As I noted in a recent post, one of the most distinctive phenomena in the U.S. financial markets this year has been the tremendous amount of IPO activity involving Special Purpose Acquisition Companies (SPACs). According to SPACInsider (here), there have been 243 SPAC IPOs so far in 2020 (as of December 22, 2020), raising total gross proceeds of over $81.3 billion. As I also noted in my prior post, lawsuits relating to SPACs are starting to accumulate. In the latest example of a securities suit relating to a SPAC transaction, a plaintiff shareholder has filed a securities class action against the surviving company following a SPACs acquisition of a target company; the complaint in the lawsuit names as defendants not only the CEO of the surviving company, but also the former president of the SPAC. As discussed below, this new lawsuit may have implications for possible future SPAC-related securities litigation in 2021, and possibly even beyond.
Background
Triterras, Inc. is a fintech company focused on trade and trade finance. Triterras is organized under the laws of the Cayman Islands with its principal business office located in Singapore. Triterras operates Kratos, a commodity trading and trade finance platform that connects commodity traders to trade and source capital from lenders directly online.
Triterras was formed via the November 11, 2020 merger of Netfin Acquisition Corp., a special purpose acquisition company, and Triterras Fintech Pte. Ltd. Netfin completed a $253 million IPO in 2019.
Rhodium Resources Pte. Ltd is a commodity trading business headquartered in Singapore. Rhodium is controlled by Srinivas Koneru, who is also the Chief Executive Officer of Triterras. According to the recently filed securities lawsuit complaint, Rhodium “enabled the launch of the Kratos platform, and substantially all of [the platform’s] users were referred to it by Rhodium.” The complaint also alleges that “the two entities have entered into an origination agreement to incentivize Rhodium to continue to refer its commodity trading customers to Kratos, in exchange for fixed payments to Rhodium at the time a referred customer meets total transaction volume requirements for a given period.”
On December 17, 2020, in an SEC filing on Form 6-K, Triterras announced that Rhodium had advised Triterras that on December 1, 2020 Rhodium had received a statutory demand for payment from one of its creditors. Triterras’s SEC filing stated that under Singapore law Rhodium must respond to the demand within 21 days or the creditor could file a bankruptcy application against Rhodium. Rhodium said further that “Its trading business has been adversely impacted by the COVID-19 pandemic.” Rhodium said that it was seeking a moratorium to shield itself from creditor actions while it planned a restructuring of its debts and continues its business as a going concern. According to the securities lawsuit complaint, Triterras’s share price fell 31% on the news.
The Lawsuit
On December 21, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Triterras. A copy of the complaint can be found here. The complaint names as a defendant Srinivas Koneru, the founder of Triterras who served as CEO of Triterras both before and after the acquisition; Koneru is also the founder of Rhodium. The complaint also names as a defendant Marat Rosenberg, who is the founder of Netfin and who served as Netfin’s President until the merger closed. The complaint purports to be filed on behalf of a class of investors who purchased Triterras securities between August 20, 2020 and December 16, 2020. [Netfin’s planned acquisition of Triterras Fintech Pte. Ltd. was first announced on August 20, 2020].
The complaint alleges that the defendants failed to disclose to investors “(1) the extent to which [Triterras’s] revenue growth relied on Triterras’s relationship with Rhodium to refer users to the Kratos platform; (2) that Rhodium faced significant financial liabilities that jeopardized its ability to continue as a going concern; (3) that, as a result, Rodium was likely to refer fewer users to [Triterras’s] Kratos platform; and (4) as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks recovery of damages on behalf of the plaintiff class.
Discussion
Although the allegations in this complaint are interesting in and of themselves (at least to me), the complaint is interesting in at least two other respects as well. First, it involves a lawsuit filed against a company that was acquired by a SPAC (a process that is generally referred to as a “de-SPAC” transaction). The filing of the complaint underscores the risk that litigation can and sometimes does arise following a de-SPAC transaction; indeed, in this case, the lawsuit arose just weeks after the de-SPAC transaction was completed.
The other interesting thing about this complaint is that the individuals named as defendants include not only the CEO of the post-transaction company, but also the individual who was the President of the SPAC prior to the de-SPAC transaction. The reason this is of interest is because it highlights the fact that individual directors and officers of the SPAC have litigation risk that survives the de-SPAC transaction.
The involvement of the former executive in the SPAC as a defendant in this lawsuit is important to note because, in my experience, individuals involved in organizing SPACs and taking them public often believe they are engaged in very low risk activity. To be sure, the SPAC IPO is itself a relatively lower risk endeavor – since the SPAC has no pre-IPO activities or employees, and even after the IPO, the SPAC exists simply as a pool of funds intended for a future investment, there isn’t likely to be much litigation involving the IPO.
However, once the SPAC moves toward a de-SPAC transaction, litigation risks increase. For starters, in connection with a planned transaction, the SPAC must release a proxy document in order to support the vote of the SPAC shareholders in connection with the proposed transaction. Plaintiffs lawyers can and often do file the typical merger objection lawsuit under Section 14(a) in connection with the proposed transaction. (For a recent example of one of these merger objection lawsuits in connection with a proposed de-SPAC transaction, refer to the December 3, 2020 complaint filed in Schuman v. Hennessey Capital Acquisition, here.)
And as this lawsuit shows, the increase litigation risk continues after the SPAC has completed the de-SPAC transaction. This lawsuit is far from the first post de-SPAC transaction lawsuit that names as defendants former directors or officers of the SPAC. As I discussed in my prior post about SPACs, another recent high-profile example of a post de-SPAC transaction lawsuit in which former officers of the SPAC were named as defendants is the securities suit recently filed against electric vehicle company Nikola.
There is a particular reason why I think all of this is important, and that is because of its implications for possible future securities litigation in 2021 and perhaps beyond. With all of that SPAC IPO activity in 2020 that I detailed above, there are going to be a ton of de-SPAC transactions in the weeks and months ahead. Many of the SPAC transactions will be successful. However, some will not. Some of the acquired companies will stumble or hit an obstacle after the de-SPAC transactions, and in some instances litigation will follow. Many of these lawsuits will involve former directors or officers of the SPAC as defendants.
There is a particular reason why these possibilities concern me. That is, with all of the SPAC funding chasing promising public companies to acquire, it is entirely possible that the best deals have already been done or that after a while the best private companies will have been acquired. The risk is that the SPAC dollars might start chasing less promising options, which would increase the possibility that some acquired companies might stumble as post-transaction public companies.
All of these factors make me think that we could see more post-transaction litigation in 2021 against companies that were acquired by SPACs.