In recent years, the popularity of SPACs has led to a variety of fiduciary duty claims premised on inadequate disclosures. These cases generally are governed by the 2021 decision in In re MultiPlan Corp. Stockholders Litigation. MultiPlan dispensed with heightened pleading requirements for demand futility in derivative actions and adopted a more relaxed standard in reviewing claims under Rule 12(b)(6). MultiPlan also defined the contours of a breach of fiduciary duty claim in SPAC litigation, specifically holding that the structure of a SPAC deal creates an inherent conflict of interest that requires adjudication under Delaware’s “entire fairness” standard of review. Following MultiPlan, a series of cases survived motions to dismiss and then settled.

Vice Chancellor Lori Will’s decision in In re Hennessy Capital Acquisition Corp. IV Stockholder Litigation broke from the trend and upheld a SPAC transaction at the dismissal stage. The court also attempted to clarify several issues left unresolved by the MultiPlan decision.

The Hennessy case arose out of the December 2020 de-SPAC transaction between Hennessey Capital Acquisition Corp. (Hennessy) and Canoo Holdings Ltd. (Legacy Canoo), a start-up company specializing in the manufacturing of electric vehicles (EVs). Hennessy’s proxy statement discussed certain aspects of Legacy Canoo’s business, including its contract engineering services segment and business-to-consumer subscription model. According to the plaintiffs, Hennessy’s proxy statement overstated the future financial performance of Legacy Canoo’s engineering services segment and its subscription-based sales model.

Three months after the de-SPAC merger closed, Canoo’s board received presentations from management and an outside consulting company that discussed a “re-casting of the company’s vision and strategy”and included a slide titled “Canoo’s Business Model Needed a Reboot.” The presentation revealed that in September and October 2020 – i.e., shortly before the de-SPAC closing – the consultant began to review Legacy Canoo’s business model. After the de-SPAC closing, the consultant completed the review and concluded that “critical changes” needed to be made to Legacy Canoo’s business model, including a transition away from the engineering segment and subscription-based sales model.

During the company’s subsequent quarterly earnings call, the board chairman disclosed that the company had decided to “deemphasize” its engineering services business segment and subscription-based sales model. He said that the company “wanted to go in a different direction based on the study that we did.”  Following this announcement, Canoo’s stock price dropped substantially.

The plaintiffs brought an action alleging that Hennessy’s directors and controlling stockholder breached their fiduciary duties by failing to make adequate disclosures in the proxy statement. More specifically, the plaintiffs alleged that Hennessy’s board and controlling stockholder touted Legacy Canoo’s engineering services and subscription-based sale model while, at the same time, failing to disclose the consultant’s engagement and the changes that would be implemented to Legacy Canoo’s business model. According to the plaintiffs, the inadequacies in the disclosures prevented the Hennessy stockholders from exercising their rights to redeem their shares in advance of the merger in an informed manner.

The Delaware Court of Chancery rejected the plaintiffs’ disclosure claims because they relied on post-closing developments. The court focused on the timing of disclosable information, finding that a failure to disclose information known pre-SPAC could provide a plausible basis to assert a material non-disclosure claim, but a failure to disclose information which develops post-closing may not give rise to such a claim. The court distinguished its prior denials of motions to dismiss in other SPAC cases because, in those cases, there was clear evidence of facts that were “known or knowable” before the approval of the SPAC transaction. The court also emphasized the heightened knowledge required to survive dismissal, noting that mere recommendations or “preliminary analyses and discussions” taken in advance of a vote need not be disclosed.

In addition to clarifying the unresolved issues in MultiPlan, the Court’s decision highlights the importance of pleading directors’ knowledge. The Court emphasized that pre-merger actions require “concrete facts” that were misrepresented to investors. Mere speculation about “poor performance” or the fact that a SPAC transaction proved less profitable than anticipated cannot give rise to a failure to disclose claim.

By clarifying some of the contours of the MultiPlan decision, Hennessy Capital illustrates the timing considerations necessary to establish a fiduciary duty claim predicated on inadequate disclosure in the SPAC context. To support a disclosure claim in the SPAC context, plaintiffs must plead material facts known by the board before the transaction closing in order to survive under entire fairness. This decision also demonstrates that disclosure claims in a SPAC transaction will not automatically survive a motion to dismiss. 

Authored by Jon M. Talotta, Allison M. Wuertz, Jordan Teti, and William Winter.