I know that Chancellor McCormick has been absolutely swamped over the last several months dealing with the Twitter litigation, but spare a thought for Vice Chancellor Laster, too, because he’s been dealing with quite a plateful himself. In fact, just since Labor Day, the Vice Chancellor has issued 10 opinions addressing motions to dismiss in litigation arising out of the de-SPAC merger of P3 Health Group LLC.
The litigation essentially involves a dispute between two PE sponsors: Chicago Pacific, which was the lead investor, and Hudson Vegas Investments, which was brought in later as an investor. Some of the motions to dismiss opinions that VC Laster issued dealt with jurisdictional issues, but this excerpt from Fried Frank’s memo on the case highlights all of the substantive issues that the Court has addressed so far. It’s quite a list:
– A Chicago Pacific principal faces potential liability with respect to the merger—because, based on the allegedly significant role he played as part of the Chicago Pacific team that engineered the merger, he was an “acting manager” of the Company, even though he had no formal role at (i.e., was not a named manager, nor a director, officer or employee of) the Company. (This decision was issued Oct. 26, 2022.)
– The Company’s General Counsel faces potential liability with respect to the merger—because, based solely on her title, she was an “acting manager” of the Company, although she had asserted that despite her title her actual role had been merely “ministerial.” (This decision was issued Sept. 12, 2022.)
– The Company faces potential liability for alleged breaches of its contractual obligations to Hudson—because (i) effecting the merger without Hudson’s consent may have violated Hudson’s right under the Company’s LLC operating agreement to veto affiliated transactions, given that (a) after the merger, Chicago Pacific designated members of the surviving company’s board and (b) Chicago Pacific contemplated a follow-on transaction involving another of its portcos; and (ii) the distribution to Hudson may not have fulfilled Hudson’s priority distribution right, given that the Company deemed the fair market value of the distributed SPAC shares to be the nominal $10 per share when the actual value likely was significantly less. (This decision was issued Oct. 31, 2022.)
– Chicago Pacific and the Company (and their key managers) face potential liability for alleged fraudulent inducement of Hudson’s initial investment in the Company—because the near-term Company projections provided to Hudson at that time were significantly higher than the actual results turned out to be, under circumstances that supported a reasonable inference of fraud based on the Company’s small size and the large spread between the projected and actual results. (This decision was issued Oct. 28, 2022.)
I blogged about the fraudulent inducement claims a couple of weeks back, and the memo addresses some of the key takeaways from that decision and the Vice Chancellor’s other substantive rulings. For example, this excerpt addresses how the terms of a relatively standard contractual consent right created problems for the PE sponsor when it designated post-merger directors:
The court found, based on the (relatively standard) language of the consent right provision in the Company’s LLC operating agreement, that the Company’s post-merger designation of Chicago Pacific principals to the surviving company’s board may have breached Hudson’s affiliated transactions consent right. The decision underscores the broad interpretive effect from use of the phrases “series of related transactions” and “entry into an agreement” in a provision granting an affiliated transactions consent right.
— John Jenkins, DealLawyers.com, November 7, 2022