In the wake of the SPAC frenzy, which peaked in 2021, investors have filed a significant number of SPAC-related lawsuits, including not only securities class action lawsuits, but also including Delaware direct action breach of fiduciary duty suits. The Delaware actions have so far in at least some cases proven to be successful. More recently, however, the Delaware courts have projected impatience and even fatigue with these kinds of suits, and in at least one recent case, granted the defendants’ motion to dismiss. However, in a more recent case, the Delaware Chancery Court, although noting that the plaintiff’s allegations are “not strong” and “close to the line between an adequate and an inadequate claim,” denied the defendants’ dismissal motion. There are several interesting features to court’s opinion, as discussed below. The Delaware Chancery Court’s October 18, 2024, opinion can be found here.

Background

Mountain Crest Acquisition Corp. II (MCAD) was a special purpose acquisition company (SPAC). MCAD’s sponsor was Mountain Crest Capital LLC. MCAD completed an IPO on January 8, 2021. On April 7, 2021, MCAD announced plans to merge with medical technology company Better Therapeutics, with the combined company to be knows as Better Therapeutics. The merger closed on October 27, 2021. Prior to the merger 84% of the MCAD shares eligible for redemption elected to redeem their shares; only about 16% of the total eligible shares remained after the merger.

At the time the merger was completed, the stock was trading at $10.97 per share. Three months after the merger, the stock price had declined to $3.68. By the time the plaintiff filed his complaint on April 23, 2023, the stock was trading at $1.28 per share.

In his class action complaint, the plaintiff filed a direct claim for breach of fiduciary duty against the directors and officers of MCAD. He also filed an unjust enrichment claim against the director and officer defendants and against the SPAC sponsor.

The plaintiff’s claim related to alleged misrepresentations in the proxy statement the SPAC issued in connection with the proposed merger. The plaintiff alleged that though the proxy attributed a value of $10 to each MCAD share, after accounting for the dilutive effect of redemptions, founder shares, and the merger transaction costs, MCAD had less than $7.50 in net cash per share to invest in the merger. The proxy did not state MCAD’s net cash per share. The defendants moved to dismiss the complaint.

The October 18, 2024, Opinion

On October 18, 2024, Vice Chancellor Sam Glasscock denied the defendants’ motion to dismiss, saying the plaintiff’s had adequately alleged a direct action breach of fiduciary duty claim against the defendants, although also emphasizing that the plaintiff’s claims were “not strong” and that the plaintiff “barely” alleged reasonably conceivable claims when assessed under the entire fairness standard.

In deploying the entire fairness standard, Delaware’s courts have emphasized that it is the most exacting standard of judicial review for corporate transactions. In this case, VC Glasscock noted the now well-established precedent that the incentive structure of SPACs creates inherent conflicts between the SPAC fiduciaries and the stockholders. Here, he said the controller defendants were incentivized to discourage redemptions of the SPAC shares in connection with the merger, “effectively competing with the public shareholders for the funds in the trust.” Because of these conflicts, VC Glasscock found, the entire fairness standard applies.

The plaintiff argued that the proxy statement, which valued the SPAC’s shares at $10 per share, was misleading because the proxy failed to disclose that the net cash value the SPAC would have to invest in the merger was less than $7.50 per share. VC Glasscock said that the failure to disclose net cash value per share is not, in itself, a breach of fiduciary duty, but that in this action, the proxy both misstates the investment value of $10 per share and also fails to disclose that the actual amount of cash available for the merger was 25% less than disclosed. It is, VC Glasscock said, “reasonably conceivable” that a stockholder would find the cash per share figure material to their redemption decision.

The defendants tried to argue that the fact that 84% of investors chose to redeem their shares shows that the Proxy was not misleading or contained omissions. Glasscock conceded that this level of redemptions “suggests a lack of material omission,” but he said he could not at the pleading stage draw the defendant-friendly inference. At this pleading stage, the plaintiff’s allegations “make it reasonably conceivable that there has been a breach of fiduciary duty in regard the Proxy. 

Glasscock noted that this case “appears to be the first to deny a motion to dismiss solely on an affirmative statement of investment value in conflict with a failure to also disclose net cash.” However, he also noted, and as the defendants conceded, nothing in the case law suggests that such a claim, adequately pled and considered along, could not survive a motion to dismiss.” The allegations, Glasscock said, may ultimately not support a finding of unfairness, but the plaintiff has met his burden to survive a motion to dismiss.

VC Glasscock also said that the plaintiff had adequately pled a nonexculpated claim unjust enrichment claims against the defendants.

Discussion

These kinds of Delaware direct action breach of fiduciary duty cases have come to be known as “MultiPlan” claims, in reference to the first of these kinds of suits to survive a motion to dismiss, in a January 2022 ruling by Vice Chancellor Lori Will. The success of the MultiPlan case itself and several of its immediate successors meant that other cases like this were soon filed. The volume of these cases apparently raised alarm bells at the Delaware Chancery Court.

As discussed here, in a May 2024 ruling in the Hennessey Capital Acquisition IV case, VC Will (who wrote the opinion in the MultiPlan case) 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.” Even though applying the entire fairness standard, VC granted the motion to dismiss in the Hennessey case.

The apparent suggestion that perhaps the Hennessey opinion meant the end for these kinds of cases in Delaware has not been borne out. As VC Glasscock’s opinion in this case shows, even a case in which the allegations are “not strong” may survive a motion to dismiss, particularly where the entire fairness standard has been applied.

In his own way, VC Glasscock did acknowledge the problem for the Delaware courts with the volume of the SPAC-related suits. Glasscock invoked an elaborate analogy to the digestive habits of anaconda snakes. These snakes, Glasscock observes, eat once a year. Open its belly, he said, and you will not see what it is eating, but what it has eaten in the past. So too with the progress of the SPAC litigation in the belly of the Chancery court. While the population of SPACs on the ground may have been reduced, “the bulge of the SPAC carcasses continues to be digested in equity.” I am not sure it quite right to compare the Chancery Court to a snake, but the Glasscock’s image does suggest that the court is laboring to digest a big mass of litigation.

The one thing for sure is that VC Glasscock’s opinion in this case does who how difficult it is to obtain dismissal of an action under the entire fairness standard, particularly give that presumption at the pleading stage in favor of the plaintiffs’ allegations.

These cases will continue to work their way through the anaconda – I mean, the courts. These actions are not without meaning beyond their immediate context, particularly as there are some signs that the SPAC marketplace may be rejuvenating. The judicial developments, along with the SEC’s revised SPAC disclosure guidelines, arguably provide useful guidance to the current crop of SPACs – although the meaning of the Delaware courts’ decisions could be less directly applicable to some of the current crop of SPACs, many of which are incorporated in the Cayman Islands, rather than in Delaware.