M. Klein Loses Bid to Exit MultiPlan SPAC Case With Novel Ruling

M. Klein & Co. and MultiPlan Corp. must face shareholder litigation over claims that they structured a merger between the health analytics business and a blank-check company to shortchange public investors while giving insiders a 1.2 million percent return, a Delaware judge said in a novel ruling.

Vice Chancellor Lori W. Will let the case move forward in Delaware Chancery Court, becoming the first judge to rule on behalf of the leading business court that ordinary fiduciary principles apply to transactions involving “special purpose acquisition companies” like those backed by M. Klein.

SPACs are publicly traded entities raising money on the promise of a reverse merger, or “de-SPAC,” with a private business that can then access public markets without the scrutiny of a traditional initial public offering. SPAC deals exploded in popularity in 2020, leaving regulators to play catch-up.

Will said Monday that her ruling in favor of investors in M. Klein’s Churchill Capital Corp. III was a narrow one. If they’d been told the truth about the merger’s details, they likely wouldn’t have a valid claim, despite “unique characteristics of a SPAC” that can lead to conflicts of interests, the judge said.

“The mismatched incentives relevant here were known to public stockholders who chose to invest,” but “those stockholders were allegedly robbed of their right to make a fully informed decision about whether to redeem their shares,” she wrote.

If the investors had been given all the information, “one can imagine a different outcome,” Will added.

The lawsuit, filed in March, is part of a wave of cases challenging the structural features of SPACs, particularly the standard practice among financiers of giving themselves “founder shares” for fractions of a cent each that are worth millions if a merger is found but nothing if a deal falls through.

Many of the suits slam SPACs with rhetorical broadsides while alleging relatively technical violations, such as inadequate disclosures. Several of them take aim at affiliates of M. Klein, which is controlled by “serial” SPAC sponsor and former Citigroup Inc. investment banking chief Michael Klein.

The suit by MultiPlan investors targets members of Churchill’s pre-deal board and other Klein affiliates that got founder shares or played a role in the transaction.

It accuses them of concealing the fact that MultiPlan’s stock was about to “crater” when its top customer, UnitedHealth Group Inc., not only withdrew from their relationship but created a competing business unit.

Will let those claims move forward Monday, saying the allegations made it plausible that the merger’s “special benefit to Klein” motivated him to do whatever it took to push the transaction through, even if it was a bad deal for ordinary investors.

Churchill shareholders “agreed to give the sponsor an opportunity to look for a target company,” but they didn’t “agree that they did not require all material information” about the deal before deciding whether to participate, the judge wrote.

She did, however, let Churchill’s former chief financial officer out of the case.

The shareholders are represented by Bernstein Litowitz Berger & Grossmann LLP. MultiPlan is represented by Richards, Layton & Finger PA and Simpson Thacher & Bartlett LLP. Klein and its affiliates are represented by Ross Aronstam & Moritz LLP and Weil, Gotshal & Manges LLP.

The case is In re MultiPlan Corp. Stockholders Litig., Del. Ch., No. 2021-0300, 1/3/22.