Electric vehicle battery company Romeo Power, which became a publicly traded company through a December 2020 merger with a SPAC, has been hit with a securities class action lawsuit following a share price decline after its announcement of a disruption in its supply chain. The new lawsuit is interesting both because of the SPAC angle and because it resulted from supply chain issues. The new lawsuit against Romeo Power was, in fact, one of two securities suits filed last week arising out of supply chain disruption. As discussed below, supply chain disruption could represent an emerging new area of corporate and securities litigation exposure. I also discuss below the fact that the new lawsuit involves yet another de-SPAC company in the electric vehicle industry
RMG Acquisition Corp., a special purpose acquisition company (SPAC), completed its IPO on February 12, 2019. On October 5, 2020, RMG announced that it had entered an agreement to merge with Romeo Power, which is focused on designing and manufacturing battery modules and packs for commercial electric vehicles. The merger was completed on December 29, 2020, with Romeo as the surviving entity, with its shares trading on the NYSE.
In the recently filed securities lawsuit complaint, the plaintiff alleges that after the merger was announced but before it was completed, the defendants made a number of statements in filings and in various news reports that Romeo projected 2021 revenue of $140 million and that the company had key partnerships with battery cell manufacturers in place. Battery cells are a critical component in Romeo’s battery modules and packs.
In a March 30, 2021 press release, Romeo disclosed its financial results for the final quarter and full year of 2020. Among other things, the company disclosed that its production had been hampered by a shortage in supply of battery cells. With respect to the company’s 2021 outlook, the company said that “our near term production and revenues will be constrained by the shortage in supply of batter cells.” The company said that it now expected 2021 revenue in the range of $18-40 million (rather than the $140 million projected prior to the merger). According to the subsequently filed securities lawsuit complaint, the company share price declined almost 20% on the news.
On April 16, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Romeo. The complaint (which can be found here) also named nine individuals as defendants: the CEO and the CFO of Romeo; the Chair and CEO of RMG; and six other individual former directors of RMG. The complaint purports to be filed on behalf of a class of investors who purchased Romeo shares (or shares of Romeo’s predecessor-in-interest RMG) between October 5, 2020 (the day the planned merger was announced) and March 30, 2021 (the day of the company reported its 2020 financial results).
The complaint alleges that, contrary to the defendants’ alleged representations during the class period, “(i) Romeo had only two battery cell suppliers, not four, (ii) the future potential risks that defendants warned of concerning supply disruption or shortage had already occurred and were already negatively affecting Romeo’s business, operations and prospects, (iii) Romeo did not have the battery cell inventory to accommodate end-user demand and ramp up production in 2021, (iv) Romeo’s supply constraint was a material hindrance to Romeo’s revenue growth, and (v) Romeo’s supply chain for battery cells was not hedged, but in fact, was totally at risk and beholden to just two battery cell suppliers and the spot market for their 2021 inventory.”
The complaint alleges further that “given the supply constraint that Romeo was experiencing during the Class Period,” the defendants “had no reasonable basis to represent that the Company had the ability to meet customer demand and that it would support growth in revenue in 2021.”
The complaint alleges that the defendants violated Section 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.
As I noted at the outset, there are (at least) two interesting things about this complaint; the first is that it involves a lawsuit filed shortly after the company went public through a de-SPAC merger; and the second is that the lawsuit arises out of supply chain disruption issues. I discuss the supply chain issues further below.
With respect to the fact that this lawsuit involves a de-SPAC company, I note that by my count, this lawsuit represents the ninth SPAC-related securities class action lawsuit to be filed this year. (My count may vary from other publicly available tallies; the Stanford Law School Securities Class Action Clearinghouse, for example, has a slightly higher count because it has included some suits in its tally that were filed as individual actions, not as class actions.)
Not only is this another lawsuit relating to a SPAC, but it is also yet another SPAC-related securities suit involving a company in the electric vehicle industry. Companies in the EV industry that merged with SPACs in recent months are having a tough time of it. The list of EV de-SPACs that have been hit with securities suits is getting long; the list includes, among others, Canoo, Inc. (about which refer here); Lordstown Motors (described here); XL Fleet (here); Nikola Motors (here), QuantumScape (here), and Velodyne Lydar (here). To be sure, it is not just de-SPAC electric vehicle companies that have gotten hit with securities lawsuits; the list of recently sued EV companies also includes Ehang Holdings (here), and Workhorse Group (here).
As has been the case with many of the lawsuits filed recently against de-SPACs, the defendants named in this lawsuit include not only individual directors and officers of the operating company, Romeo; the list of individual defendants also includes seven individual former directors and officers of the SPAC itself, RMG.
It is also interesting that this lawsuit arises out of the pre-merger publication of the projections of the target company. As readers of this blog will recall, I recently discussed (here) the public statement of John Coates, the Acting Director of the SEC Division of Corporate Finance, in which Coates publicly questioned the widely held belief that SPAC transactions were not subject to the same constraints as traditional IPOs when it comes to pre-transaction publication of financial projections. And regardless of whether SPACs are or are not subject to the same legal constraints as IPOs about projections, this case certainly underscores the risk involved with the dissemination of pre-transaction projections.
