Long-time readers know that the significant amount of SPAC activity in past years led to a surge in SPAC-related litigation. Some of this litigation has taken the form of traditional securities class action lawsuits. However, among the more noteworthy developments in the rise of SPAC-related litigation has been the emergence of a separate type of suit, the Delaware direct action breach of fiduciary class action lawsuit, sometimes referred to a MultiPlan claim in reference to the first suit of the type to be filed. As detailed below, these kinds of lawsuits have gone through a relatively swift evolution. Many of the these kinds of cases remain pending, have not yet reached the settlement stage. However, the GeneDX lawsuit, which is one of these kinds of cases, recently settled for $21 million, subject to court approval. There are a number of interesting aspects of this settlement, as discussed below. The parties settlement stipulation in the case can be found here.
Background
CM Life Sciences Holdings (CMLS) was a special purpose acquisition company (SPAC). It completed an IPO in September 2020. It merged with the clinical data and genomics company Sema4 Holdings in July 2021. Sema4 is now known as GeneDX. Following the merger, the share price of the merged company plunged.
In February 2023, as detailed here, a plaintiff shareholder filed the first of several Delaware Chancery Court direct action breach of fiduciary duty class action lawsuits against CMLS; certain of its pre-merger executives; as well as the sponsor and financial backers of CMLS. The various lawsuits were later merged. The lawsuits allege that the defendants pushed through the merger based on merger-related documents containing misrepresentations or omissions.
The plaintiffs allege that as a result of the way that the SPAC and the merger deal were structured, the defendants had “strong incentives” to convince investors to approve the merger, regardless of how illogical it may have been. The defendants were also motivated to convince the investors to vote in favor of the merger, rather than to redeem their shares as was their right under the SPAC structure. The plaintiff alleged the misrepresentations deprived the investors of their right to redeem their shares, which plunged in valued after the merger, resulting in significant “value destruction” for the shareholders.
The Settlement
In May 2024, the parties engaged in mediation processes, which ultimately resulted in the parties’ agreement to settle the consolidated actions for $21 million dollars for the plaintiff class, as discussed here. The settlement is subject to court approval. The parties’ settlement agreement including a provision for attorneys’ fees and expenses of more than $1.5 million in fees and nearly $75,000 in expenses.
Discussion
Readers may recognize this kind of lawsuit as a MultiPlan claim. This name is in reference to the MultiPlan lawsuit, which was the first of these Delaware direct action breach of fiduciary duty lawsuits to be filed, as discussed in detail here. MultiPlan was also the first of these kinds of suits to survive a motion to dismiss, in a January 2022 ruling by Vice Chancellor Lori Will. Significantly, in denying the motion to dismiss in the MultiPlan lawsuit, VC Will held that the “entire fairness” standard applied, an exacting standard making it much more difficult for defendants to succeed on motions to dismiss.
Additional rulings in which the motions to dismiss were denied quickly followed; a subsequent dismissal motion denial in the Gig3 case sounded alarm bells as observers became concerned that these rulings could result in a “gold rush.” The fears that there could be a rush to file more of these MultiPlan claims arguably was well-founded, as the filings of many of these kinds of cases soon followed, as discussed here.
The concerns about the threat of this kind of litigation were further underscored by the fact that the MultiPlan case itself settled for $33.75 million. Other settlements have followed. For example, as discussed here, the various ATI Physical Therapy lawsuits (inclusive of securities class action litigation; derivative litigation; and one of these Delaware direct action breach of fiduciary duty lawsuits) recentlhy settled for a combined $31 million, of which the settlement of the direct action fiduciary duty lawsuit represented $6 million.
None of this has been lost on the Delaware Court of Chancery, which has begun to push back. As discussed here, in a May 2024 ruling in the Hennessey Capital Acquisition IV case, VC Will (who wrote the opinions in both the MultiPlan and Gig3 cases) said the following about the upsurge in MultiPlan lawsuits: 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.”
In granting the motion to dismiss in the Hennessey Capital case, VC Will said 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.”
VC Will’s pushback in the Hennessey Capital case does not mean that the MultiPlan type lawsuits are dead, but it does show that these kinds of cases are not automatic winners for the plaintiffs, even with the benefit of the “entire fairness” standard at the motion to dismiss stage.
Another thing that is important to note with respect to the future possibilities for these kinds of suits is that the current SPACs are much less likely to be susceptible to these kinds of allegations. The SEC’s new SPAC disclosure rules, which were finalized in January 2024 and went into effect in July 2024, mandate disclosures of a type that are likely to address many of the ills alleged in these MultiPlan lawsuits.
So the phenomenon of MultiPlan litigation may have run full cycle. However, in the meantime, there is still the backlog of these kinds of lawsuits filed in the last several years still working their way through the system. Many of them may, like the GeneDX case, eventually result in settlements. This latest settlement will represent a reference point for future settlements of these kinds of cases.
There is one detail in the papers about the GeneDx settlement that caught my attention. The settlement papers provide unusually detailed information about which lawyers will be receiving fee payment as part of the settlement, as well as how much they are to receive. One particular name caught my eye. Among the lawyers to receive fees is Stanford Law Professor Michael Klausner, who is to receive $35,200 in fees.
Readers with long memories may recall that the whole MultiPlan litigation phenomenon had its intellectual genesis in an academic paper Klausner wrote in November 2021 with NYU Professor Michael Ohlrogge, as discussed in detail here. The two authors also wrote a subsequent paper in which they responded to the comments of SPAC defenders who criticized the authors’ initial paper, as discussed here. Klausner not only, along with Ohlrogge, provided the intellectual underpinnings for these kinds of lawsuits, he was actually involved in some of the first of these cases. For example, as discussed here, Klausner acted a co-counsel in the Gig3 case to which I referred above.
The fact that Klausner is in line to receive fees in the GeneDX settlement suggests that he has remained involved in other cases as well, although the size of his fee in the GeneDX case suggests that his involvement may not have been as significant as it was in the earlier, trend-setting cases. Anyway, it is interesting to see an academic succeeding in finding a way to monetize his academic writings and research. I understand Klausner also had a role in developing the outlines for the SEC’s new SPAC disclosure guidelines.