Readers of this blog know that there have been several SPAC-related securities class action lawsuits filed in 2021, with the suits mostly coming in after the de-SPAC transaction has been completed. Even readers who think they get the idea already will want to be sure to take a look at the new SPAC-related lawsuit that came in earlier this week. What makes this one different is that, though the lawsuit names both the SPAC and the SPAC merger target company as defendants, the merger, though announced, has not yet even taken place. And, mind you, this is not your garden variety merger objection lawsuit, it is a full blown 10b-5 class action lawsuit. Interested? Read on.
Churchill Capital Acquisition Corporation IV (Churchill IV), is a special purpose acquisition corporation (SPAC) that was formed in April 2020 and that completed an IPO on July 30, 2020. If the name Churchill Capital Acquisition Corporation sounds familiar, it is because one its related predecessor SPAC entities, Churchill Capital Acquisition Corporation III, is enmeshed in both federal court securities class action litigation (refer here) and state court breach of fiduciary duty litigation (here) relating to its merger with MultiPlan Corporation.
The Churchill SPAC entities were sponsored by M. Klein and Company, an investment firm of which Michael Klein is the founder and managing partner. Michael Klein is the founder, Chairman, CEO and director of Churchill IV.
On February 22, 2021, Churchill IV announced that it had entered an agreement to merge with Lucid Motors, an electric automobile manufacturing company. Lucid was founded by Peter Rawlinson in 2007. Rawlinson remains CEO of Lucid.
Though the planned merger was not announced until February 22, 2021, several weeks before the merger was announced, on January 11, 2021, Bloomberg, in an article entitled “Lucid Motors in Said to Be in Talks to List Via Michael Klein SPAC” (here), reported that “Electric vehicle maker Lucid Motors is in talks to go public through a merger with one of Michael Klein’s special purpose acquisition companies.” Prior to the Bloomberg article, Churchill IV’s shares had been trading at $10.03 per share. Following the publication, the shares climbed to $13.20.
According to the subsequently filed securities lawsuit complaint, by January 22, 2021, Churchill IV’s shares were trading as high as $22.35, due to rumors about the Lucid merger.
On February 4, 2021 (that is, still weeks before the merger was announced), Rawlinson, the Lucid CEO, told Forbes that the company wants to build 6,000 vehicles in 2021, potentially generating revenues of $900 million. That day, Churchill IV’s shares closed at $30.22.
According to the subsequently filed securities lawsuit complaint, Rawlinson appeared in interviews on CNBC on February 5, 2021, and on Fox Business News on February 16, 2021, in which he talked about the company’s 2021 production plans and plans for growth. Churchill IV’s stock price continued to climb, closing on February 18, 2021 at an all-time high of over $58.
On February 22, 2021, the Churchill IV merger was formally announced. That same evening, Rawlinson told Bloomberg News that production of the first Lucid car would be delayed until at least the second half of 2021, and that the company was projecting 2021 production of 557 vehicles, instead of 6,000 as he had previously said. On February 23, 2021, the price of Churchill IV’s stock declined to $35.21. As of April 18, 2021 (the day the complaint was filed), the share price had declined to $19.52.
On April 18, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of Alabama against Churchill IV. A copy of the complaint can be found here. The complaint also names as defendants Lucid Motors (well, actually, Atieva, Inc. d/b/a Lucid Motors); Michael Klein; Jay Faragin, the CFO of Churchill IV; and Rawlinson.
The complaint purports to be filed on behalf of a class of investors who purchased Churchill IV securities between January 11, 2021 (the date of the Bloomberg article) and February 22, 2021 (the date the merger was announced). 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 plaintiff class.
By my count, this lawsuit is the 11th SPAC-related securities class action lawsuit to be filed so far in 2021. (My count may differ from other publicly available tallies, as my count includes only lawsuits filed as class actions; I do not include individual actions.)
The lawsuit shares a number of similarities with many of the previously filed SPAC-related lawsuits. For example, it involves SPAC merger in the electric vehicle industry. For a time in late 2020 and early 2021, EV companies were the subject of a great deal of investor enthusiasm, and valuations in the industry soared. As investor enthusiasm recently has shifted to skepticism, valuations have declined, and many of the EV companies have become involved in securities suits. (In the discussion section of a recent post, here, I list all of the SPAC-related EV companies that have been hit with securities suits, as well as the EV companies not involved in SPAC transactions that have also been hit.)
The thing that makes this lawsuit different from the earlier lawsuits is that the SPAC merger transaction has not yet taken place. Churchill IV remains just a SPAC, Lucid Motors remains a private company. Rawlinson is the CEO of a private company.
