As I noted in my recent round-up of the Top Ten D&O Stories of 2021, one of last year’s important securities litigation stories was the onslaught during the year of SPAC-related securities class action lawsuit filings. I also added in the year-end round-up my projection that SPAC-related securities suits could be an even bigger factor in 2022. Though we are only in the opening days of 2022, the filing of SPAC-related securities suits in the New Year has already begun. On January 7, 2022, a shareholder plaintiff filed the first SPAC-related securities suit of 2022 against the post-merger company and certain of its officers, as well as against former officers and directors of the SPAC itself and its Sponsor. A copy of the complaint filed against Talkspace, Inc. can be found here.
Hudson Executive Investment Corporation (HEIC) was a special purpose acquisition company (SPAC). HEIC completed an IPO on June 11, 2020. On January 13, 2021, HEIC announced that it had entered an agreement to merge with Talkspace, a private company that provides individuals and therapists with an online platform for therapy sessions delivered via messaging, audio, and video. The merger was completed in June 2021 pursuant to a June 17, 2021 shareholder vote. The merger closed on June 22, 2021. Following the merger, Talkspace was the surviving entity as a publicly traded company.
On August 9, 2021, Talkspace announced its financial results for the second quarter 2021. Among other things, in a conference call discussing the quarterly results, corporate officials, according to the subsequent securities complaint, “revealed some … issues relating to increased customer acquisition costs … due to rising digital advertising costs while downplaying their impact.” The subsequent complaint alleged that “despite these disclosures, defendants did not reveal the full truth about Talkspace”; among other things Talkspace reaffirmed its fiscal year and third quarter revenue guidance.
On November 15, 2021, Talkspace issued a press release announcing the company’s results in the third quarter of 2021, the company’s first full quarter as a publicly traded company. Among other things the company announced an increase in reserves for credit losses, a slowdown in B2B business due to delay in launching new products and features, and a decline in gross profit compared to the year prior.
Talkspace also announced that its CEO, Oren Frank was stepping down. In the conference call discussing the company’s quarterly results, Douglas Bronstein, who had been CEO of the HEIC prior to the merger, and who was a director of Talkspace post-merger, and who took over as Talkspace’s interim CEO, said, among other things, “The overall financial results for the third quarter came in below expectations management shared with investors on our last earnings call. We are obviously disappointed by this performance and we have to do better.”
According to the subsequently filed securities class action lawsuit complaint, by December 30, 2021, the company’s common stock was trading below $2 per share, “80% below the price shareholders would have received if they had redeemed their shares instead of approving the Merger less than one year earlier.”
On January 7, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Talkspace; against Frank, the Talkspace CEO who stepped down in November 2021; against Braunstein, who had been CEO and Chairman of HEIC prior to the merger, as well as a principal of the major investor behind HEIC’s sponsor, as well as a director of Talkspace post-merger and interim CEO of Talkspace after November 15, 2021; and against certain other former directors and officers of HEIC, as well as HEIC’s sponsor and other HEIC-related entities.
The complaint purports to be filed on behalf of a class of persons who held HEIC common stock as of the May 19, 2021 record date and who were therefore entitled to vote on the Merger at the June 17, 2021 special meeting of shareholders.
The complaint alleges that in the Proxy that HEIC filed with the SEC in connection with the merger transaction, the Proxy omitted and/or misrepresented the following in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 : “(a) that Talkspace was experiencing significantly increased online advertising costs in its B2B business since the beginning of 2021; (b) that Talkspace was experiencing lower conversion rates in its online advertising in its B2C business; (c) that, as a result of (a) and (b) above, Talkspace was experiencing increased customer acquisition costs and more tepid B2C demand than represented to investors; (d) that as a result of (a)-(c) above, Talkspace was suffering from ballooning customer acquisition costs and worsening growth and gross margin trends; (e) that Talkspace had overvalued its account receivables from certain of its health plan clients in its B2B business, which amounts had to be adjusted downward; and (f) that, as a result of (a)-(e) above, Talkspace’s 2021 financial guidance was not achievable and lacked any reasonable factual basis.
