A Canadian-based deep-sea mining company is the latest firm to be hit with a SPAC-related securities class action lawsuit. The company, which plans to mine the seabed for materials to be used in electric vehicles batteries, merged with a SPAC in September 2021. The company’s share price recently declined following news reports and a short-seller report questioning the company’s financing, licensing, and its claimed sustainability credentials. A copy of the October 28, 2021 complaint can be found here.
Sustainable Opportunities Acquisition Corp. (SOAC) is a special purposed acquisition company that completed its IPO on May 5, 2020. On March 4, 2021, SOAC announced its plan to merge with Deep Green, Inc. The two companies completed their business combination in September 2021. The combined company changed its name to TMC the metals company, Inc. (TMC). The shares of TMC began trading on Nasdaq on September 10, 2021. TMC is based in Canada and organized under the laws of the Cayman Islands.
TMC is a deep-sea exploration and mining company, focused on mining the seabed in certain specified areas for metals nodules. The recovered metals are to be used in electric vehicle batteries with the least possible negative environmental and social impact.
On September 13, 2021 (that is, just three days after the combined company’s shares began trading), Bloomberg published an article stating that two investors failed to supply $330 million needed to complete the private equity in public equity (PIPE) component of the transactions associated with the business combination that formed TMC. The Bloomberg article also questioned TMC’s “green credentials,” noting specific concern in the scientific community that TMC’s activities will damage sensitive ecosystems, accompanied by scientific calls for a moratorium on deep-sea mining. According to the subsequently filed securities complaint, the company’s shares fell 20% on this news.
Then on October 6, 2021, Bonitas Research, a short-seller, published a report raising multiple questions concerning TMC, including whether the company had overpaid to insiders for the seabed mining rights; whether the company had inflated its exploration expenses in order to mislead investors about the scale of its operations; and whether the company had a history of associating with “bad actors.” According to the complaint, the company’s shares fell 7% on this news.
On October 28, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York. The complaint names as defendants TMC; the CEO of Deep Green, who became the CEO of TMC following the merger; and the CEO of SOAC (the SPAC), who became a director of TMC following the merger. The complaint purports to be filed on behalf of a class of investors who purchased the shares of the SPAC prior to the merger and shares of TMC following the merger, between March 4, 2021 (the date the merger was announced) and October 5, 2021 (the trading day following the publication of the Bonitas Research Report). 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.
The complaint quotes extensively from the documents and public statements surrounding the merger announcement and the merger transaction. The complaint alleges that the defendants made false or misleading statements or failed to disclose that: “(1) the Company had significantly overpaid for [a seabed license] acquisition to undisclosed insiders; (2) the Company had artificially inflated its … exploration expenditures to give investors a false scale of its operations; (3) the company’s purported 100% interest in [the seabed license] was wholly owned by two Nauruan foundations and that all future income from [the license] would be used in Nauru; (4) Defendants had significantly downplayed the environmental risks of deep-sea mining polymetallic nodules and failed to adequately warn investors of the regulatory risks faced by the Company’s environmentally risky exploitation plans; (5) the Company’s PIPE financing was not fully committed and, therefore, the Company would not have the cash necessary for large scale commercial production; (6) as a result of the foregoing, the Company’s valuation was significantly less than Defendants disclosed to investors; and (7) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”
By my count, this lawsuit is the 26th SPAC-related lawsuit to be filed this year. Like many of the prior lawsuits, this lawsuit involves a company acquired by a SPAC that stumbled right out of the gate as a public company. Like many of the prior SPAC-related suits, the lawsuit involves a company involved in the electric vehicle industry (although in this case, not actually in the electric vehicle industry).
This lawsuit is also similar to many of the previously filed SPAC-related securities suits in that the lawsuit was filed after the company was the subject of a negative short-seller report. By my count, of the 26 SPAC-related securities lawsuits filed in 2021, ten have involved companies that were the subject of a negative short-seller report.
Also like many of the previously filed SPAC-related securities suits, the defendants named in this suit involve a former officer of the SPAC. In addition, again like many of the previous suits, the individual defendants are sued in multiple capacities; the TMC CEO is also named in his capacity as the CEO of the predecessor private company; the former CEO of the SPAC is also sued in his capacity as a current director of TMC. The potential liabilities of these individuals potentially could trigger coverage under multiple different policies, including both the SPAC’s runoff policy and the go-forward policy for the merged company. The involvement of multiple policies could lead to the kind of “Tower vs. Tower” coverage conflict that Silicon Valley attorney Boris Feldman wrote about earlier this year.
One final though. There are over 400 SPACs out there looking for merger candidates. As the time remaining the search period begins to decline, the possibilities for merging with a target company that is no more ready to become a public company than this one seems to increase.