Regular readers know that I have been tracking new securities class action lawsuits filed related to SPACs and SPAC transactions. In the latest of these suits — a securities class action lawsuit filed against a company that was acquired by a SPAC in September 2020 — a plaintiff shareholder has filed a securities suit against the company relating to post-transaction board actions taken against senior company officials. The complaint in the securities class action lawsuit filed on March 2, 2021 against Velodyne Lydar, Inc. can be found here. Also, please note the further discussion below relating to yet another recent SPAC-related securities lawsuit, as well.
Background
Graf Industrial Corp. is a special purpose acquisition company that completed its IPO in October 2018. Velodyne Lydar is develops automated systems for surround-view lidar sensors. Velodyne became a public traded company on September 30, 2020, when it merged with Graf.
On February 22, 2021, Velodyne published a press release (here) in which the company announced that it had “removed David Hall as Chairman of the Board and terminated Marta Hall’s employment as Chief Marketing Officer” after an Audit Committee investigation “concluded that Mr. Hall and Ms. Hall each behaved inappropriately with regard to certain Board and Company processes, and failed to operate with respect, honesty integrity, and candor in their dealings with Company officer and directors.”
The February 22 press release further states that the Audit Committee investigation had commenced in December 2020 and had been conducted by an independent law firm. Based on the investigation, the Board approved the remedial actions involving the removal of Mr. Hall and the termination of Ms. Hall. The Board also formally censured Mr. Hall and Ms. Hall and “directed them both to receive appropriate remedial training.” The press release notes that the two individuals will “remain members of the Company’s Board of Directors.”
The subsequent securities class action complaint does not refer to it, but on February 24, 2021, David Hall and Marta Hall issued a press release in response to the actions described in the company’s February 24, 2021 press release. Among other things, the February 24 press release identifies David Hall and Marta Hall as the company’s founders and states that the two own voting control of over 58% of the company’s outstanding common stock.
In the February 24 press release, David Hall and Marta Hall assert that they “have acted ethically and tirelessly to advance the best interests of” the company and presided over years of growth and success” and “laid the groundwork for Velodyne Lidar to go public via a reverse merger.” The Board’s “rash decision” to censure them was “based on an opaque, secret investigation into baseless, unfounded claims” that revela that the company’s “governance is broken.” The move to strip them of their positions “appears more like an internal power grab that a pro-stockholder action.” The press release concludes by stating that “we are committed to righting these wrongs in the weeks ahead and plan to communicate substantive updates in the near-term.”
A February 22, 2021 Reuters article about the developments at Velodyne (here) paraphrases Marta Hall as saying that “the special-purpose acquisition company (SPAC) that took Velodyne public through a reverse merger last fall was trying to cut the Halls out of the decision-making process at Velodyne.”
The Lawsuit
On March 2, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Velodyne, Anand Gopalan, its current CEO, and Andrew Hamer, its current CFO. The complaint purports to be filed on behalf of a class of investors who purchased company securities during the period November 9, 2020 to February 19, 2021. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and seeks to recover damages on behalf of the plaintiff class.
The complaint refers generally to a number of public statements of the company prior to the February 22 press release and alleges that in these various statements the defendants failed to disclose to investors “(1) that certain of Velodyne’s directors had failed to operate with respect, honesty, integrity, and candor in their dealings with the Company’s officers and directors; (2) that the Company was investigating the foregoing matters; and (3) that, 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 refers to the February 22 press release and asserts that the company’s share price declined 15% on the news and the price of its warrants declined 20%.
Discussion
This lawsuit relates to a company that merged with a SPAC last fall. The complaint expressly refers to the company’s merger with the SPAC. However, the complaint does not contain any substantive allegations relating to the SPAC or to the deSPAC transaction. The complaint does not refer to any actions that took place prior to the deSPAC transaction. The complaint does not name as defendants any of the former directors or officers of the SPAC. In that respect, this lawsuit is similar to the lawsuit filed in January 2021 against QuantumScape (discussed here), in that both lawsuits involve post-deSPAC transaction companies but neither of the lawsuits refers to the transaction and neither lawsuit names former SPAC officials as defendants.
While this lawsuit has these features differentiating it from other SPAC-related litigation in which, for example, the lawsuits include as defendants former directors and officers of the SPAC and refer to pre-deSPAC activity, it still does involve a company that recently became publicly traded as a result of a transaction with a SPAC, similar to the QuantumScape lawsuit. Just as I have counted the QuantumScape lawsuit in my tally of 2021 SPAC-related securities class action lawsuits, I will also include the new lawsuit against Velodyne Lidar in my running tally as well.
