In the latest example of the kind of SPAC-related litigation that has been such a big part of the securities class action litigation filings this year, space infrastructure company Redwire Corporation, which merged with a publicly traded SPAC in September 2021, was hit with a securities class action lawsuit after the company delayed filing its third-quarter financial results. A copy of the December 17, 2021 complaint can be found here.
Genesis Park Acquisition Corp. (GPAC) was a special purpose acquisition company. GPAC completed an IPO on November 23, 2020. On March 21, 2021, GPAC announced its plans to merge with Redwire, a company providing space infrastructure to the national security, civil, and commercial markets. The two companies completed the business combination on September 2, 2021, with Redwire as the surviving entity. The combined company’s shares began trading on the NYSE on September 3, 2021.
On November 10, 2021, Redwire announced that it would postpone the release of its third quarter earnings results. The company said that it was “notified by an employee of potential accounting issues in a business subunit,” and that the audit committee was investigating the allegations. According to the subsequently filed securities class action complaint, the company’s share price declined 16% on this news.
On November 15, 2021, Redwire filed a notice with the SEC stating that the company could not timely file its quarterly report for the period ending September 30, 2021. Due to the pending investigation into accounting issues at a business subunit, “the Company has not been able to finalize its financial statements or its assessment of the effectiveness of its disclosure controls and procedures and any impact” on the report. According to the complaint, the company’s shares fell a further 8.3% on this news.
On December 17, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Middle District of Florida against Redwire; Peter Cannito, who is identified in the complaint at “the Company’s Chief Executive Officer at all relevant times”; and William Read, who is identified as the Company’s Chief Financial Officer at all relevant times.” (Even though the term “the Company” as used in the complaint refers to GPAC, and then following the merger to Redwire, I believe from reading the complaint that Cannito and Read were CEO and CFO, respectively, of Redwire, both before and after the merger and were not officers or directors of GPAC prior to the merger.)
The complaint purports be filed on behalf of a class of investors who purchased Redwire’s securities, or prior to the merger, GPAC’s securities, between August 11, 2021 (the date GPAC filed its Proxy Statement with the SEC) and November 14, 2021 (the day before the second of Redwire’s two announcements about its delayed third quarter financial statements).
The complaint alleges that during the class period, the defendants failed to disclose to investors: “(1) that there were accounting issues at one of Redwire’s subunits; (2) that, as a result, there were additional material weaknesses in Redwire’s internal control over financial reporting; and (2) [sic] that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were material misleading and/or lacked a reasonable basis.”
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 new lawsuit is the 29th SPAC-related lawsuit to be filed so far this year. The amount of SPAC-related securities litigation filed this year represents a significant increase over the amount of SPAC-related securities litigation filed in 2020, when only seven SPAC-related securities suits were filed.
Although most of the SPAC-related securities suit complaints filed this year include former directors and officers of the SPAC as named defendants, this complaint apparently did not. (As I noted above, I believe that the two individuals named as defendants were officers of Redwire prior to the SPAC and were not officers of the SPAC.) By my tally, ten of the 29 SPAC-related securities suits filed this year (about 34%) did not include former directors or officers of the SPAC as named defendants; nineteen of the 29 SPAC-related suits did name former directors and officer of the SPAC as defendants.
As was the case with many of the post-SPAC merger companies named as defendants in the SPAC-related suits filed this year, this company stumbled out of the gate as a public company. In this case as in many of these cases, there were problems with the defendant company’s first financial reports as a public company or first full-reporting-period post-merger financial reports. The number of post-merger companies experiencing these kinds of issues in connection with their very first financial reports as a public company suggests that a certain number of the companies going public by way of a merger with a publicly traded SPAC are not fully ready for the burdens and scrutiny that go with being a public company.
It is a significant detail to me of this lawsuit that the SPAC involved completed its IPO in November 2020, during the SPAC IPO frenzy that took over the financial markets at the end of 2020 and through April 2021. There were literally hundreds of SPAC IPOs during this period. Most of these SPACs are still in their search period, but over the coming months some of the more than 500 SPACs now searching for merger partners will complete their intended business combinations. Many of the mergers will be successful. However, some will experience problems. I don’t think I am being too cynical to suggest that, as much SPAC-related litigation we have seen in 2021, there is going to be a lot more of it in 2022 and even into 2023.