In a lawsuit that captures two of the top current securities class action lawsuit trends, a plaintiff shareholder has filed a securities class action lawsuit against health technology company Butterfly Network. The new lawsuit is both SPAC-related and COVID-related. Butterfly merged with Longview Acquisition Corp., a special purpose acquisition company (SPAC), in February 2021. The allegations included, among other things, a contention that the defendant company failed to take into account pandemic’s “broad consequences” in its operations and reporting. A copy of the plaintiff’s February 16, 2022 complaint can be found here.
Longview Acquisition Corp. completed its IPO on May 20, 2020. On November 20, 2022, Longview announced its plan to merge with Butterfly. Shareholders approved the merger on February 12, 2021, and the go-forward company began trading on the NYSE under the name Butterfly Network, Inc. on February 16, 2021.
On November 15, 2021, Butterfly announced its financial results for the third quarter 2021. Among other things, the company announced that its total gross margin for the quarter was negative 35% and that its expected 2021 revenue would be “significantly below” the guidance the company had given for its 2021 revenue in the first quarter. In an earnings call that same day, Butterfly’s CEO said, among, other things, that the company’s results were impacted by “healthcare logistical challenges, and doctor, nurse, and medical technician fatigue concurrent with COVID conditions and its broad consequences.”
According to the subsequently filed securities class action lawsuit complaint, the company’s shares declined nearly 13% on this news.
On February 16, 2022, a plaintiff shareholder filed a securities class action lawsuit in the District of New Jersey against Butterfly; against certain of its directors and officers; and against five individuals who had been officers or directors of Longview at the time of the merger. The complaint purports to be filed on behalf of two classes of persons: first, holder of the SPAC’s common stock as of the record date for the February 12, 2021 merger; and second, investors who purchased the securities of Butterfly between February 16, 2021 (the date on which Butterfly’s shares began trading on the NYSE) and November 15, 2021 (the date of the company’s third quarter earnings release).
The complaint alleges that during in the proxy documents in connection with the merger and during the class period, the defendants made false and/or misleading statements and/or failed to disclose that: “(i) Butterfly had overstated its post-Merger business and financial prospects; (ii) notwithstanding the ongoing COVID-19 pandemic, Butterfly’s financial projections failed to take into account the pandemic’s broad consequences, which included healthcare logistical challenges, and medical personnel fatigue; (iii) accordingly, Butterfly’s gross margin levels and revenue projections were less sustainable than the Company had represented; (iv) all of the foregoing was reasonably likely to have a material negative impact on Butterfly’s business and financial condition; and (v) 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), 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 thereunder. The complaint seeks to recover damages on behalf of the plaintiff classes.
As I noted at the outset, this new lawsuit manages to combine two of the most important current securities class action litigation trends, the trend toward COVID-related litigation and the trend toward SPAC-related litigation.
In terms of the COVID-related litigation trend, by my count, this lawsuit represents the 48th COVID-related securities class action lawsuit to be filed since the initial coronavirus outbreak in the U.S. in March 2020. The lawsuit is also the fifth COVID-related securities class action lawsuit to be filed so far in 2022, proving that nearly two full years into the pandemic, the risk of COVID-19-related litigation is continuing.
As I have noted as these cases have accumulated over the last two years, the cases have generally fallen into one of three categories: cases involving companies that experienced a COVID-19 outbreak in their facilities (cruise ships, private prison systems); cases involving companies that hoped to profit from the pandemic (vaccine manufacturers, diagnostic testing companies); and cases involving companies that experienced a disruption in their operations or financial performance because of the pandemic (hospital systems, real estate developers). In late 2021, a fourth category developed involving companies that had initially prospered at the outset of the pandemic but whose fortunes flagged as conditions changed (e.g., Peloton Interactive, discussed here).
This case seems to fall into the third category, as the company experienced a disruption both in the operations and financial results due to COVID-19-related circumstances. The significance of this observation to me is that it seems to suggest that as long as the coronavirus is continuing to cause disruptive conditions, it is going to continue to interfere with companies’ operations and finances, and therefore it is going to continue to beget securities litigation.
With respect to the SPAC-related litigation trend, by my count, this lawsuit represents the 35th SPAC-related securities class action lawsuit to be filed since January 1, 2021, and the fourth SPAC-related lawsuit to be filed so far in 2022. As is the case with many of the prior SPAC-related lawsuits, the individual defendants include not only directors and officers of the go-forward operating company, but also include former officers and directors of the SPAC itself.
It is noteworthy to me that this lawsuit involves a SPAC from the SPAC IPO class of 2020. By my count, 21 of the 35 SPAC-related securities lawsuits filed since January 1, 2021 involve SPACs from the 2020 SPAC IPO class. On one level, it is hardly surprising that there might be a number of SPAC suits relating to the SPAC IPO Class of 2020, as there were nearly 250 SPAC IPOs completed in 2020. What is more surprising is that there have been so few suits so far related to the SPAC IPO class of 2021; while there were nearly 250 SPAC IPOs in 2020, there were over 600 SPAC IPOs completed in 2021, yet since January 1, 2021, there has only been one lawsuit filed so far involving a SPAC from the IPO class of 2021.
While there surely be more lawsuits coming relating to the 2020 SPAC IPO class, what we all need to be prepared for is the coming wave of suits involving the 2021 SPAC IPO class. Most of the 2021 SPAC IPOs are still in their search phase. As these companies announced planned mergers and complete intended business combinations, more and more of these 2021 SPAC IPO class companies will be moving into the SPAC lifecycle phase in which litigation has seemed so far to develop. In other words, while the filing of SPAC-related litigation is an important current trend, it seems likely to continue as an important trend for some time to come.