In the latest securities class action lawsuit involving a company that recently became publicly traded through a merger with a SPAC, a biodegradable plastics company and certain of its directors and officers have been hit with securities suit following media reports questioning the company’s claims about the biodegradability of its products. The company, Danimer Scientific, is one of several recently sued companies that completed a SPAC merger in December 2020. A copy of the May 14, 2021 complaint against Danimer can be found here.
Live Oak Acquisition Company completed an IPO on May 8, 2020. On December 29, 2020, Live Oak completed a merger with Meridian Holdings Group, Inc. d/b/a Danimer Scientific (“Legacy Danimer”). The merged company’s shares began trading on the NYSE on December 30, 2020, under the name Danimer Scientific, Inc.
Danimer sells biodegradable plastic under the brand name Nodax. The company claims that Nodax is biodegradable, renewable, and sustainable.
On March 20, 2021, the Wall Street Journal published an article entitled “Plastic Straws that Quickly Biodegrade in the Ocean? Not Quite, Scientists Say” (here), in which a number of questions are raised about the biodegradability of Nodax. Among other things, the article stated that “many claims about Nodax are exaggerated and misleading, according to several experts on biodegradable plastics.”
The experts, according to the article, “say more testing and stricter regulations are needed,” and warn that containers made from the material “can persist in the ocean for several years.” The article also quoted a scientific researcher as saying the company’s claims about Nodax are “sensationalized” and “not accurate” and that the claims about Nodax’s biodegradability is “greenwashing.” According to the subsequently filed securities class action complaint, the company’s share price fell nearly 13% following publication of the article.
In analyst reports dated April 22, 2021 and May 4, 2021, Spruce Point Capital Management raised further questions about Danimer, including supposed inconsistencies between Legacy Danimer’s and the current company’s historical and present claims regarding the size of its operation; the company’s expected profitability; and Nodax’s biodegradability. The later report raised further questions about the company’s production figures and financial projections. The company’s share price declined further based on the publication of each of these reports.
On May 12, 2021, the Wall Street Journal published a letter to the editor written by Stephen Croskrey, Danimer’s CEO, in which Croskrey defended the company’s claims about the biodegradability of Nodax, while acknlowledging that “the timeframe for complete degradation varies” depending on conditions.
On May 14, 2021, a plaintiff shareholder filed a securities class action lawsuit against Danimer Scientific in the Eastern District of New York. The complaint names as defendants the company; the company’s CEO and CFO; and seven individual members of the company’s board of directors. One of the individual company directors named as a defendant, Richard J. Hendrix, served as CEO of Live Oak prior to the merger. The complaint purports to be filed on behalf of a class of investors who purchased shares of Danimer between December 30, 2020 (the date the shares of the merged company began trading on the NYSE) and March 19, 2020 (the date before the publication of the Wall Street Journal article).
The complaint, which quotes extensively from the Wall Street Journal article as well as the Spruce Point Capital Management reports, alleges that during the class period, the defendants made false and misleading statements or omitted to disclose that: “Danimer had deficient internal controls; (ii) as a result, the Company had misrepresented, inter alia, its operations’ size and regulatory compliance; (iii) Defendants had overstated Nodax’s biodegradability, particularly in oceans and landfills; and (iv) as a result, the Company’s public statements were materially false and misleading at all relevant times.”
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 plaintiff seeks to recover damages on behalf of the class.
By my count, this lawsuit is the 13th SPAC-related securities class action lawsuit to be filed so far in 2021. Like many of the other companies named as defendants in these lawsuits, Danimer has been hit with a securities suit shortly after the company merged with a publicly traded SPAC.
Although this new lawsuit has many features in common with the prior suits, it is somewhat unusual in that though the complaint quotes from pre-merger filings and documents, the start date of the class period is December 30, 2020, the date the merged company’s shares began trading on the NYSE. In other words, the plaintiff in this case is not seeking to recover damages on behalf of purchasers of the securities of the pre-merger SPAC; rather, the only members of the putative class are purchasers of the post-merger publicly traded company’s securities. Indeed, though one of the former officers of the SPAC was named as a defendant in this lawsuit, he is named as a defendant solely in his capacity as a director of the post-merger company and not in his SPAC-related capacity.
The fact that the SPAC-related lawsuit is focused solely on the post-merger company is somewhat unusual — although as I noted in a post last week, the SPAC-related lawsuit filed earlier this month against the online gaming platform company, Skillz, also was focused solely on the post-merger company. The complaint in this lawsuit, as was the case in the complaint filed against Skillz, would appear to trigger only the the post-merger go-forward company’s public company D&O insurance policy (although given the allegations in the complaint relating to pre-merger disclosures, the run-off policies may not in the end prove to be entirely clear of this claim).
Perhaps the most significant thing that this new lawsuit has in common with the prior SPAC-related lawsuits is that the defendant company in this suit was sued relatively quickly in the company’s life as a public company, and the lawsuit primarily has to do with questions being asked about the company’s as-yet unproven product, production methodology or plan, or services. Thus, the lawsuits recently filed, for example, against PureCycle Technologies (discussed here), Lucid Motors (here), Romeo Power (here), and Canoo (here) all involve complaints filed against fledgling companies based on allegations that the companies had overstated the qualities or characteristics of their unproven product or services or unproven production capabilities.
Another noteworthy thing about this lawsuit is that it involves a company that completed its merger with a SPAC in December 2020. Other post-merger companies that completed their mergers in December 2020 and that have been sued in SPAC-related securities suits in 2021 include Skillz (about which refer here); Romeo Power (here); Canoo (here); and XL Fleet (here). The fact that so many companies have been sued that completed their mergers just before year-end raises the question about whether there might have been a push to get deals done in 2020.
Of the 12 SPAC merged companies that have been sued in 2021 (allowing for the fact that Lucid Motors had not yet completed its planned SPAC merger when it got sued), two completed their mergers in 2021; nine completed their mergers in 2020; and one completed its merger in 2019. The pattern seems to be that the post-SPAC-merger companies that are getting sued are getting sued relatively quickly in their lives as publicly traded companies.
It could be argued that I am trying to find patterns in a data set that is too narrow to support these kinds of generalizations, which may be a fair comment. The one thing I think I can say for sure based on what I have observed as I have watched these lawsuits emerge over the last few weeks is that more of these kinds of lawsuits are going to continue to be filed in the weeks and months ahead. SPAC-related securities litigation (and other types of SPAC-related corporate and securities litigation) is going to be one of the important litigation phenomena of the year.