Solak v. Mountain Crest Capital: fiduciary duties claims abound for SPAC sponsors and directors

Mountain Crest Acquisition Corp. II (Mountain Crest) was a special purpose acquisition company, or SPAC, with Mountain Crest Capital LLC (Sponsor) acting as Mountain Crest’s sponsor. Suying Liu was Mountain Crest’s CEO and Chairman of the Board as well as a managing member of Sponsor. Dong Liu was Mountain Crest’s CFO and director as well as a member of Sponsor. 

Mountain Crest completed its IPO in January 2021, selling 5.75 million units for US$10 per unit for an aggregate of US$57.5 million. The shares of common stock were redeemable for US$10 plus interest at the time and represented one share of common stock as well as one right to receive 1/10 of a share of common stock upon consummation of a merger. The proceeds from the IPO were retained in a trust account and could be used only to redeem shares, contribute to a merger, or return the public stockholders’ investment in the event of a liquidation.  

Four months later, in April 2021, Mountain Crest and Better Therapeutics, Inc. announced that they had entered into a merger agreement. Under the agreement, stockholders of Mountain Crest and Better Therapeutics would receive shares in the merged company. On October 12, 2021, Mountain Crest mailed a proxy statement to stockholders that recommended approval of the merger and attributed a value of US$10 to each public share in Mountain Crest. The proxy statement did not note, however, the dilutive effect of redemptions, the existence of founder shares (which only had value if a merger was consummated), and merger-related costs, all of which would result in the net cash value per share to be US$7.50 per share. The stockholders approved the merger in October 2021. 

The plaintiff filed this lawsuit, alleging direct claim for breach of fiduciary duty against the directors of Mountain Crest (the Board) as well as Sponsor and its two members and unjust enrichment against Sponsor and the directors of Mountain Crest. Defendants moved to dismiss on two grounds:  first, that the plaintiff’s claims were derivative, not direct, and that the plaintiff failed to make a demand on the Board; and second, that the plaintiff’s complaint failed to state a claim under Rule 12(b)(6).   

The court rejected the defendants argument that the plaintiff’s claims were derivative. The court applied the test articulated in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004), and found the claim to be direct because the stockholders, not the company (a) suffered the alleged harm and (2) would receive the benefit of any recovery. 

The court then found that the complaint stated a “reasonably conceivable claim for breach of fiduciary duty.” As a preliminary matter, the court found that the complaint sufficiently alleged facts demonstrating a conflicted transaction—including that Liu and Liu controlled Sponsor, and that the defendants had a financial interest in the merger because, without a merger, their founder shares would be worthless—that rebutted the presumption of the business judgment rule and required the application of the entire fairness standard. The court then reasoned that even though failure to disclose net cash per share alone is not a fiduciary breach, it was reasonable to infer here that an investor would consider the US$10 per share consideration quoted in the proxy and assume that the net cash per share would be approximately the same – when in fact it was 25 percent less, a delta the court found to be material at this stage.

In reaching its decision, the court noted that the facts alleged in the complaint were “close to the line between an adequate and an inadequate claim,” but that, when applying Rule 12(b)(6)’s mandate to construe reasonable inferences in favor of the plaintiff, “the causes of action pled [were] on side of viability.” The court also noted that this was the first case to deny a motion to dismiss based “solely on an affirmative misstatement of investment value in conflict with a failure to also disclose net cash.”  

Authored by Allison M. Wuertz, Jacey Gottlieb, and Mickaela Fouad.