Takeaways From the Delaware Court of Chancery’s First Dismissal of MultiPlan-style SPAC Challenge

Background

The Hennessy action arose from the December 2020 de-SPAC transaction between Hennessy Capital Acquisition Corp. IV (“Hennessy”) and Canoo Holdings Ltd. (“Legacy Canoo”), a manufacturer of electrical vehicles.  Hennessy’s merger proxy statement discussed Legacy Canoo’s contract engineering services segment and its business-to-consumer subscription model and, in the plaintiff’s telling, touted the future importance and potential of these segments to Legacy Canoo.

Three months after the merger closed, Canoo’s board received presentations from management and its outside consultant that discussed a “re-casting of the company’s vision and strategy.”³  The consultant’s presentation noted that in September and October 2020—i.e., months before the December 2020 merger closing—the consultant had begun to “assess [Legacy] Canoo’s initial economic model,” and in October to November 2020, it “identif[ied] [the] most attractive segments to focus on.”⁴  The presentation noted that, as a result of this work, “critical changes were made to Canoo’s business model,” including “demphasiz[ing] [the] role of [lifestyle vehicle] subscriptions” and “pivot[ing] from [a] subscription-led sales model to [an] outright sale led sales model.”⁵

Three days after this meeting, Canoo’s executive chairman announced that the board had determined that Canoo would “deemphasize” the company’s subscription model and the engineering services business line.  The chairman emphasized that the company “wanted to go in a different direction based on the study that we did.  And with the board’s help and observations, it kind of solidified that.”⁶  Following this announcement, Canoo’s stock price declined significantly.⁷

Based on these developments, the plaintiff alleged that Hennessy’s sponsor and directors breached their fiduciary duties by touting Legacy Canoo’s engineering services business and the subscription-based model while failing to disclose that, in fact, the company has abandoned these lines of business before the merger closed.⁸  As in all MultiPlan claims, the plaintiff alleged that these disclosures caused Hennessy’s stockholders not to exercise their rights to redeem their shares in advance of the merger, and that the receipt of “founder shares” rendered Hennessy’s sponsor and directors conflicted in the merger.⁹

The Court’s Ruling

The Hennessy court granted dismissal, concluding that plaintiff’s allegations did not support a conceivable claim that defendants impaired the Hennessy stockholders’ redemption decision.  The court found that the plaintiff’s allegations, even taken as true, only supported an inference that the consultant “may have reached early recommendations about aspects of the company’s business in the fall” but that “Delaware law does not … require the disclosure of preliminary analyses and discussions.”¹⁰  The court noted that the plaintiff attempted to rely primarily on allegations of post-closing conduct to support the existence of a pre-closing disclosure violation, which was in contrast to the allegations in prior cases of “concrete facts” that “were kept from public stockholders” pre-merger.¹¹  The court also buttressed its conclusion by noting that, even if Legacy Canoo’s business had been altered pre-closing, there were no well-pled “facts from which [it] could infer knowledge [of the alteration to Legacy Canoo’s business] by Hennessy’s board.”¹²  Lastly, the court appeared to look askance at the “remarkably similar complaints” filed in MultiPlan-style actions “based on flaws in years-old proxy statements that became problematic only when the combined company underperformed.”¹³

Takeaways

The court’s decision provides several key takeaways for defendants in MultiPlan-style actions:

• A plaintiff must plead a disclosure violation.

First, the Hennessy decision confirms that a plaintiff must plead a viable disclosure violation to support a MultiPlan claim.  In some prior actions, the courts had suggested the existence of such a requirement.¹⁴  However, because the courts in each of those cases found a disclosure violation, they had not reached the argument advanced by some plaintiffs, including the plaintiff in Hennessy, that the defendants’ alleged conflicts and the alleged unfairness of the merger were themselves sufficient to state a breach of fiduciary duty claim—regardless of the adequacy of the disclosures.

The court squarely rejected that argument.  It explained that a MultiPlan claim is “narrow” and rests on the impairment of a redemption right, and “[i]f the impairment takes the form of disclosures, the facts must provide grounds to infer that the defendants made a material misstatement or omission….”¹⁵

• The adequacy of the allegations will be tested at the pleading stage, including through examination of defendants’ books-and-records production.

The court also rejected the plaintiff’s argument that the pleading requirement is “relaxed” in the context of MultiPlan-style claims.  The court applied the standard materiality test for disclosure violations, explaining that the applicability of entire fairness review does not change the pleading requirements under Rules 8 and 12(b)(6), which indeed “are enforced with special care in the context of representative litigation” given “the risk of strike suits.”¹⁶

Applying this standard, the court examined the documents cited by the plaintiff and concluded that, as a whole, they did not support the plaintiff’s proffered inferences.  This is a powerful reminder that the court can, and will, review closely the documents incorporated into the complaint by reference and that it may find that the inferences flowing from these materials undermine the allegations of the complaint itself.

• Pre-closing disclosure violations cannot necessarily be inferred from post-closing struggles.

Next, the Hennessy action is notable in its refusal to infer a pre-closing disclosure violation from post-closing adverse developments or changes in business strategy.  This is significant in the SPAC space given well-documented post-closing struggles of many companies after their de-SPAC transactions.  The court emphasized the importance of pleading “concrete facts” existing pre-closing that were misrepresented to investors, and it noted that “[p]oor performance is not, however, indicative of a breach of fiduciary duty.”¹⁷

• A plaintiff must plead the defendants’ knowledge of the misstatement or omission.

Lastly, the Hennessy decision confirms that a complaint must plead that a misrepresentation or omission arises out of facts that were “known or knowable” to the SPAC board before the merger closed.¹⁸  In Hennessy, the plaintiff sought to supplement the complaint by noting the results of an SEC investigation of Canoo post-merger.  The court concluded that “[t]he SEC documents could perhaps support an inference that Legacy Canoo officers misrepresented the strength of the company’s projected contract engineering revenue.  But the documents make it unreasonable to infer that [the SPAC’s] directors and officers knew or could have known about these issues.”¹⁹  That is because the SEC alleged that Legacy Canoo “did not communicate the negative engineering updates or their associated negative impact on 2021 and 2022 projected revenue to [Hennessy]” and “concealed material information from [Hennessy]” about engineering services prospects.²⁰  The court concluded that the allegations in Hennessy “stand in stark contrast to the sort of knowable facts that faithless fiduciaries purportedly failed to uncover in prior decisions.”²¹  The decision makes clear that MultiPlan-style claims are not a strict liability cause of action, and that pleading defendants’ mental state is an essential element of such claims.

¹ 268 A.3d 802 (Del. Ch. 2022)

² 2024 WL 2799044 (Del. Ch. May 31, 2024).

³ Id. at *6. 

⁴ Id. 

⁵ Id. 

⁶ Id. 

⁷ Id.

⁸ Id. at *11

⁹ Id. at **10-11.

¹⁰ Id. at **13-14. 

¹¹ Id. at **12-13. 

¹² Id. at *15. 

¹³ Id. at *1.

¹⁴ MultiPlan, 268 A.3d at 816; Delman v. GigAcquisition3, LLC, 288 A.3d 692, 727 (Del. Ch. 2023).

¹⁵ 2024 WL 2799044, at *10.

¹⁶ Id. at *9.

¹⁷ Id. at *1. 

¹⁸ Id. at *10. 

¹⁹ Id. at *16. 

²⁰ Id. 

²¹ Id. at *16, n. 176.