In a few days, when I work up my summary of the year’s events in the world of D&O, one of the stories I will be covering will be the volume of SPAC-related securities litigation during the year. The SPAC-related litigation represents a significant part of the year’s securities class action lawsuit filings. The latest example of this phenomenon is the lawsuit filed late last week against residential home improvement financing platform Sunlight Financial Holdings, Inc., which became a public company through a July 2021 merger with a SPAC. The new lawsuit is in many ways representative of the kinds of SPAC-related lawsuits filed this year. A copy of the complaint in the new lawsuit can be found here.
Background
Spartan Acquisition Corp. II is a special purpose acquisition company (SPAC). Spartan completed a SPAC IPO on November 24, 2020. Sunlight Financial LLC (Legacy Sunlight) operated a for business-to-business financing platform for residential solar and home improvement contractors. On January 21, 2021, the companies announced their plan to complete a business combination. Legacy Sunlight and Spartan completed the business combination in July 2021, with the merged company known as Sunlight Financial Holdings.
On September 28, 2022, Sunlight announced that it was taking a receivables impairment charge of $30 to $33 million for the fiscal quarter ending September 30, 2022. The company reported that “the Company was informed of certain actions taken by one of its installer partners to address liquidity issues faced by the installer” which “would likely result in an inability of the Company to collect on advances outstanding to such installer.” The company also announced its was withdrawing its full year outlook due to the “installer liquidity event.” The company also said it was re-underwriting all of its contractor partners’ advances to “further mitigate risk going forward.” According to the subsequently filed securities class action complaint, the company’s share price fell over 57% on this news.
The Lawsuit
On December 16, 2022, a plaintiff shareholder filed a securities class action lawsuit against Sunlight in the Southern District of New York. The complaint names as defendants certain directors and officers of Sunlight. The complaint also names a defendants certain former officers of the SPAC. The complaint purports to be filed on behalf of a class of investors who purchased securities of Sunlight (or of the predecessor SPAC) between January 25, 2021 and September 28, 2022.
The complaint alleges that during the class period the defendants failed to disclose to investors “(1) that the Company lacked effective underwriting and risk evaluation with respect to its contractor advance program; (2) that Sunlight lacked the oversight and periodic monitoring systems necessary to timely detect bad debt associated with its contractor advance program; (3) that the Company lacked effective internal controls over accounting and reporting of non-cash advance receivables; (4) that, as a result, the Company would be forced to take a non-cash advance receivables impairment charge exceeding $30 million; and (5) 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 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
As noted at the outset, SPAC-related litigation has been an important part of the overall volume of securities class action litigation in 2022. By my count, there have been 23 SPAC-related securities class action lawsuits filed during 2022 (and a total of 54 SPAC-related suit filings since January 1, 2021). The 23 SPAC-related suits this year represents about 12% of all of the securities class action lawsuit filing in 2022.
While there have been a significant number of SPAC-related securities class action lawsuits filed in 2022, the pace of new SPAC-related suit filings dropped off as the year progressed. Thus, while there were a total of 23 SPAC-related suits filed this year (so far), 17 of those 23 suits were filed before May 31, 2022. Only six months have been filed in the nearly seven months since May 31, 2022. There may be a number of reasons for this dropoff, the likeliest being that overall decline in the value of SPACs and de-SPAC companies. With fewer high-fliers, there are fewer companies experiencing the kind of conspicuous drops in share prices that can attract the unwanted attention of plaintiffs’ lawyers.
The newly filed lawsuit shares a number of features in common with many of the other SPAC-related suits that have been filed, including in particular the fact that the defendants named in the lawsuit include individuals who served as officers of the former SPAC. By my count, 32 of the 54 (about 60%) SPAC-related securities suits that have been filed since January 1, 2021 have included former officers of the SPAC as named defendants.
As we get ready to head into the New Year, the natural question is whether the SPAC-related litigation that was such an important part of overall securities lawsuit filing this year will continue next year. Until recently, it seems likely, given the sheer volume of SPAC IPOs in 2020 and 2021, that there would continue to be SPAC-related lawsuit filings for the foreseeable future. With the notable drop off in the pace of filings during the last seven months of this year, the possibilities for volumes of future SPAC-litigation seem less likely – particularly as more of the searching SPACs head into liquidation. It will be interesting to see what happens to SPAC-related litigation filings as we head into 2023.