Securities class actions involving Special Purpose Acquisition Companies (SPACs) can raise interesting issues. A SPAC is a publicly traded shell company created to merge with an existing privately held business so as to allow the target company to go public without the time, expense, and regulatory scrutiny of an initial public offering. If the privately held business makes material misstatements that affect the SPAC’s stock price prior to the merger, can that company and its officers be liable for securities fraud?
The U.S. District Court for the Northern District of California recently considered that question in In re CCIV/Lucid Motors Sec. Litig., 2023 WL 325252 (N.D. Cal. Jan. 11, 2023). CCIV is a SPAC that acquired Lucid Motors, an electric car manufacturer, in February 2021. CCIV’s shareholders brought a securities class action alleging that in the weeks prior to the announcement of the merger, Lucid had made false and misleading statements about its production capacity and production start date that caused CCIV’s stock price to artificially increase because there were market rumors about a possible merger. Once the merger was entered into, Lucid disclosed that its factory was not yet built and production would not begin in spring 2021, leading to a 36% decline in CCIV’s stock price.
In their motion to dismiss, the defendants argued that CCIV’s shareholders did not have standing to sue Lucid and its officers because the alleged misstatements were about Lucid, not CCIV. The defendants relied heavily on a pair of Second Circuit decisions (Nortel and Menora) holding that stockholders do not have standing when the company whose stock they purchased is negatively impacted by the material misstatements of another company. The district court did not find those decisions persuasive, noting that they appeared to rely on an overly restrictive reading of Supreme Court precedent. Moreover, while other courts outside the Second Circuit have adopted the same approach, some decisions have suggested that there might be an exception to the general rule if the two companies have a direct relationship, as in a merger. Nor did the district court find that there was any public policy rationale for limiting standing in this situation, noting that the Supreme Court has rejected proposed limitations on the Section 10(b) private right of action in the past.
Despite finding that standing existed, the district court ultimately dismissed the claims for lack of materiality. In particular, the district court found that “[t]o show information regarding a potential merger is material plaintiffs must be able to allege that the merger was likely to occur at the time they relied on defendants’ misrepresentations.” In this case, however, the alleged misrepresentations were made at a time “when Lucid and CCIV had not even publicly acknowledged that a merger was being considered.” Under these circumstances, the district court held, alleged misstatements about Lucid could not have been material to CCIV’s investors.
Holding: Motion to dismiss granted with leave to amend.
Quote of note: “Here, plaintiffs purchased securities in CCIV and seek to hold Lucid and its CEO Rawlinson liable for inducing them to make those purchases through misrepresentations and omissions about the value of Lucid itself which CCIV then acquired. Thus, plaintiffs purchased securities, have identified specific alleged misconduct, and the alleged loss is discernible. The Court finds plaintiffs have standing.”