In addition, the complaint also alleges that the “failure of the Proxy to disclose the fact that Talkspace was suffering heightened online advertising and customer acquisition costs, lower conversion rates, and more tepid demand in its B2C business and worsening growth and gross margin trends violated Item 303.” Finally, the complaint alleges that these alleged failures “also violated Item 105, because these adverse facts created significant risks that were not disclosed even though there were some of the most significant factors that made an investment in Talkspace securities speculative or risky.”
The new lawsuit involving Talkspace is the first SPAC-related lawsuit of 2022, but it shares a number of features in common with many of the SPAC-related securities suits that were filed in 2021.
For example, like many of the 2021 lawsuits, the individual defendants named include former directors and officers of the SPAC. (Nearly two-thirds of the 2021 suits included former SPAC officials as named defendants).
As was the case with many of the 2021 suits, this lawsuit involves a post-merger company that stumbled short after becoming a public company; in this case, the lawsuit was filed based on the company’s disclosures in connection with its first full quarter as a public company. The circumstances in this case and in many of the other cases filed last year suggest that many of the companies that merged with SPACs are not always fully ready for the burdens and scrutiny that go with becoming a public company.
The lawsuit against Talkspace is also like several of the lawsuits filed last year in that the defendants named include the SPAC’s sponsor, as well as number of the entities affiliated with the SPAC and the SPAC sponsor. The proliferation of financial defendants likely means that a number of different D&O insurance programs are potentially triggered by this complaint.
With respect to the multiple financial entity defendants, it is worth noting that defendant Braunstein is named as a defendant in multiple different capacities – not only in his capacity as a former officer and director of the SPAC and as a post-merger director of the go-forward company, but also in his capacity as a principle or participant in the various other financial entity defendants (including the Sponsor and the Sponsor’s principle financial backer). The multiple capacities in which Braunstein is named could present significant D&O insurance complications.
One particularly interesting thing to me is the specific legal theory on which this plaintiff has chosen to proceed. Unlike as is the case with most of the SPAC-related lawsuits filed in 2021, this lawsuit does not seek to rely on alleged violations of Section 10(b) in connection with statements made to the marketplace prior to the merger and following the merger; rather, the plaintiff in this lawsuit is alleging violations only of Sections 14(a) and 20(a) of the ’34 Act in connection with alleged misrepresentations or omissions in the Proxy statement filed in connection with the merger. (To be sure, the plaintiff is also alleging violations of Items 303 and 105 in connection with the same alleged misrepresentations and omissions.)
It appears that rather than seeking to pursue claims on behalf of open market traders, this plaintiff is seeking to pursue claims only on behalf of investors who could have redeemed their shares in connection with the merger but who did not allegedly because of being misled by misrepresentations or omissions in the Proxy statement. It is an interesting approach, and it does kind of make me wonder why the plaintiff filed only a Section 14 claim, and did not file a Section 10 claim, either in addition to or instead of the Section 14 claim. A curious twist on the usual pattern, and one worth watching.
In any event, this is yet another SPAC-related lawsuit involving the SPAC IPO class of 2020. The SPAC here completed its IPO in July 2020, just as the SPAC IPO frenzy in late 2020 was setting in in earnest. I suspect that we will be seeing more lawsuits involving SPACs from the IPO class of 2020, and as the year progresses, we will start to see more suits from the SPAC IPO class of 2021 as well. In any event, and as I have said before, I don’t think I am going out on a limb by predicting that we are for sure going to be seeing a lot more SPAC-related securities litigation in 2022. Strap on your helmets because it is going to be a very interesting ride.
Coming Attractions: Please note that on Thursday, January 13, 2022 at 11:00 AM EST, my colleague Marissa Streckfus and I will be conducting a free, hour-long webinar in which we will discuss The Top Ten D&O Stories of 2021. Registration for the webinar can be found here. I hope you will please join us for the webinar.