SPAC sponsors, investors, advisors, and (most keenly) directors are asking questions following a Delaware court’s denial in January of the defendants’ request for dismissal in the MultiPlan Corp. shareholder litigation. Those same SPAC sponsors and directors may be prudent to take a page from the MLP playbook.
In the MultiPlan litigation, the court found that, despite the SPAC’s shareholder vote and redemption feature, there was an inherent conflict between the SPAC founders (and directors) because the founders’ shares would be worthless in the absence of a de-SPAC transaction, creating a potential incentive for the recommendation of a transaction worth less than the redemption price. The court held that the directors’ fiduciary obligations should be evaluated under the “entire fairness” standard rather than the less stringent “business judgment” standard.
Legal responsibilities of board members have evolved over the years from the application of decisions by courts into a doctrine commonly referred to as the “business judgment rule”. The basic premise is executives and directors are not liable for decisions that are made in good faith. However, in 1983 in Weinberger v. UOP, Inc., a Delaware court introduced the concept of “entire fairness”, which encompasses both “fair price” (economic and financial considerations) and “fair dealing” (how a transaction is structured, where and how it is initiated, how it is disclosed and negotiated with directors, and what and how approvals were received).
The MultiPlan decision was an eye-opener for SPAC sponsors and directors because the conventional wisdom was, even in conflict transactions, an informed shareholder vote would cleanse conflicts and could defeat most lawsuits (DE 2015 Corwin v. KKR). As a result of this conventional wisdom, most de-SPAC transactions rely on a proxy statement and shareholder vote combined with the inferred structural protection of common shareholders’ redemption rights.
It should be noted that the Delaware court in MultiPlan was explicit in stating the decision to reject the dismissal request was based on a mosaic of information, most notably:
Following this decision, SPAC directors and sponsors are left with continued uncertainty as to when and if “entire fairness” will be applied and, if so, what steps can be taken to protect against lawsuits.
From a conflict standpoint, MLPs and SPACs have certain similarities. Both are formed and managed by a sponsor. MLPs typically enter a series of “drop-down” transactions with the sponsor where conflicts could arise. Unlike SPACs, MLPs are technically partnerships, and their fiduciary responsibilities are defined in their partnership agreements. Partnership agreements address this risk by incorporating a well-proven standard from the corporate world. Almost universally, MLP partnership agreements call for approval of conflict transactions via “special approval” whereby a special committee of independent directors vote on a transaction, typically informed by a robust process, including outside advisors and a fairness opinion.
While the Delaware court left some ambiguity as to how transactions will be evaluated in the future, a SPAC sponsor and directors would benefit from the added scrutiny on de-SPAC transactions that would come from the additional approval of an independent special committee and independently provided fairness opinion.