Last week, the SEC introduced proposed disclosure guidelines for special purpose acquisition companies (SPACs) which, if ultimately finalized, will significantly alter the business, legal, and regulatory environment for SPACs and for their merger partners. In the meantime, plaintiffs’ lawyers continue to demonstrate their interest in pursuing claims against post-SPAC-merger operating companies. As discussed below, and in two more examples of what is already one of the most noteworthy securities litigation phenomena so far this year, last week plaintiffs’ lawyers filed two more SPAC-related securities class action lawsuits. As has been the case with many of the recent SPAC-related securities suits, both of the latest suits involve companies in the electric vehicle and smart vehicle industries.
The Volta, Inc. Securities Suit
In the first of the two new SPAC-related securities suits, on March 30, 2022, a shareholder plaintiff filed a securities class action lawsuit in the Northern District of California against Volta, Inc., its CEO, and its CFO. A copy of the complaint in the Volta lawsuit can be found here. Volta aims to develop and maintain electric vehicle charging stations. Volta became a publicly traded company as a result of a business combination that was completed on August 26, 2021, involving Volta Industries (Legacy Volta) and Tortoise Acquisition Corp. II, a SPAC that completed its IPO on September 10, 2020.
On March 2, 2022, Volta issued a press release stating that the financial impact of the restatement of its third quarter 2021 financial results was greater that previously disclosed. On March 21, 2022, the company announced that it was rescheduling the timing of the release of its fourth quarter and full year 2021 financial results. On March 28, 2022, the company announced that its founders had resigned from their respective positions as CEO and President of the company. The company’s share price declined 18% on this news, after smaller declines in connection with the prior company statements.
The complaint purports to be filed on behalf of a class of investors who purchased securities of Volta or of the predecessor SPAC between August 2, 2021 (the date the SPAC filed with the SEC its proxy statement relating to the SPAC’s proposed merger with Legacy Volta) and March 28, 2022.
The complaint alleges that the defendants failed to disclose to investors: “(1) that Volta had improperly accounted for restricted stock units issued in connection with the Business Combination; (2) that, as a result, the Company had understated its net loss for the third quarter 2021; (3) that there were material weaknesses in the Company’s internal control over financial reporting that resulted in a material error; (4) that, as a result of the foregoing, the Company would restate its financial statements; (5) that, as result of the foregoing, Legacy Volta’s founders would imminently exit the Company; (6) that, as a result, the Company’s financial results would be adversely impacted; and (7) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially 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 class.
The Embark Technology, Inc. Securities Suit
Northern Genesis Acquisition Corp. II was a SPAC that completed its IPO on January 12, 2021. On November 10, 2021, the SPAC completed a merger with Embark Trucks, Inc. (Legacy Embark), a company that develops self-driving vehicle software for the trucking industry, with the surviving entity known as Embark Technology, Inc.
On January 6, 2022, The Bear Cave, a short seller, published a report entitled “Problems at Embark Technology.” Among other things, the report said that “Embark’s current valuation appears to be based on puffery rather than actual substance. The company holds no patents, has only a dozen or so test trucks, and may be more bark than bite.” According to the subsequently filed securities lawsuit complaint, the company’s share price declined nearly 17% following the report’s publication.
On April 1, 2022, a plaintiff shareholder filed a securities class action lawsuit against Embark in the Northern District of California. A copy of the complaint can be found here. The complaint purports to be filed on behalf of investors in the pre-merger SPAC or the post-merger operating company between January 12, 2021 (the date the SPAC completed its IPO) and January 5, 2022 (the day before the publication of the short seller report). The defendants named in the complaint include not only the company itself, but the pre-merger CEO and CFO of the SPAC, as well as the CEO and the CFO of the post-merger operating company.
The complaint alleges that the defendants made false and materially misleading statements and/or failed to disclose that: “(i) the Company had performed inadequate due diligence into Legacy Embark; (ii) Legacy Embark and the Company following the Business Combination held no patents and an insignificant amount of test trucks; (iii) accordingly, the Company had overstated its operational and technical capabilities; (iv) as a result of all of the foregoing, the Company had overstated the business and financial prospects of the Company post-Business Combination; 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) 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.
Discussion
By my count, with the filing of these two latest lawsuits, there have now been nine SPAC-related securities class action lawsuits filed so far in 2022, and a total of 40 SPAC-related securities suits filed since January 1, 2021.
The two lawsuits are somewhat similar to many of the SPAC-related suits that have been filed since the beginning of 2021. Among other things, both of the new lawsuits involve companies in the electric vehicle or smart vehicle technology industries. By my count 13 out of the 40 (about one-third) SPAC-related securities suits filed since January 1, 2021 have involved companies in the EV and smart vehicle technology industries.
The Embark Technology lawsuit also has several other features in common with many of the previously filed SPAC-related suits. For example, the Embark complaint names as defendants two former officers of the predecessor SPAC. By my count, 27 of the 40 SPAC-related suits filed since January 1, 2021 (about two-thirds) have included former directors or officers of the SPAC as named defendants. Similarly, the Embark complaint was filed after the company’s share price declined following the publication of a critical short seller report. By my count, 17 of the 40 SPAC-related securities suits filed since January 1, 2021 (about 40%) have involved allegations based on short seller reports. (The Volta complaint by contrast did not include any short seller report allegations and the Volta complaint does not name former directors or officers of the SPAC as individual defendants.)
There is another feature of the Embark Technology complaint that is noteworthy, and that is that the SPAC involved completed its IPO in 2021. 2021 was of course the year in which the SPAC frenzy reached its crescendo; there were over 600 SPAC IPOs in 2021. But notwithstanding this absolute explosion during 2021 in the number of SPAC IPOs, up until now very few of these class of 2021 SPACs (or their successor operating companies) have been hit with securities suits – by my count, prior to the filing of the Embark Technology complaint, there had only been one prior SPAC-related securities suit filed that involved a SPAC from the SPAC IPO class of 2021.
Undoubtedly, the reason few of the SPACs from the 2021 SPAC IPO class have been hit with suits so far is that most of them are still in their search period. The SPAC-related securities litigation that has been filed so far shows that the SPAC lifecycle event that sets the stage for later litigation is the SPAC’s announcement or completion of a merger. As things stand, there are over 600 SPACs out there currently seeking to identify a merger partner. Over the coming months, as these SPACs identify merger targets and complete their mergers, some (but by no means all) of them will find themselves attracting the unwanted attention of plaintiffs’ securities class action attorneys. If the track record so far is any guide, many of the companies that get hit with these suits will have been the subject of short seller reports.