As I have noted in prior posts (most recently here), one of the most significant recent securities litigation trends has been the number of filings against post-SPAC-merger publicly traded companies. In the latest of these SPAC-related suit filings, last week a plaintiff shareholder filed a securities class action lawsuit against Arquit Quantum, a U.K.-based cybersecurity firm that merged with a SPAC in September 2021. Though this latest lawsuit is in many ways representative of the emerging SPAC-related securities litigation, it also has some distinct features as well, as discussed further below. A copy of the May 6, 2022 complaint in the case can be found here.
Centricus Acquisition Corp. was a special purpose acquisition company (SPAC). Centricus completed an IPO on February 28, 2021. On May 12, 2021, Centricus announced its plan to merge with Arquit Limited, a private company organized under the laws of the Cayman Islands and based in London. Arquit is a cybersecurity company that claims to have a “unique encryption technology.” The companies completed the merger on September 3, 2021. The post-merger company began trading on Nasdaq under the name Arquit Quantum, Inc.
In the proxy statement issued in connection with the merger, Centricus made various statements about Arquit’s cybersecurity capabilities and encryption technology. The proxy statement also made various statements about Arquit’s future business prospects. In various SEC filings following the completion of the merger, the company made additional statements concerning the company’s capabilities, technology, and business prospects.
On April 18, 2022, the Wall Street Journal published an article entitled “British Encryption Startup Arquit Overstates Its Prospects” (here). Among other things, the Journal article quoted unnamed sources as stating that the company’s encryption technology “might never apply beyond niche users … unless there were a major overhaul of internet protocols.” The article also said that British cybersecurity officials “questioned the viability of Arquit’s proposed approach to encryption technology.” The article detailed various other limitations to the company’s technology and also raised questions about the company’s revenue. The company’s share price fell 17% on the news.
On May 6, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against Arquit; certain of its directors and officers; and several former directors and officers of the SPAC. The complaint purports to be filed on behalf of two classes: first, all investors who purchased the company’s securities between September 7, 2021 (the date the merged company’s share began trading) and April 18, 2022 (the date of the Journal article); and second, all holders of Centricus securities as of the record date for the August 31, 2021 special shareholders meeting held to consider approval of the merger.
The complaint quotes extensively from the company’s proxy statement and its post-merger SEC filings. The complaint also quotes extensively from the April 18 Journal article.
The complaint alleges that in the proxy statement and in the SEC’s filings, the defendants made false and/or misleading statements and/or failed to disclose that: “(1) Arquit’s proposed encryption technology would require widespread adoption of new protocols and standard of for [sic] telecommunications; (2) British cybersecurity officials questioned the viability of Arquit’s proposed encryption technology in a meeting in 2020; (3) the British government was not an Arquit customer but, rather, providing grants to Arquit; (4) Arquit had little more than an early-stage prototype of its encryption system at the time of the Merger; and (5) as a result, Defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.”
The plaintiff alleges that the defendants violated Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to recover damages on behalf of the classes.
By my count this lawsuit is the 47th SPAC-related lawsuit to be filed since January 1, 2021, and the 16th to be filed so far this year. The SPAC-related lawsuits have been a significant component of the total securities class action lawsuit filings this year; the 16 SPAC-related suits represent about 22.5% of the 71 2022 YTD securities lawsuits filings.
The new lawsuit shares a number of features in common with many of the previously filed SPAC-related securities lawsuits. For example, in addition to naming as defendants officers or directors of the post-SPAC operating company, this complaint also names as defendants certain officers and directors of the pre-Merger SPAC. Slightly less than two-thirds (63.8%) of the SPAC-related suits filed since January 1, 2021 have included former directors and officers of the SPAC as named defendants.
Another feature this new lawsuit has in common with the prior suits is that the complaint was filed after the defendant company experienced stock price drop following the publication of a sharply critical public report, whether in the form of a media story or a short-seller report. About 44% of all SPAC-related suits since January 1, 2021 have had this feature.
One relatively distinct feature of this new lawsuit is that it involves a SPAC from the SPAC IPO class of 2021. Even though there were over 600 SPAC IPOs completed in 2021, there still have been relatively few lawsuits filed so far involving class of 2021 SPACs. By my count, this lawsuit is only the third SPAC-related suit so far that has involved a SPAC from the IPO class of 2021; all of the other suits have involved SPACs that completed their IPOs in 2020 or earlier.
The reason that there have been relatively few suits so far involving SPACs from the IPO class of 2021 is that most of the 2021 SPACs are still in search mode; that, they are still seeking to identify a merger target. The completion of the merger is that SPAC lifecycle event that contributes most significant to the securities litigation risk; almost all of the SPAC-relates securities suits filed since January 1, 2021 were filed following the defendant company’s SPAC merger.
Although this lawsuit is only the third SPAC-related suit since January 1, 2021 involving a SPAC from the IPO class of 2021, the likelihood is that over the coming months there will be many more securities suits involving Class of 2021 SPACs.
According to SPACInsider (here), as of May 6, 2022, there are 606 SPACs in search mode, 571 of which are from the 2021 SPAC IPO class or earlier. Over the coming months, as the SPACs identify merger targets and complete their intended mergers, the SPAC and the post-merger company will move into a phase where the possibilities for securities class action litigation will increase. While most of these post-merger companies will not get hit with securities suits, a certain number of them will.
So, if it is the case as I suggested at the outset that SPAC-related lawsuits have been an important part of securities class action litigation so far in 2022, the likelihood is that this trend will continue as the year progresses and even as we head into 2023. There likely are many SPAC-related securities lawsuit filings yet to come.