As I have noted in prior posts, one of the most significant securities litigation phenomenon over recent months has been the rise of lawsuits involving special purpose acquisition corporations (SPACs). Last week, two more of these SPAC-related suits were filed. Although the new lawsuits have features in common with many of the prior SPAC-related suits, they also have several interesting distinctive attributes as well, as discussed below.
The Grab Holdings Lawsuit
Altimeter Growth Corp. was a SPAC. It completed its IPO on September 30, 2020. On December 1, 2021, Altimeter completed a business combination with Grab Holdings Limited, a delivery app organized under the laws of Cayman Islands and based in Singapore, with Grab as the surviving entity with its shares listed on Nasdaq.
On March 16, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Grab, its CEO, and its CFO. A copy of the complaint can be found here. The complaint purports to be filed on behalf of a class of investors who purchased Grab securities between November 12, 2021 (the date Grab filed its amended F-4 in connection with the business combination) and March 3, 2022.
On March 3, 2022, Grab released its fourth quarter 2021 financial results. The company announced that its quarterly revenues had declined 44% from the previous quarter. The company also reported a $1.1 billion loss. In its financial release, the company stated that the revenue declined as the company “preemptively invested to grow driver supply to support strong recovery in mobility demand.” In a conference call held in connection with the earning release, the company’s CEO said that “our driver supply base moderated down amid lower mobility demand in the third quarter.” The company’s CFO said that it would take one or two quarters “to get that equilibrium between drivers and riders, between supply and demand.” According to the complaint, the company’s share price declined over 37% on this news.
The complaint alleges that the defendants failed to disclose to investors: “(1) that Grab’s driver supply declined during the third quarter; (2) that, as a result, Grab continued to invest heavily in driver and consumer incentives to ‘preemptively recalibrate driver supply’; (3) that, as a result, the Company’s financial results would be adversely impacted, including, among other things, a significant decline in revenue; and (4) that, as a result of the foregoing, Defendant’s positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The plaintiff 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.
The Cano Health, Inc. Lawsuit
Jaws Acquisition was a SPAC that completed its IPO on May 13, 2020. On June 3, 2021, Jaws completed a business combination with Primary Care (ITC) Intermediate Holdings, Ltd. (PCIH). Cano Health is the surviving company formed by the business combination. Cano provides primary health care services in the U.S. and Puerto Rico.
On March 18, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of Florida against Cano; certain of its directors and officers; and two former officers of the SPAC. A copy of the complaint can be found here. The complaint purports to be filed on behalf of a class of Cano investors who purchased securities of the company (or of its predecessor-in-interest, Jaws) during the period May 18, 2020 (the day that Jaws’ shares began trading on the financial markets) and February 25, 2022.
On February 25, 2022, the company issued a press release statingthat it would delay its earnings release for the fourth quarter and full year 2021. Among other things, the company stated in the course of preparing its financial statements for the periods, it had discovered “certain potential non-cash adjustments to account for revenue recognition under ASC 606.” The adjustments related to “how and when the Company accrues revenue related to Medicare Risk Adjustments.” The timing of the adjustments “are expected to impact the timing of revenue recognition by delaying recognition of certain amounts related to the Medicare Risk Adjustments to subsequent periods.” According to the complaint, the company’s share price fell 6.1% on this news. On March 14, 2022, the company announced that it would be restating its prior financial statements for the first, second, and third quarters of 2021.
The complaint alleges that the defendants made false and misleading statements and failed to disclose that: “(i) Cano overstated its due diligence efforts and expertise with respect to acquiring target businesses; (ii) accordingly, Cano performed inadequate due diligence into whether the Company, post-Business Combination, could properly account for the timing of revenue recognition as prescribed by ASC 606, particularly with respect to Medicare risk adjustments; (iii) as a result, the Company misstated its capitated revenue, direct patient expense, accounts receivable, net of unpaid service provider costs, and accounts payable and accrued expenses; (iv) accordingly the Company was at an increased risk of failing to timely file one or more of its periodic financial reports; and (v) that 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 plaintiff class.