By my count, the Velodyne lawsuit represents the fifth SPAC-related securities class action lawsuit to be filed so far this year. (With respect to the tally, please also see my further note below relating to pre-deSPAC merger objection litigation.)
Though this lawsuit does not include any substantive allegations relating to the deSPAC transaction or to pre-deSPAC activities, the lawsuit is still interesting and indicative of future possible litigation involving companies that become publicly traded as a result of a merger with a SPAC.
The fact is that as a result of a merger with a publicly traded SPAC, a private company not only achieves a public listing, but also faces all the burdens and responsibilities that go with being a public company. For some companies, there may be growing pains associated with going from being a private company to being a public company. It is very hard to tell from the outside what happened at Velodyne involving David Hall and Marta Hall, but whatever it was, the impression is that the two individuals – founders and principal shareholders of the company – may have continued to treat the company as if it still were their show. In that regard, I note the paraphrased statement attributed to Marta Hall cited in the Reuters article cited above that “the special-purpose acquisition company (SPAC), that took Velodyne public through a reverse merger last fall was trying to cut the Halls out of the decision-making process at Velodyne.”
The kinds of problems that can arise for private companies that become public companies are going to be worth keeping in mind in the months ahead. In the 14 months since January 1, 2020, there have been over 450 SPAC IPOs; there are currently more than 360 SPACs looking for acquisition targets. In the months ahead, there are going to be a ton of private companies that are going to become public companies through future deSPAC transactions. Many of these companies will be well-positioned for the burdens and responsibilities of being publicly traded; however, some may not be. Some of these formerly private companies may stumble, and when they do they may find themselves facing the unwanted attention of the plaintiffs’ lawyers.
All of that said, it is probably worth noting that the plaintiffs’ lawyers in this particular case likely will face an uphill battle in seeking to establish that the circumstances described in the complaint constitute securities fraud. On consideration of the motion to dismiss, the court will have to search hard to find allegations sufficient to establish that investors were misled or that the supposedly misleading statements were made with scienter. In other words, merely because there may be lawsuits filed against companies that become publicly traded as a result of mergers with SPACs does not mean that the allegations will necessarily be meritorious.
Merger Objection Lawsuit Filed Against SPAC: In addition to SPAC-related securities class action lawsuits, there also recently have been several SPAC-related merger objection lawsuits filed, typically as individual actions rather than as class actions. These lawsuits typically are filed against the SPAC company itself shortly it announces its planned merger and before the transaction is completed. The defendants typically include certain directors and officers of the SPAC. The complaints typically allege that the defendants violated Section 14 (a) and 20(a) of the Securities Exchange Act of 1934 and are typically based on allegations of misrepresentations or omissions in the proxy statement through with the SPAC is seeking shareholder approval of the planned acquisition.
The latest example of this type of lawsuit is the complaint filed on March 1, 2021 against Thunder Bridge Acquisition II Ltd., in connection with Thunder Bridge’s proposed merger with Ay Dee Kay, LLC d/b/a indie Semiconductor (“indie”). The complaint, a copy of which can be found here, alleges that Thunder Bridge and certain of its directors and officers violated Section 14(a). The action is filed as an individual action, rather than as a class action.
There have of course been a number of prior lawsuits along these lines (refer for example here). There is however a particular feature of the Thunder Bay complaint that is noteworthy. The complaint references and in fact actively links to the November 19, 2020 Harvard Law School Forum on Corporate Governance article entitled “A Sober Look at SPACs” (here) written by Stanford Law Professor Michael Klausner, NYU Law School Professor Michael Ohlrogge, and Emily Ruan of Stanford. This article, if you are not familiar with it, raises many questions and concerns about the way SPACs are organized and structured.
From the very first time I read the “Sober Look” blog post, I realized the post raises concerns that could well find their way into future litigation. The post seems to me like a distant early warning, like a forecast of an approaching storm. The one thing I have wondered was whether the article had caught the attention of plaintiffs’ lawyers; we now know the answer to that question. Yes, the article has caught the attention of plaintiffs’ lawyers. And not only have the plaintiffs’ lawyers read it, they are quoting it in their complaints.
If you have not yet read the article, I strongly recommend that you take some time and read it. Just like the information in a weather report, you may find the information in the blog post both interesting and useful.