Unlike several of the de-SPAC securities lawsuits, this lawsuit did not follow after a short-seller report. However, like the lawsuit recently filed against Canoo (and to which I linked above), this lawsuit involves a company that stumbled out of the gates and that tripped up in its very first earnings release as a public company. There certainly has been no shortage of companies that have gone public through traditional IPOs that have stumbled out of the gates; just the same, the track record of many recent de-SPAC companies does raise the question whether some of these companies were really ready for their public debut.
This observation is highly relevant given that there are now well over 400 SPACs out there looking for merger partners. The question that has to be asked is whether there really are that many private companies that are ready for the burdens, scrutiny and responsibility of being a public company. And the sequence of events in this case also raises the question whether the absence in a de-SPAC transaction of the discipline and process that usually surrounds a traditional IPO creates risk that the private company merger target may not be ready for public company life.
One final note about the SPAC-related issues. The SPAC involved in this lawsuit completed its IPO in 2019. (In fact, many of the recent SPAC-related lawsuit have involved SPACs from the 2019 IPO class.) The de-SPAC transaction was in late 2020. The securities suit was filed in April 2021. This is a point I have made before, but worth repeating here, which is that the timing of this sequence tells us a lot about when the litigation consequences of the 2020-21 SPAC wave will fully materialize.
Thinking About the Supply Chain Issues: Litigation arising out of supply chain issues is not necessarily a new thing. But I am sure I am not the only one that has noticed that there have been a host of recent high- profile supply chain issues. For starters, there is the semiconductor supply shortage that is roiling the automobile sector and other industries; there is the supply chain disruption that arose as a result of the blockage of the Suez Canal; there are the supply chain problems that arose because of the February 2020 winter weather event in Texas. Then of course there are all the various kinds of supply chain disruptions that have followed from the pandemic.
It is because of these and other similar concerns that I find the supply chain allegations in this complaint so interesting – I had been wondering and worrying that the fallout from the various supply chain issues could result in corporate and securities lawsuits. This case demonstrates that supply chain issues can indeed lead to securities litigation.
Nor was the Romeo lawsuit the only securities suit filed last week involving supply chain disruption-related allegations. A separate lawsuit filed late last week also involved supply chain allegations.
On April 15, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Chinese Nasdaq-listed bitcoin mining machine manufacturer Canaan, Inc. Among other things, the complaint (a copy of which can be found here) alleges that allegedly bullish company statements during the class period concealed that “due to ongoing supply chain disruptions” the company’s sales declined in the fourth quarter 2020. The supply chain disruptions involved mining machine chips. In public statements about the decline, the company said that COVID-19 had caused the supply chain disruptions. The complaint alleged that the company’s share price declined nearly 30% on news of the sales decline.
As we have seen in recent years as event-driven litigation has become such a prevalent part of securities class action litigation, anything that significantly disrupts business operations and affects financial results can lead to a securities lawsuit. Supply chain disruption is a widespread problem affecting the global marketplace, interfering with business operations at many companies. Merely having supply chain issues alone likely will not result in many companies getting sued, but companies that surprise the market about problems associated with supply chain disruption or that created expectations that are thwarted by supply chain issues may well get hit with securities suits. I strongly suspect that Romeo and Canaan are going to be far from the only companies that experience securities litigation in the coming months due to supply chain disruption.
Along those lines, supply chain disruption issues seem likely to continue and may even grow. The Suez Canal blockage underscores how vulnerable the global supply chain system is. The disruption from the winter storms in Texas also suggests that as extreme weather events become more widespread as a result of climate change, similar supply chain disruptions could become more common. Further supply chain disruptions could mean further corporate and securities litigation as well.
There are other ways that supply chain issues can lead to corporate and securities litigation, regulatory scrutiny, and enforcement actions. In thinking about these issues, it is important to keep in mind how supply chain disclosure has increasingly become a high-profile issue. For example, in the U.S., reporting companies have been required to incorporate disclosures about conflict minerals in their periodic reports for several years. In the same way, under the Modern Slavery Act 2018, Australian companies are subject to mandatory requirements to report publicly on the actions they have taken to address modern slavery risks in their operations and supply chains. The UK, which has had supply chain anti-slavery disclosure measures in place since 2015, recently moved to make slavery risk disclosure requirements mandatory.
These kind of disclosure requirements clearly create the risk of regulatory or enforcement action. All of these things, including in particular the recent litigation described above, suggests to me that supply chain issues could be an emerging source of potential corporate and securities litigation exposure. At a minimum, there is a risk that the current spate of supply chain disruption could lead to further litigation like the lawsuits recently filed against Romeo and Canaan.
One final note about the Canaan case; it not only is a supply chain disruption-related lawsuit, but it is also a COVID-19 related lawsuit as well. I have added it to my list of COVID-19-related cases. By my count, there have now been a total of 30 COVID-19-related securities class action lawsuits filed since March 2020.