In the latest SPAC-related securities class action lawsuit filing, a plaintiff shareholder has filed a securities class action suit against electric vehicle company Lightning eMotors and certain of its directors and officers, after the company disappointed investors in its first post-SPAC-merger financial release. As discussed below, the Lightning eMotors SPAC-merger transaction was already the subject of a separate, prior Delaware Chancery Court action. A copy of the new federal court securities class action lawsuit complaint can be found here.
GigCapital 3 was a special purpose acquisition company (SPAC). GigCapital 3 completed its IPO on May 18, 2020. On December 10, 2020, GigCapital entered business combination agreement with Lightning eMotors, pursuant to which the two companies would merge and Lightning eMotors was to be the surviving company. The business combination closed on May 6, 2021 and the merged company’s shares began trading on the NYSE on May 7, 2021.
On August 16, 2021, the Company announced its financial results for the second quarter of 2021. The financial results included a quarterly net loss per share of $0.79 compared to a loss of $0.10 in the second quarter of 2020. The company also pulled its full year financial guidance for the remainder of 2021. According to the subsequently filed securities class action lawsuit complaint, the company’s share price declined about 17% on the news.
On October 15, 2021, a plaintiff shareholder filed a securities class action lawsuit in District of Colorado against Lightning eMotors; its CEO; and its CFO. The new class action complaint does not name any of the former executives of the SPAC as defendants. The complaint purports to be filed on behalf of a class of investors who purchased Lightning eMotors between May 7, 2021 (the date the merged company’s shares began trading on the NYSE) and August 16, 2021 (the date of the second quarter financial release). 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 class.
The complaint alleges that during the class period the defendants made false or misleading statements or failed to disclose that: “(i) the Company would record a substantially greater net loss per share in the second quarter of 2021 compared to the second quarter of 2020 and would pull its full year guidance for the remainder of 2021; (ii) accordingly the Company materially overstated its financial position and/or prospects; and (iii) as a result, the Company’s public statements were materially false and misleading at all relevant times.”
By my count, this lawsuit is the 25th SPAC-related securities class action lawsuit to be filed this year. It is also one of many SPAC-related securities suits that have been filed against companies in the electric vehicle industry and it is one of many in which the post-SPAC merged company disappointed investors in its first post-merger earnings release.
If the names of the SPAC, GigCapital 3, and of the SPAC target company, Lightning eMotors, seem familiar, it is because the transaction in which the two merged is already the subject of pending litigation. As I discussed in a blog post at the time (here), on August 4, 2021, a plaintiff shareholder filed a state law breach of fiduciary duty lawsuit in Delaware Chancery Court against the SPAC’s sponsor, GigAcquisitions3; the SPAC’s CEO Avi Katz; and five other former directors of the SPAC. The Delaware Chancery Court action does not name Lightning eMotors as a defendant, nor does it name any Lightning eMotors executives as defendants. The complaint alleges that the sponsor and directors had conflicts of interest and had financial incentives to enter into the merger; the complaint also alleges that pre-merger redemptions of SPAC shareholders meant that the cash value of the merged company was substantially less than the merger valuation, and that the valuation was supported only through the provision of inflated revenue projections for the target company. The Delaware lawsuit purports to be filed on behalf of a class of investors who held shares of the SPAC between the record date and the closing date.
The relationship between these two lawsuits is interesting. Though they both ultimately relate to the same transaction, they do not overlap at all. The defendants named in the two lawsuits are completely different; none of the defendants named in the Delaware lawsuit are named in the new federal court lawsuit and vice versa. Similarly, the purported classes do not overlap at all either; the end date of the Delaware lawsuit class is the day before the beginning date of the new federal court lawsuit class.
The lack of overlap between these two lawsuits means that the lawsuits trigger different towers of insurance. The Delaware lawsuit would trigger the former SPAC’s runoff D&O insurance policy, while the new federal court lawsuit would trigger the go-forward D&O insurance put in place for the merged company. This unusual set of circumstances may mean that this litigation could avoid the type of “Tower vs. Tower” insurance coverage disputes that overlapping claims could create (as discussed here).
The accumulation of lawsuits relating to this one SPAC transaction does show how SPAC activity can lead to the proliferation of litigation, as there are different groups of potentially aggrieved persons and different groups of potential litigation targets, as well as different categories of alleged wrongful acts. While each set of circumstances of course has its own particular aspects, the common characteristics of the circumstances surrounding many SPAC transactions does suggest that we will continue to see many more SPAC-related lawsuits in the future – particularly for company’s the stumble out of the gates post-merger – even if the merged company is not in the electric vehicle industry.