In the latest example of a post de-SPAC transaction electric vehicle company getting hit with a securities class action lawsuit, a plaintiff shareholder has filed a securities suit against Canoo, Inc. as well as against the former directors and officers of the SPAC into which Canoo merged in December 2020. The new lawsuit is one of many securities suits that have been filed against companies in the electric vehicle industry. The underlying circumstances may illustrate some of the pitfalls involved when a fledgling private firm becomes a publicly traded company. The plaintiff’s April 2, 2021 complaint can be found here.
Hennessy Capital Acquisition Corp. IV is a special purpose acquisition corporation (SPAC). Hennessey completed its IPO in March 2019. On August 18, 2020, Hennessey issued a press release in which it announced that it planned to merge with electric vehicle company Canoo Holdings Limited. Hennessey voted to approve the merger on December 21, 2020, with Canoo, Inc. as the surviving entity and as a publicly traded company.
The August 18 press release announcing the merger emphasized Canoo’s “unique business model” and highlighted the company’s opportunities to realize revenues from providing engineering services to other companies and a separate strategy of attempting to sell electric vehicles to consumers on a subscription-vehicle service. In Hennessey’s subsequent filings and in the documents prepared in support of the merger, the Hennessey highlighted these aspects of Canoo’s business model. The filings and documents also highlighted Canoo’s existing relationship with Hyundai Motor Group as a demonstration of the potential of its engineering services model.
On March 29, 2021, in Canoo’s first post-merger conference call as a publicly traded company, and just three months after the merger was completed, Tony Aquila, Canoo’s Executive Chairman (and Executive Chairman of Hennessey prior to the merger) announced that the company would “de-emphasize the originally stated contract services line” and instead would emphasize a different strategy of selling its own vehicles to commercial operators (rather than to consumers through a subscription model). Canoo’s Founder and CEO, Ulrich Kranz, did not participate in the call. The company also announced the same day that the company’s post-merger CFO has resigned, effective April 2, 2021.
A March 29, 2021 article in The Verge about the conference call (here) quoted a securities analyst as having said during the call that “These are significant surprises on the call today, and that’s not ideal.” The article also reported that Canoo’s reported arrangement with Hyundai apparently was “dead.”
The article also reported that when Aquila was asked in the call about the apparent departure from the company’s prior strategy, Aquila said company management had been “a little more aggressive” than he would’ve been with some of their public statements, and that talk of potential partnerships was “presumptuous.” The article also quoted Aquila as having said “You’ve got to be careful with statements you make. So, you know, again, I think it was a little premature.”
In the subsequently filed securities class action lawsuit, the complaint alleges that the price of Canoo’s shares fell 21% in the next trading day after the press conference.
On April 2, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against Canoo; Kranz, Canoo’s Founder and CEO; Aquila, who was Executive Chairman of Hennessey prior to the merger and who became Executive Chairman of Canoo post-merger; and nine other former directors and officers of Hennessey.
The complaint purports to be filed on behalf of a class of investors who purchased securities of Canoo (or its predecessor in interest, Hennessey) between August 18, 2020 (when the merger was announced) and March 29, 2021 (the date of the conference call). [NOTE: A second complaint was also filed in the Central District of California on April 2, 2021 against Canoo. The second complaint named as individual defendants only Kranz; Aquila; and the CFO whose resignation was announced on March 29, 2021. A copy of the second complaint can be found here.]
The complaint quotes at length from the August 18 press release as well as the various pre- and post-merger filings the company made in which the company described Canoo’s business strategy. The complaint alleges that the defendants failed to disclose to investors “(1) that Canoo had decreased its focus on its plan to sell vehicles to consumers through a subscription model; (2) that Canoo would de-emphasize its engineering services business; (3) that, contrary to prior statements, Canoo did not have partnerships with original equipment manufacturers and no longer engaged in the previously announced partnership with Hyundai; and (4) 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 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 to recover damages on behalf of the investor class.
In an April 2, 2021 article entitled “EV Companies Went Public With Big Plans. They’re Quickly Hitting Snags” (here), the Wall Street Journal noted that in the past year a number of electric vehicle companies have entered the public securities market with ambitious plans, but that now, “months into their lives on the public markets, a set of these companies are missing targets, adding costs and, in one case, upending major parts of a business model.” The article not only refers to Canoo, but also notes several other electric vehicle companies, including XL Fleet and Lordstown motors. These three companies have more in common beyond the fact that they are electric vehicle companies; all three of them also recently became public companies through mergers with a SPAC – and all three of them have now been hit with securities class action lawsuits. (The recent lawsuit filed against Lordstown is described here, the XL Fleet lawsuit here.)
