In my recent wrap-up of the top D&O stories of 2022, I noted that one of last year’s key topics was the quantity of litigation involving special purpose acquisition companies (SPACs). It now appears that this trend is continuing into the new year. Late last week, a plaintiff shareholder filed a SPAC-related securities suit against battery development company Enovix, alleging that the company had misrepresented its manufacturing capabilities. A copy of the January 6, 2023, complaint against the company can be found here.
Rodgers Silicon Valley Acquisition Corp., a special purpose acquisition company (SPAC), completed an IPO on December 8, 2020. On February 22, 2021, the SPAC announced its plan to complete a business combination with Enovix. The two companies completed the business combination on July 15, 2021, with Enovix as the surviving, publicly traded company. Thurman Rodgers, the Chairman and CEO of the SPAC, became a director of the post-merger company, and in November 2022, Rodgers became Enovix’s Executive Chairman.
Enovix designs and develops silicon-anode lithium-ion batteries for consumer electronics, mobile phones, and electric vehicles. At times relevant to the subsequently filed securities class action complaint, Enovix had plans to manufacture its batteries using a manufacturing facility in Fremont, California that it called “Fab-1.” Enovix also developed plans to expand its manufacturing capabilities through a proposed manufacturing facility it called “Fab-2.”
When the proposed merger was announced, Enovix announced its “ambitious goal” to develop its own manufacturing line and to begin delivering products to consumers in the second quarter of 2022. In August 2022, Enovix announced that it had met its goal of achieving its first product revenue in Q2 2022, but also announced that it needed to “increase its manufacturing yield metrics” and “prioritize Fab-1 improvements in the third quarter” of 2022, noting that the company would be taking the manufacturing line down to improve individual process modules, with the expectation that revenue would “ramp” beginning in Q4 2022.
In November 2022, Enovix announced that in the third quarter 2022, it had realized just $8,000 in revenue, that it would be “dialing back” its work on improving Fab-1, and shifting its focus to Fab-2, because intended improvements in Fab-1 were not having the desired results, adding that the company anticipated “achieving lower overall output from Fab-1 in 2023,” with fewer that one million batteries in 2023. The company’s share price declined 44% on this news.
On November 7,2023, the company announced that Rodgers would assume the role of Executive Chairman. In a statement, Rodgers criticized the company for a “lack of clear investor communications,” adding that “we have poorly communicated on the status of Fab-1.”
On January 3, 2023, at a special presentation to investors via conference call, Rodgers disclosed that the company’s Fab-2 production plans would be delayed several months because of equipment failures experienced in the Fab-1 lines. The company’s share price declined a further 41% on this news.
On January 6, 2023, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Enovix; Rodgers, in his capacity as a former officer of the SPAC and in his capacity as a director and officer of Enovix; and certain other Enovix directors and officers. The complaint purports to be filed on behalf of investors who purchased shares of Enovix or of the predecessor SPAC during the period February 22, 2021 (when the business combination was announced) and January 3, 2023.
The complaint alleges that during the class period, Defendants made failed to disclose material facts “about Enovix’s revenues and ability to manufacture its proprietary battery technology.” In reality, and contrary to disclosure made during the class period, the complaint alleges, “Fab-1 did not need to be ‘improved’ so much as it needed to be fixed.” The company’s manufacturing lines were “beset by problems that required significant manual intervention to produce batteries.” The defendants, the complaint alleges, “obscured these problems from investors.” Despite “boasts” about the company’s ability to produce “millions of units” for customers, the defendants “did not inform investors that the lines were not running anywhere close to their intended levels and could not produce at scale absent dramatic changes.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to recover damages on behalf of the class.
As I noted at the outset, this lawsuit is the first SPAC-related securities class action lawsuit to be filed in 2023. By my count, there have now been a total of 55 SPAC-related securities class action lawsuits filed since January 1, 2021, with 23 of them filed during calendar year 2022.
As I noted in my recent year-end round up, the SPAC-related securities suit filings in 2022 reflected an unusual filing pattern during the course of the year. That is, though there were 23 SPAC-related securities suits filed in 2022, 17 were filed prior to May 31, 2022; only 6 were filed after May 31, 2022. So this new lawsuit is only the 7th SPAC-related suit to be filed since May 31, 2022.
This new complaint does share certain features in common with many of the previously filed SPAC-related securities suits. Thus, for example, the defendants named include not only directors and officers of the target company in its pre- and post-merger form; the defendants named included at least one former officer of the SPAC. Defendant Rodgers is named as a defendant both in his capacity as a former officer of the SPAC and in his capacity as a director and officer of the de-SPAC company.
It is noteworthy to me that the SPAC involved here completed its IPO in 2020. There still have been relatively few SPAC-related securities suits filed with complaints involving SPACs that completed their IPOs in the SPAC IPO boom year of 2021 – perhaps because so many of them are still either search for a merger target or have elected to liquidate. (By my count, only five of the 55 SPAC-related securities suits that have been filed since January 1, 2021, have involved IPO class of 2021 SPAC, whereas 35 of the 55 SPAC-related securities suits have involved SPACs from the SPAC IPO class of 2020.)
The filing of this lawsuit in the first few days of January does raise the question of what we might expect in terms of SPAC-related securities litigation filings going forward in 2023. While it remains to be seen how this will play out, I do expect that SPAC-related securities litigation will prove to be one of the important stories of 2023. What form that litigation will take and how much of it there will be is an interesting question, one that will be significantly affected by the extent to which the more than 300 SPACs that are still in search mode ultimately elect to liquidate.