As I noted in my recent year-end round up of the top D&O stories of 2022, one of the important trends last year was the volume of SPAC-related D&O litigation. Now, in what is the first SPAC-related securities suit of 2023, a plaintiff shareholder has launched a SPAC-related securities suit against satellite company Terran Orbital, related to the company’s March 2022 merger with a publicly-traded SPAC. Although the new lawsuit reflects the ongoing trend of SPAC-related lawsuit filings, the new lawsuit also has some unusual features, as discussed below. The February 17, 2023, complaint in the lawsuit can be found here.
Tailwind Two Acquisition Corp., a special purpose acquisition company (SPAC), completed its IPO on March 4, 2021. On October 28. 2021, Tailwind Two announced its plane to complete a business combination with the satellite firm Terran Orbital, Inc. (Legacy TOC). The two companies completed their business combination on March 25, 2022. The publicly traded merged company, Terran Orbital Corp., is referred to in the complaint as “New TOC.”
The new lawsuit purports to be filed as a class action lawsuit on behalf of all non-insider owners of shares of pre-merger Legacy TOC who through their employment with Legacy TOC were asked to vote in favor of the merger. The complaint alleges that the Proxy Prospectus prepared and filed in connection with the proposed merger was “materially false and misleading.”
The gist of the plaintiff’s complaint is that in connection with the merger the former Legacy TOC employees were told that in exchange for their Legacy TOC shares they were to receive New TOC common shares that were to be registered and issued pursuant to the terms of the Merger Agreement. In particular, the plaintiff alleges that the employees were told that, “when the deal closes,” and in exchange for their Legacy TOC shares, they would receive New TOC shares that would be “freely tradeable,” without restrictions.
However, the complaint alleges, the employee shareholders did not receive the New TOC shares at the time business combination was completed. Instead, the plaintiff alleges, the process took several more weeks, during which time the plaintiff and the other class members were unable to sell their shares and the Terran share price fell. The complaint alleges that by the time class members had access and control over their New TOC shares, New TOC had lost almost half of its value.
On February 17, 2023, the plaintiff, an employee shareholder, filed a securities class action lawsuit in the Southern District of New York against Terran Orbital; against the former directors and officers of Legacy TOC; against Tailwind Two and against the sponsor of Tailwind Two; against the former directors of Tailwind Two; and against the securities transfer agent for Terran Orbital and Tailwind Two.
The complaint alleges that the Proxy Prospectus issued in connection with the business combination was false because it misleadingly suggested that the employee shareholders would be provided with freely tradeable shares of new TOC on the effective date of the merger. The complaint also alleges that nothing in the Proxy Prospectus disclosed the “protracted process the Plaintiff and the class members would need to endure to get their freely tradable New NOTC stock,” nor was there “any disclosure or warning of the any risk that Plaintiff and class members would not get their freely tradable New TOC common stock” on the effective date of the business combination.
The complaint alleges that the defendants violated Sections 11(a) and 12(a)(2) of the Securities Act of 1933. The complaint also asserts claims for Negligence; Breach of Fiduciary Duty; and Aiding and Abetting Breach of Fiduciary Duty. The complaint seeks to recover damages on behalf of the plaintiff class.
As I noted at the outset, this new lawsuit is the first SPAC-related securities class action lawsuit filing of 2023. (Please see my discussion of the “first” designation below.) It is at one level not surprising that the first SPAC-related suit did not come until the eighth week of the new year; as I noted in my year-end wrap up of D&O stories of 2022, though there were 23 SPAC-related securities suits filed in 2022, the filing pace dropped off significantly as the year progressed. Thus, while there were 17 SPAC-related securities suits filed before May 31, 2022, only six were filed in the remaining months of the year. The apparent slowdown in the pace of SPAC-related securities suit filings in the second half of 2022 seems to have continued in 2023, with the first SPAC-related suit of 2023 only now just being filed.
Not only has the first suit only just been filed, it is a rather unusual one, at that. First of all, the plaintiff class on whose behalf the complaint was filed does not include all public shareholders, it is only just the employee shareholders of the merged company. Second, the misrepresentations alleged are unusual as well; the complaint does not allege misrepresentations with respect to the target company’s business or operations. Rather, the complaint alleges that the defendants made misrepresentations about when and how the employee shareholders would get their shares in the merged company.
One thing other thing that is noteworthy about the complaint is the roster of defendants in the suit. The plaintiff has named as defendants not only Terran and the former directors of Legacy TOC, but also the SPAC, the SPAC’s sponsor, the SPAC’s directors, and even the securities transfer agent that was responsible for setting up the share accounts for the shareholder employees. The broad range of defendants in this case shows the extent of the liability risks that arise in connection with SPAC transactions. The broad range of defendants named also has implications for the insurance programs potentially implicated in the lawsuit as well.
While the significance of this lawsuit to me is that it represents the first SPAC-related securities suit filing of 2023, because of its unusual features, it is hard to discern what it might mean as far as the potential for further SPAC-related securities suit filings in the weeks and months ahead. This suit pertains to circumstances specific to (and arguably unique to) this situation. It may have little relevance in connection with other de-SPAC companies and transactions.
One final note. The SPAC involved completed its SPAC IPO in March 2021, at what was essentially the peak of the SPAC IPO frenzy in 2021. I note this because, notwithstanding the surge of SPAC IPOs in the first quarter of 2021, there have been relatively few SPAC-related suits – so far – filed with respect to SPAC transactions involving SPACs from the 2021 IPO class. By my count, of the 56 SPAC-related securities suits filed since January 1, 2021, only six of the lawsuits have involved SPACs from the 2021 IPO class. Many of these 2021 SPAC IPO companies may still be seeking merger partners; others have liquidated. It may be as the SPAC life cycle for the remaining un-merged SPACs from the 2021 IPO class plays out, there may be further developments, including even the possibility of further litigation.
In any event, it remains to be seen if the slowdown of SPAC-related securities suit filings noted in the second half of 2022 will continue in 2023. Signs so far are that the slowdown has carried over into 2023.
More About “First”: Some readers may want to know everything I took into account in designating this suit as the “first” SPAC-related lawsuit of the year. There have in fact been other SPAC-related securities complaints filed during calendar year 2023.
For example, on January 11, 2023, a plaintiff shareholder filed a securities class action lawsuit against Latch, Inc., a company that became publicly traded as a result of a prior merger with a SPAC. A copy of the January 2023 complaint can be found here. However, as discussed here, in late August 2022, Latch was sued in a prior securities class action lawsuit. The more recent filing pertained to more or less the same allegations (although the later suit did assert a different legal theory). Under my standard counting methodology, because the two suits are more or less related, they only count once and only count at the time of the first complaint filing. So according to my methodology, the January 2023 suit against Latch doesn’t “count” as a 2023 lawsuit.
A more recent lawsuit filing illustrates a different issue. On February 21, 2023, Volta, Inc. was sued in a merger objection lawsuit, pertaining to announced plans of Volta to be acquired by Shell USA, Inc. A copy of the merger objection lawsuit complaint can be found here. The currently publicly traded version of Volta was formed as a result of the predecessor company’s August 2021 merger with a SPAC. Though the current version of Volta is the product of a SPAC merger, I don’t think this new lawsuit should count as a SPAC-related lawsuit, because the suit itself relates to the planned merger with Shell USA, not the prior SPAC merger. In any event, I also note that in April 2022, Volta was previously hit with a SPAC-related securities suit (as discussed here).
I share these observations now in order to elucidate my methodology and also to show that in the process of “counting,” many little decisions must be made. Reasonable minds could of course differ.