The fact is that electric vehicle companies have been the subject of a number of SPAC mergers in recent months, and many of these post-deSPAC transaction electric vehicle companies have also been the subject of securities class action lawsuits. In addition to Canoo, Lordstown, and XL Fleet, the list of post- SPAC electric vehicle companies that have been sued in securities lawsuits also includes Nikola (about which refer here), QuantumScape (here), and Velodyne Lydar (here).
To be sure, the plaintiffs lawyers are not only targeting electric vehicle companies that went public through a merger with a SPAC; in recent months, plaintiffs lawyers have also targeted other electric vehicle companies as well , including Ehang Holdings (about which refer here), and Workhorse Group (here).
The one thing that is slightly different in the lawsuit against Canoo compared to lawsuits filed against several of the other electric vehicle companies is that, unlike many of the other companies sued, Canoo was not the subject of a short-seller report that precipitated a stock price drop that triggered the lawsuit.
There are a couple of things about the Canoo lawsuit worth emphasizing in thinking about what the lawsuit may mean more generally in terms of securities class action liability exposures. First of all, it should be noted that the individual defendants named in the lawsuit includes all of the pre-merger directors of the SPAC itself. The complaint itself is replete with quotations from pre-merger statements of the SPAC. These considerations are significant when thinking about the scope of potential liabilities of directors and officers of SPACs generally.
The second thing worth noting about the Canoo lawsuit has to do with the way that the company seemingly stumbled out of the gate in its life as a public company. It is of course not uncommon for newly public companies to have problems early in their public company life; that is one of the important reasons that traditional IPO companies are viewed as higher risk than more mature companies. But I think that the way that Canoo stumbled is particularly important.
In that respect, it is worth reading the lengthy quoted statements in the complaint from the March 29 conference call; it seems pretty clear that Canoo’s Executive Chairman, Aquila (who was also Executive Chairman of the SPAC), thinks that the company’s management may have made some statements they possibly shouldn’t have and that the fact that these statements got made had to do with management’s lack of public company experience.
Thus, in commenting on what he call the company’s management’s prior “aggressive” statements, Aquila is quoted as saying that “I think more maturity of this team would not be that presumptuous” and that “I think they had the opportunities but they weren’t at our standard of representation to the public markets,” adding that “this comes back to having an experienced public company here to be careful of the statement you make. So again, I think it was a little premature.” He also said “I think the Company just like any adolescent company is it’s learning.” There are numerous other statements in the same vein.
The pretty clear implication of Aquila’s conference call statements is that Canoo’s management may not have been ready for life as a public company; the problem for everyone is that the company is going through these growing pains as a public company, and the company’s investors are affected as a result.
In thinking about these statements and what their larger meaning might be beyond the context of just this one company, I think it is important to note that there are now well over 400 SPACs looking for private companies with which to merge. The question that has to be asked is whether there are really that many private companies that not only have promising business plans but that are also ready for the scrutiny, burdens, and responsibilities that go with being a public company. It is also worth emphasizing that it is not just formerly private electric vehicle companies that will undergo scrutiny and that could fall prey to similar problems – all companies will face the scrutiny, regardless of their industry.
Companies that go public through traditional IPOs also sometimes stumble. But there generally is a process for companies that complete traditional IPOs to try to ready themselves for life as a public company. Some commentators have noted that companies going public through merger with a SPAC may not have the benefit of these processes. Which raises the question whether at least some companies that go public through merger with a SPAC are ready for what comes next.
In any event, I note in closing that this lawsuit is by my count the eighth SPAC-related securities class action lawsuit to be filed this year. (My count differs from that of other publicly available sources; for example, the Stanford Law School Securities Class Action Clearinghouse has a slightly higher count that I do, as it has included in its tally certain lawsuits that were filed as individual actions and not as class action lawsuits). I expect that this count will grow as the year progresses.
In thinking about when the full litigation potential of the current SPAC frenzy might be realized, it is worth contemplating the fact that Hennessey completed its IPO in March 2019; the subsequent sequence of events took a couple of years to play out. The lawsuit came in two years after the IPO. Just something to think about when trying to prognosticate when we are likely to see litigation relating to the SPAC IPO classes of 2020 and 2021.