I emphasize the timing of the lawsuit and the status of the corporate entity defendants because the context is important in relation to the ongoing D&O insurance industry thinking about SPAC-related securities litigation risks. The common perception is that the only litigation risks for a SPAC prior to the merger are the inevitable pre-merger merger objection lawsuits alleging proxy misrepresentations or inadequate consideration. The risk of these kinds of merger objection lawsuits is generally viewed as perhaps unavoidable but not really all that serious.
However, this lawsuit is not a run-of-the-mill merger objection lawsuit. In fact, there are no allegations in this lawsuit about the merger terms or proxy disclosures. Rather, the defendants are alleged to have made statements or omissions that drove the pre-merger share price of the SPAC itself. The lawsuit is a full-blown class action damages suit under the ’34 Act, even though the merger has not yet even taken place. This development represents an interesting new angle on the possibilities for pre-merger litigation risks for SPAC entities and their directors and officers.
Then there is Lucid Motors. It is still a private company. Rawlinson is the CEO of a private company.
The D&O insurance for Lucid Motors and its CEO likely is written on a private company D&O form. I have no way of knowing the specific terms and conditions of Lucid’s D&O insurance policy. It may well be that given Lucid’s high profile nature and its prior significant valuations, it is written on a form that provides insurance for securities law liabilities. If so, good for them. However, most private company D&O insurance policies have a securities law liabilities exclusion, precluding coverage for loss arising from claims for violations of the securities laws. To be sure, some policies specify that the exclusion only applies if the company has completed an IPO. But not all private company securities law liability exclusions are worded this way. The securities law liability exclusion in many private company D&O insurance policies, at least if unamended, would preclude coverage for claims like the ones brought against Lucid Motors and Rawlinson in this lawsuit.
The fact that the securities claims were brought against Lucid Motors and Rawlinson before the company became a public company is worth thinking about. The common perception is that securities law liabilities for the SPAC merger target company arise only once the merger transaction has been completed. As this lawsuit demonstrates, there are circumstances when SPAC merger targets’ securities law liabilities could not only involve pre-merger conduct (which is not all that unusual or unexpected) but could also arise in a lawsuit filed prior to the merger (which may not always be fully anticipated). Whether or not there is coverage under a pre-merger private company D&O insurance policy for a securities claim made before the merger is completed is going to depend on the wording of the securities law liabilities exclusion, among other things.
Though Lucid Motors and Rawlinson have been sued in a securities lawsuit, it is a very peculiar sort of securities claim. The claimants are not shareholders of Lucid; the claimants are shareholders of Churchill IV. So here’s a thought problem for D&O insurance practitioners: would the securities claims that have been filed against Lucid and Rowlinson meet the definition of Securities Claim if Lucid’s insurance had been written on a public company D&O insurance form?
The answer depends on the approach taken in the policy form. Some public company D&O insurance policies define a Securities Claim as a Claim alleging a violation of the securities laws. Other policies define a Securities Claim as a Claim brought by the company’s shareholders. Some policies work a combination of these two approaches. But it could be that under a public company insurance policy that requires a Claim to be brought by the company’s shareholders in order for the Claim to be a Securities Claim, the kind of claim brought against Lucid here (that is, a Claim brought by shareholders of another company) would not meet the definition of Securities Claim. A thought-provoking set of circumstances for any D&O practitioner, for sure…
There is even more to think about here. For starters, the whole conversation about possible insurance coverage for a claim like this is focused solely on risk transfer solutions for potential securities law liabilities. This case presents a textbook example of the much greater significance of risk management (as opposed to risk transfer) as a method to try to address potential securities law liabilities. What do I mean by “risk management”? It means things like making sure that when your private company is in talks that could lead to the company becoming a public company, the CEO should not be out making statements and giving interviews in which he or she is making projections about the company’s conjectured future.
Another thing to think about is that this is the second round of serious corporate and securities litigation relating to one of the Churchill SPACs. I state that as a fact. Readers can look at the circumstances and decide for themselves what they think the significance is of this fact. And that’s all I am going to say on that topic.
One final note. For an aspiring artistic director thinking of staging a dramatic rendition of this story, in order to appreciate Rowlinson’s motivation, it is important for the artistic director to understand that before founding Lucid, Rowlinson was Vice President of Vehicle Engineering at Tesla and Chief Engineer of the Tesla Model S. Rowlinson’s time at Tesla clearly has left a mark. In his statements to the press quoted in the securities class action lawsuit complaint, it appears as if Rowlinson were channeling his inner Elon Musk, as if Musk’s approach represents the one true path for a successful electric vehicle company CEO. As far as I can tell, the electric vehicle industry appears to be full of executives in full Elon Musk emulation mode.