is particularly interesting. The court recently approved the settlement of these cases for a total of $31 million. As discussed below, there are several interesting features of these settlements. The court’s approval of the settlements is detailed in a September 24, 2024, Law360 article (here).

Background

Fortress Capital Acquisition Corp. II, a special purpose acquisition company (SPAC), completed its IPO on August 12, 2020. On February 22, 2021, the SPAC and ATI Physical Therapy announced their plans to merge. The merger was completed on June 16, 2021.

In subsequent litigation relating to the SPAC and the merger, the claimants alleged that one month after the merger, in announcing its second quarter 2021, results, the merged company disclosed that, due to the pandemic, it has experienced increased attrition among its physical therapists, as well intensifying competition to hire them. Due to the therapist staffing issues, the company reduced its forward revenue projections.  Three months later, the company announced further reductions to its guidance, owing to continuing therapist staffing issues.

The Litigation

On August 16, 2021, a plaintiff shareholder filed the first of several securities class action lawsuits against certain directors and officers of ATI, as well as against certain directors and officers of the SPAC. The various securities class action complaints were later consolidated complaint. The consolidated complaint purported to be filed on behalf of investors who had purchased securities of the SPAC or of the merged company between February 22, 2021 (the date the merger was announced), and October 19, 2021.

The consolidated securities class action complaint alleged that during the class period, the defendants failed to disclose to investors: “(1) that ATI was experiencing attrition among its physical therapists; (2) that ATI faced increasing competition for clinicians in the labor market; (3) that, as a result of the foregoing, the Company faced difficulties retaining therapists and incurred increased labor costs; (4) that, as a result of the labor shortage, the Company would open fewer new clinics; and (5) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.” The securities class action plaintiffs alleged that the defendants had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

A separate set of plaintiffs filed a so-called MultiPlan claim against the directors and officers of the SPAC. This type of action involves a direct action breach of fiduciary duty complaint, in which the claimants allege that the defendants breached their fiduciary duties in connection with proxy disclosures related to the investors’ redemption option at the time of the merger. The allegation is that the defendants failed to disclose the dilutive effect of redemption or otherwise made misleading statements that interfered with investors’ abilities to decide whether or not to redeem their shares. The name is a reference to the Delaware direction action breach of fiduciary duty claim filed against the directors and officers of the SPAC into which health services company MultiPlan merged; the MultiPlan claim was the first of these kinds of claims to survive a motion to dismiss in Delaware Chancery Court, as discussed here.

In addition to the consolidated securities class action lawsuit and the MultiPlan action, a separate set of claimants also filed a shareholder derivative lawsuit, in which the claimants alleged that the defendants’ alleged actions breached their fiduciary duties and thereby harmed the corporation itself.

The Settlements
After the various actions survived motions to dismiss, the parties entered settlement discussions. The parties reached preliminary agreements to settle the action, and on September 24, 2024, District of Illinois Edmond Chung granted final approval of the proposed settlements.

As explained in the Law360 article to which I linked above, the approximately $31 million in total settlement value was comprised of three separate funds. $18.9 million of the funds are to go to the members of the class in the securities class action lawsuit. Another $6 million is to go to the MultiPlan claim plaintiffs, who could have redeemed their shares but, they allege, were misled into retaining their shares and letting them convert into ATI stock. Finally, a separate $6.45 million is to be paid to the company to release the derivative claims filed.

The Law360 article states that this final $6.45 million was to be paid by “director and officer insurance covering ATI and its individual defendants.” The Law360 article does not say whether any of the directors and officers insurance was to pay any of the other settlement amounts.

The Law360 article quotes Judge Chang as saying that the money involved was “about as much water as can be squeezed from the stone,” adding his view that the risks associated with continuing to litigate the cases make settlement approval appropriate. He added that the settlement is “as best as can reasonably be accomplished in this kind of setting.”

Discussion

As I noted at the outset of this post, there has been an ongoing influx of SPAC-related litigation over the last several years. The resolution of this litigation shows the ways in which this type of litigation can end up, at least for those cases that survive the motions to dismiss. There have of course been prior settlements of SPAC related litigation. For example, the Akazoo securities lawsuit (a case that harks back to an earlier era, before the 2020-2021 SPAC frenzy, settled for $35 million. The SPAC-related Securities Class Action lawsuit filed against Clover Health Investments settled in April 2023 for $22 million (of which $19.5 million was funded by D&O Insurance).

The settlements here of the ATI lawsuit are interesting because they reflect the coordinated settlements of the full panoply of SPAC-related securities and corporate lawsuits that can be filed. The settlements here resolved not only the securities class action lawsuit but also the derivative lawsuit and the direct action breach of fiduciary duty claim (that is, the MultiPlan claim). The MultiPlan lawsuit itself settled for $33.75 million, which the MultiPlan claim here settled for $6 million.

One interesting feature of these cases and these settlements to me is that these various lawsuit not only represent example of SPAC-related litigation, but the underlying lawsuits also represent examples of COVID-19-related litigation as well, in that the key element here – that is, the attrition of and ability to attract physical therapists – was attributable to the pandemic. Not only that, but the labor supply shortages that are at the heart of this case also represents an example of the ways in which macroeconomic factors can translate into securities litigation. These various litigation typologies – that is, the respective connections to SPAC, COVID-19, and labor supply disruption – have been in recent years significant factors contributing to the overall volume of securities class action litigation filings. This case shows how a single set of litigation can in fact fall into multiple categories.

One final comment. I can only imagine who difficult it was to get all of the various sets of plaintiffs, defendants, and insurers, and their respective attorneys, to agree to an overall settlement arrangement that provided for the resolution of each of the various types of litigation involved here. The fact that the litigants were able to work out this overall settlement is a tribute to the professionalism of all involved.