In the latest post-SPAC-merger securities class action lawsuit, a plaintiff shareholder has filed a securities suit against a rare earth mining and processing company that completed a SPAC merger in November 2020. Like many SPAC-related securities suits that have been filed in recent months, the lawsuit follows a drop in the company’s share prices following a negative short-seller report. A copy of the February 22, 2022 lawsuit against MP Materials Corp. can be found here.
Fortress Value Acquisition Corp. (FVAC) is a special purpose acquisition company (SPAC). FVAC completed an IPO on April 29, 2020. In July 2020, FVAC announced its plan to merge with MP Mine Operations LLC. The merger was completed on November 17, 2020. The merged company went forward as a publicly traded company under the name MP Materials Corp.
On February 3, 2022, Bonitas Research, a short seller, published a report about MP Materials. Among other things, the report accused MP Materials as having executed an “abusive transfer price manipulation scheme” with a related party in China, Shenghe Resources Holdings Co., Ltd., which as of March 22, 2021 owned 7.7% of MP Materials. According to the report, as part of the scheme, Shenghe allegedly “overpaid” MP Materials for concentrates to artificially inflate MP Materials’ profit, at a time that coincided with the SPAC insider lock-up expiration. The report also quoted a September 2019 German academic study that concluded that the ore at MP Materials’ Mountain Pass facility “is not economically viable to harvest.”
According to the subsequently filed securities class action lawsuit complaint, the price of MP Materials’ share declined over 14% following the report’s publication.
On February 22, 2022, a plaintiff shareholder filed a securities class action lawsuit complaint in the District of Nevada against MP Materials. The complaint names as defendants two individuals who served CEO and CFO, respectively, of the post-merger company, as well as two defendants who served as CEO and CFO, respectively, of the SPAC prior to the business combination. The complaint purports to be filed on behalf of investors who purchased shares of the SPAC prior to the merger or shares of the go-forward company following the merger between May 1, 2020 (when the merged company’s shares began trading) and February 2, 2022 (the day before the publication of the short seller report).
The complaint alleges that during the class period the Defendants made false and/or misleading statements and/or failed to disclose that: “(i) FVAC had overstated its due diligence efforts and expertise with respect to identifying target companies to acquire; (ii) FVAC performed inadequate due diligence into Legacy MP Materials prior to the Business Combination, or else ignored significant red flags regarding, inter alia, Legacy MP Materials’ management, compliance policies, and Mountain Pass’s profitability; (iii) as a result, the Company’s future business and financial prospects post-Business combination were overstated; (iv) MP Materials engaged in an abusive transfer price manipulation scheme with a related party in the People’s Republic of China (‘China’) to artificially inflate the Company’s profits; (v) MP Materials’ ore at Mountain Pass was not economically viable to harvest for rare earth metals; and (vi) 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 complaint seeks to recover damages on behalf of the class.
By my count, this lawsuit is the 36th SPAC-related securities class action lawsuit to be filed since January 1, 2021, and the fifth to be filed so far in 2022. Like many of the previously filed SPAC-related lawsuits, the individuals named as defendants in this lawsuit included individuals who served directors or officers of the pre-merger SPAC company. (Nearly two thirds of the SPAC-related suits filed in 2021 included former SPAC officials as defendants.) And like many of the previously filed SPAC-related suits, this lawsuit comes after a decline in the defendant company’s share price following the publication of a short seller report critical of the company. (Nearly half of the SPAC-related lawsuits filed in 2021 followed shortly after the publication of a short seller report.)
While this lawsuit involves features in common with many of the other SPAC-related lawsuits, there are also features of this lawsuit that are unusual. For example, the complaint contains allegations of misrepresentations before the merger was even announced. Thus, the complaint alleges that the defendants misrepresented their expertise to assess merger candidates and misrepresented the due diligence and process capabilities the company would use to evaluated potential targets.
The complaint’s due diligence-related allegations are a little bit odd. The complaint’s allegation that the SPAC performed inadequate due diligence and ignored red flags are the kind of allegations that more typically would be found in a mismanagement/breach of fiduciary duty lawsuit, rather than in a misrepresentation lawsuit. But in any event, this lawsuit’s focus on the due diligence process are unusual. Most of the prior SPAC-related lawsuits have focused on misrepresentations about the merger target company, rather than about the supposed capabilities (or lack thereof) of the target company.
One final item of note about this lawsuit is that it involves a SPAC from the SPAC IPO class of 2020. I note this because, of the lawsuits filed since the beginning of 2021, all but one involves SPACs from the SPAC IPO classes of 2020 or earlier. There has been only one SPAC-related lawsuit so far that involves a SPAC from the SPAC IPO frenzy year of 2021. Indeed, most of the SPACs from the SPAC IPO class of 2021 are still in the search phase and thus have not yet reached the SPAC lifecycle events that have typically given rise to litigation. However, over the course of the coming months, more and more of these Class of 2021 SPAC will be announcing and completing mergers, which suggests to me that in the months ahead we will start to see more SPAC lawsuits involving Class of 2021 SPACs. MY expectation is that we will see a lot more SPAC-related lawsuits ahead.