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SPAC litigation gains momentum

As instances of cases increase, Michelle Heisner and Santiago Corcuera-Mansi of Baker McKenzie outline which ones to watch

2020 was a record-breaking year for SPACs, with more than $70 billion raised. The blaze of SPAC glory for the previously minor market player became an inferno in the spring of 2021, with more than $160 billion in SPAC proceeds year to date. But with this increased popularity, SPACs have become a target for shareholder litigation.

This development comes as no surprise to practitioners in the US, where public M&A is synonymous with lawsuits. While the plaintiffs’ bar has had to brush up its strategy, the basic premises of their SPAC filings are thus far the same as those employed in traditional M&A.

See also: Asian SPACs must tread carefully or face consequences

Much more will certainly be written concerning protections for board and sponsors as the SPAC path to liquidity becomes more established.  But at the outset, the best way to reduce litigation risk is likely to adhere to best practices in traditional M&A and IPO.

Disclosure-based lawsuits

The IPO of the SPAC itself provides only a limited opportunity for disclosure-based litigation, due to the fact that the SPAC has no operating history to disclose. Accordingly, we are seeing typical public M&A strike suits making disclosure-based allegations in connection with the SPAC's acquisition – such as the failure to include financial projections, details relating to negotiations (e.g. the pursuit of other potential acquisition targets), reasoning for not hiring a financial advisor, and financial analyses considered by the SPAC's board. 

To date, the suits almost universally make claims of material misstatements or omissions under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act). Rarer are claims under Section 14(a) of the Exchange Act, which prohibits false and misleading statements in connection with proxy solicitations. Once lead counsel is certified from among the claims filed, we expect that they will invest resources and amend their complaint to more than the bare minimum of pleadings, and as a result the number of Section 14(a) claims will increase.

See also: US SPAC market makes first moves into Europe

While strike suits are typically easily settled, as certain SPACs perform poorly vis-à-vis the projections of the operating companies that they acquire, we may see cases that test the limits of the protections for forward-looking statements provided by the Private Securities Litigation Reform Act (the PSLRA). Already, the US Securities and Exchange Commission has stated that a de-SPAC transaction may be an "initial public offering" and therefore not entitled to the PSLRA's safe harbour.

Process-based lawsuits

SPACs, which typically must complete an acquisition within 18 to 24 months of their IPO, may be susceptible to fiduciary duty claims owing to the conflicts of interests of SPAC sponsors. The critique is that sponsors are incentivised to rush into an acquisition, regardless of the quality of the target, or they will lose their initial investment. Some courts have already held that the failure to adequately diligence a target in this context is not protected by the business judgment rule.

These cases are interesting because, while the potential for conflicts of interest exist, de-SPAC transactions possess features that differentiate them from traditional M&A:       

  • a SPAC's directors do not sell the SPAC to the highest bidder, but rather approve a transaction that is the SPAC’s very purpose for being;
  • many conflicts of interest are disclosed at the time of the IPO of the SPAC;
  • an informed shareholder vote in connection with the de-SPAC transaction should cleanse such conflicts; and
  • a SPAC's shareholders are not squeezed out in a SPAC transaction, but instead are protected against an unwanted acquisition through their ability to redeem their shares.

1.

Waitr Holdings, Inc. f/k/a Landcadia Holdings

Key facts:

  • SPAC: Landcadia Holdings
  • Target: Waitr, a food delivery platform described as the GrubHub or Seamless of the southern United States
  • Completion: November 15 2018

In the year following the acquisition, Waitr lost approximately 96% of its market value, replaced its CEO two times and, after trading below $1 per share for 30 days, faced being delisted from Nasdaq. 

Why we are watching?

As more SPAC-related complaints arise, this case may prove to be the test case that will give us an indication of how claims under Section 14(a), Section 10(b) and Rule 10b-5 may unfold.

2.

Multiplan Corp. f/k/a Churchill Capital Corp. III

Key facts:

  • SPAC: Churchill Capital Corp. III
  • Target: Multiplan, a healthcare data analytics provider
  • Completion: October 8 2020

One month after going public, UnitedHealth Group Inc., Multiplan's top customer, withdrew from its relationship and created a competing business unit. Muddy Waters then published a report setting forth their key reasons for shorting shares.

Why we are watching?

This complaint looks for the Delaware Court of Chancery to make clear if boards of SPACs are subject to an "entire fairness" standard of review in connection with de-SPAC transactions.

3.

Velodyne Lidar f/k/a Graf Industrial Corp.

Key facts:

  • SPAC: Graf Industrial Corp.
  • Target: Velodyne Lidar, a manufacturer of sensors for self-driving vehicles
  • Completion: September 29 2020

Only a few months following completion of this de-SPAC transaction, it was announced that David Hall (the founder of Velodyne) and Marta Hall (David Hall’s wife and chief marketing officer of Velodyne) were being replaced following an investigation by the board’s audit committee that found they had “behaved inappropriately with regard to board and company processes". Velodyne’s stock, which had been plummeting since the de-SPAC, crashed even further following this announcement.

Why we are watching?

This case, unlike the previous cases mentioned, makes Section 10(b) claims regarding post-de-SPAC actions of Velodyne's board.

Plaintiffs allege that the public statements and SEC filings of Velodyne regarding its financial health and the goings-on of its board during the period of November 2020 and February 2021 were false and misleading, causing an artificial inflation of stock prices and losses to the class members.

See also: European SPAC uptick expected in 2021

Michelle Heisner
Partner
Baker McKenzie, New York
Santiago Corcuera-Mansi
Associate
Baker McKenzie, New York

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