(Reuters) – I’m not the first to predict it, but the past few weeks have brought unmistakable signs that shareholder class action firms are homing in on Special Purpose Acquisition Companies, those so-called blank-check entities that go public in order to raise cash to acquire a private business within a limited time frame. More than 170 SPACs have tapped capital markets so far in 2020, raising upward of $50 billion, according to analysis by Kevin LaCroix at the D&O Diary. And though Reuters reported earlier this month that the SPAC IPO frenzy may be abating, plaintiffs’ firms seem eager to pursue class action claims that some SPAC deals breached securities laws.
The most convincing evidence: intense competition to lead a proposed shareholder class action against the electric truck maker Nikola. Nikola began trading on the Nasdaq in June, after it was acquired by a SPAC called VectoIQ Acquisition in a $3.3 billion merger. In September, the company’s shares plummeted by as much as 30%, or more than $1 billion, after the short-seller Hindenburg Research accused Nikola of fraud. Nikola denied the allegations, but the Securities and Exchange Commission opened an investigation within days. The company subsequently disclosed that Nikola and founder Trevor Milton have also received grand jury subpoenas from the Justice Department. (Milton resigned as CEO in September.)
Shareholders filed prospective class actions in Arizona, New York and California alleging that Nikola, Milton and other Nikola and VectoIQ executives committed securities fraud in statements and SEC filings before and after the merger closed. Shareholders agreed that the cases should proceed before U.S. District Judge Steven Logan in Phoenix. Lead plaintiff briefs were due on Nov. 18. Most of the big names in the shareholder bar made a bid, including Lieff Cabraser Heimann & Bernstein; Entwistle & Cappucci; Robbins Geller Rudman & Dowd; Pomerantz; Block & Leviton; Labaton Sucharow; Kessler Topaz Meltzer & Check; Bernstein Liebhard; Wolf Popper; the Rosen Firm and Faruqi & Faruqi.
The turnout in the Nikola case is a significant increase from lead plaintiff bids in a year-old SPAC class action against Landcadia Holdings and Waitr, the food delivery company Landcadia acquired in 2018. In that case, Kahn Swick & Foti’s client beat out (2020 WL 4758269) a Pomerantz client to lead the class action. And in the SPAC class action over Modern Media Acquisition’s 2019 reverse merger with the music streaming company Azakoo, only the Rosen Firm moved for its client to be named lead plaintiff.
The biggest loss in the Nikola case was alleged by T3 Trading Group, which claimed that it owned nearly 30,000 shares in VectoIQ as of the date of the shareholder vote on the Nikola merger. T3’s lead plaintiff brief said that in total, T3 invested $380 million in Nikola shares during the class period, which it said should begin with the merger announcement in March 2020 and extend to mid-September. T3 alleged losses of $15 million.
T3’s lawyers at Lowey Dannenberg did not respond to my email. Nikola counsel from Kirkland & Ellis declined to comment.
T3’s claimed losses are big enough that Lieff Cabraser and Entwistle & Cappucci have already dropped their clients’ lead plaintiff bid. But Andrew Entwistle told me by email that the Nikola case probably won’t be his firm’s last foray into SPAC class actions. “The interest in SPACs is wholly driven by the fact that they are a structure that lends itself to abuse,” Entwistle said. SPAC sponsors, he explained, typically promise investors that their capital will be used to acquire a target company within a particular time frame, usually two years or less, or their money will be returned. That time pressure to find a target and complete a deal “can cause the interests of promoters and investors in the SPAC to be out of alignment,” Entwistle said. “When that happens, SPAC investors often find themselves exposed to undisclosed and unanticipated risks.”
A spate of press releases by shareholder firms purporting to investigate SPAC acquisitions also hints that plaintiffs’ lawyers are eager to target SPACs. Look, for instance, at recent announcements by Monteverde & Associates. The firm, best known for filing shareholder suits over M&A deals, has reached out in the last few weeks to investors in five different SPACs. WeissLaw, another frequent filer of M&A class actions, put out press releases this month about four other blank-check companies. To be sure, press releases touting “investigations” by plaintiffs’ firms are a long way from actual class actions. But the firms’ announcements demonstrate that the plaintiffs’ bar sees potential in SPAC shareholder class actions.
Just ask class action defense lawyers. Quinn Emanuel Urquhardt & Sullivan discussed potential shareholder litigation in its Oct. 1 client alert, Litigation Risk in the SPAC World. Cleary Gottlieb Steen & Hamilton warned about SPAC investor class actions at the Harvard Corporate Governance Blog on Nov. 9. Freshfields blogged about D&O insurance for executives of SPACs and their target companies on Nov. 13.
“We have seen an unmistakable increase,” said Susan Saltzstein of Skadden, Arps, Slate, Meagher & Flom, who has been tracking recent SPAC class action filings in state and federal court. And, according to Saltzstein, the filings don’t tell the whole story because some plaintiffs’ firms don’t even go to the trouble of suing, instead simply asserting “behind-the-scenes demands … targeting proxy statements and other corporate filings,” Saltzstein said in an email. Those demands, she said, typically allege inadequate disclosures – even though, according to Saltzstein, the purported disclosure deficiencies “often fall within categories that are hardly material and have been rejected by courts.”
Saltzstein’s depiction sounds a lot like M&A shareholder litigation. Disclosure class actions, as you know, were once a staple of Delaware Chancery Court, then migrated to federal court and have since morphed into dismissed cases by individual shareholders whose lawyers say they’re owed mootness fees for enhanced disclosures. You may recall that the 7th U.S. Circuit Court of Appeals is considering whether trial judges have the inherent power to dismiss baseless M&A challenges. The appellate court’s decision in that case, Saltzstein said, could also affect the future of shareholder SPAC cases.