SPAC Litigation Has Arrived

This article was originally published in ABA’s Business Law Today Month-in-Brief

We all knew it was coming. With 248 SPAC IPOs in 2020 and 324 SPACs already gone through their IPOs in 2021, it was inevitable that the plaintiffs’ bar would take notice and launch at least a few lawsuits. As of mid-May, 13 SPAC-related securities lawsuits have been brought against SPACs in 2021. One of the latest was filed on May 14, 2021 against Danimer Scientific, Inc., a biodegradable plastics company which merged with Live Oak Acquisition Company, a SPAC, on December 29, 2020. The complaint is available here and an in-depth discussion about the case is here.

Some interesting trends are starting to emerge from the SPAC lawsuits. For example, seven of the securities lawsuits have come about following a publication of a short seller’s report. Most of these lawsuits are filed in connection with the SPAC’s business combination or de-SPAC.

The defendant roster is broad and can include not only the post-merger going forward entity, but also the original SPAC, the pre-merger private company and the directors and officers of all three. The plaintiffs can be pre-merger SPAC stockholders, stockholders of the private company to be acquired by the SPAC, stockholders of the merged entity or a combination of these.

Lawsuits are brought in state and federal courts and in some cases in several state and federal courts against the same entities based on a similar set of circumstances. The majority of the lawsuits are filed shortly after the merger but at least one, the acquisition of Lucid Motors by Churchill Capital Acquisition Corporation IV, was filed before the merger was even completed.

In addition to the securities class actions suits, some of which are very likely to result in large settlements, the garden variety merger objection suits are very common. In fact, these kinds of suits are almost a given and come shortly after almost every SPAC merger announcement. They typically allege insufficient disclosure, are followed by an 8-K filing that responds to the insufficient disclosure allegations, and go away relatively quickly for, according to some market participants, a behind-the-scenes fee of around $50,000.

The heftier securities lawsuits are not as ubiquitous but have not yet gone far enough in their process to yield enough settlement data. One lawsuit, involving a streaming media company, Akazoo, that merged with a SPAC called Modern Media in September of 2019, recently reached a partial $35 million settlement. The circumstances in that lawsuit involved the acquired company defrauding the SPAC and a consequent SEC enforcement action. The fraud in that lawsuit, however, is not a common element in the more recent lawsuits brought against SPACs.

The allegations in most of these suits typically focus on misstatements or omissions in the pre-merger disclosure and on the breach of the directors’ and officers’ fiduciary duties in sourcing and acquiring the private company. Improper or insufficient diligence is a frequent area of concern and post-merger integration issues have also been cited. For some of the pre-revenue or new technology companies, like the recent wave of electric vehicle companies merging with SPACs, allegations frequently revolve around those companies overstating the qualities or characteristics of their unproven technologies. Overly optimistic projections have also become an issue, one that SEC specifically called it out in its recent statements.

With all these varying elements, SPAC litigation will continue to evolve and eventually we will get a sense of how serious and costly a typical SPAC lawsuit is likely to be. For now, there is no question that lawsuits will continue to be brought and that they are worth watching.

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