These new lawsuits have only just been filed and it remains to be seen how they will fare. I will say that the plaintiffs in these cases will face an uphill battle attempting to show that the complaints have adequately alleged scienter. To be honest, these are not strongest complaints I have seen in a while.
One feature that the two complaints have in common is that both of the lawsuits involve defendant companies that became publicly traded through business combinations with SPACs. Post-SPAC-merger companies have been an increasingly common target of securities class action lawsuits in recent months. By my count, with the addition of these two lawsuits, there have been a total of 38 SPAC-related lawsuits filed since January 1, 2021, with now 7 SPAC-related lawsuits filed in 2022.
Although the Grab lawsuit involves a company that merged with a SPAC, the complaint’s allegations do not related significantly to the SPAC itself. Indeed, although the purported class period in the Grab lawsuit does begin prior to the date of Grab’s merger with the SPAC, and specifically alleges misrepresentation’s in the SPAC’s public filings prior to and relating to the business combination, it does not otherwise refer to misconduct by the SPAC; no former officers of the SPAC are named as defendants.
The Cano lawsuit, by contrast, actively refers to alleged misconduct by directors and officers of the SPAC prior to the merger, and, indeed, the complaint names two former officers of the SPAC as individual defendants. The complaint contains allegations that the SPAC’s pre-merger due diligence was inadequate and failed to detect the target company’s accounting weaknesses, while at the same time stating SPAC’s capabilities to identify appropriate merger targets. It is relatively common among the suits that have been filed in recent months against post-SPAC-merger companies that directors or officers of the pre-merger SPACs are named as individual defendants; roughly two-thirds of the SPAC-related complaints that have been filed since January 1, 2021 have included former directors or officers of the SPAC as named defendants.
There is one feature of the company defendant in the Grab lawsuit that I find noteworthy and that is that Grab, the defendant, is not only organized under the laws of the Cayman Islands, it is based in Singapore. To this point, it has been relatively unusual for the SPAC-related lawsuits to involve a corporate defendant based outside the U.S. However, this may change.
As I have previously noted on this site, there are squadrons of SPACs out there right now looking for merger targets. (According to SPACInsider, there are 612.) At some point, if it has not already happened, the low hanging fruit will be gone. The target-seeking SPACs are going to have to search further afield. Target-seeking SPACs increasingly will look outside the U.S. (I am already seeing this happen in the deals that are crossing my desk.) Just because a company is based outside the U.S. does not mean it is not an appropriate or worthy merger target. However, in some instances, it is possible these non-U.S. companies could complete their mergers and become listed companies without fully understanding or appreciating the burdens and responsibilities that go with being a U.S. publicly-traded company. An increase in the number of non-U.S. SPAC mergers would add yet another layer of risk to the already complex risk profile that characterizes the current and coming wave of SPAC merger transactions.
One final note. Both of the SPACs involved with the defendant companies in these two lawsuits completed their IPOs in 2020, just as the SPAC onslaught in the financial markets was building and before the explosion of SPAC IPOs in early 2021. There still has only been one SPAC-related securities class action lawsuit filed involving a SPAC from the SPAC IPO class of 2021. (All of the rest of the lawsuits have involved SPACs from the SPAC IPO years of 2020 and prior.)
However, there were over 600 SPAC IPOs in 2021. (According to SPACInsider, there were 613.) Most of those Class of 2021 SPACs are still seeking their merger partners. Over the rest of this year and into 2023, these SPACs will be completing their intended mergers. I note this because the announcement and/or completion of the SPAC merger transaction is the SPAC lifecycle event that precedes securities suit filings. Obviously, most of the companies involved will not get hit with suits – but a number of them will. In other words, there is a certain amount of lawsuit-related kinetic energy within the reserve of target-seeking SPACs; over the coming months, that energy will be released, resulting, in some cases, in securities class action lawsuits. You can put a marker on it, there will be many more SPAC-related securities suits this year and next.