One factor that contributed significantly to the total number of securities class action lawsuits filed in 2021 and 2022 was the proliferation of SPAC-related securities suit filings. Although diminished in number this year relative to the two prior years, and while the filing pace has declined as the year has progressed, SPAC-related securities suits continue to be filed in 2023. In the latest example of this continuing trend, last week a plaintiff shareholder filed a securities suit against the executives and sponsor of a SPAC that merged with a health monitoring technology company that later went bankrupt. The named defendants include officers of the bankrupt company. While the suit is interesting as an example of the continuing threat of SPAC-related litigation, it may be even more important as an illustration of the way that geopolitical risk increasingly can translate into securities litigation.
SC Health Corporation was a special purpose acquisition company (SPAC) organized under the laws of the Cayman Islands company and with its executive offices in Singapore. SC Health completed an IPO on July 11, 2019. On March 19, 2021, SC Health announced that it had entered into an agreement to complete a business combination with Rockley Photonics Limited (Rockley Private) a U.K.-based company with its primary operations in Pasadena, California, that was developing a silicon photonics-based health monitoring platform for monitoring various biomarkers. In March 2021, at the same time the merger was announced, SC Health completed a PIPE offering. The two companies announced the completion of the merger on August 11, 2021, with Rockley Photonics Holdings Limited as the surviving publicly traded company.
Historically, Rockley Private had derived its revenues by providing non-recurring engineering and development services on customer-specific silicon photonic chipsets. Apple and Hengtong Rockley Technology Co, Ltd. (a joint venture with Hengtong Rockley Technology, Ltd. [HRT], a related party that manufactures optic fiber transceivers based on silicon photonics chipsets) provided substantially all of Rockley’s revenue in 2019 and 2020. Rockley Private’s business plan was based on expected revenues in 2022 and 2023 from sales to consumer wearable original equipment manufacturers (OEM). Until those revenues materialized, Rockley Private expected most of its 2021 and 2022 revenues to come from HRT. The securities class action complaint alleges that the HRT revenues were “in serious undisclosed facts regarding HRT.”
According to the complaint, HRT was subject to “intense scrutiny” from the U.S. Commerce Department because of Hengtong’s acquisition of Huawei Technologies’ majority ownership interest in an optical undersea cable business, Huawei Marine. In May 2019, the U.S. Bureau of Industry and Security (BIS) added Huawei and its non-US affiliates to the banned “Entity List,” including Huawei Marine. Hangtong acquired Huawei Marine in June 2020. In February 2021, the World Bank (acting at the request of the U.S. and other countries) invalidated a 2020 bid by Huawei Marine to build undersea cables for several Pacific Island countries.
Rockley Private’s revenue projections for the years 2021 through 2024 that were used in connection with the proposed merger depended in part on its anticipated revenues from the joint venture with Hengtong and the “strength and ever-increasing number of major customers” for its new consumer wearable products. Among other things, in the initial investor presentation when the proposed business combination was first presented, Rockley Private projected 2023 revenue of $446 million from its consumer wearable products in 2023. Initially, after the merger was first completed, Rockley continued to provide these optimistic projections and to highlight the significance of its customer relationships.
In December 2021, Rockley announced that it did not intend to continue with planed sales to its joint venture with HRT because Hengtong and certain of its affiliates had been placed on the BIS “Entity List.” Rockley reduced its projected 2021 from $27 million to $7 million. However, Rockley continued to promote the strength of its growing customer list and the prospects of its planned consumer wearable products.
In May 2022, Rockley announced a $81.5 million private debt placement. In the announcement, Rockley reduced its anticipated 2023 revenues to a range of from $300 million to $320 million, from the original $426 million projection, while also announcing that its product development programs remained on track. The company’s share price declined 17% on this news.
In its August 2022 earnings release call with investors and analysts, Rockley lowered its 2022 revenue guidance and withdrew its 2023 revenue guidance. It also said that it was shifting its focus away from the consumer wearables business. The company’s share price declined another 30%. The securities lawsuit complaint says that “because the full truth concerning Rockley’s customer base, Rockley’s expected revenues, and the commercial viability and timeline of its new product lines remained concealed by defendants, the price of Rockley securities remained artificially inflated.”
In its November 2022 earnings release, the company further lowered its 2022 guidance and omitted any 2023 guidance.
On January 23, 2023, news media reported that Rockley had filed for Chapter 11 bankruptcy. At the time of the filing, “Rockley had yet to commercialize a single new product.”
On November 9, 2023, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California. A copy of the complaint can be found here. The defendants named in the lawsuit include the Chairman and the CEO of the SPAC; the CEO and two CFOs of Rockley; the SPAC sponsor; the investment firm that controlled the SPAC sponsor, and affiliates of the investment firm. The complaint purports to be filed on behalf of investors who purchased securities of SC Health and Rockley between March 19, 2021 (the date the business combination was announced) and January 23, 2023, as well as on behalf of the March 2021 PIPE offering investors.
The complaint alleges that in connection with the proposed business combination and in the immediate aftermath of the business combination, the defendants misrepresented or failed to disclose:
(a) the JV Agreement was in jeopardy because Hengtong, Rockley’s JV partner, had acquired a majority interest in a company, Huawei Marine (later renamed HMN Tech) on the banned entities list maintained by the U.S. Bureau of Industry and Security (BIS) of the U.S. Department of Commerce since 2019;
(b) that the JV Agreement was in further jeopardy because in February 2021 the World Bank had invalidated a bid by Huawei Marine (later renamed HMN Tech) to build an undersea cable based on security concerns raised by the United States and other countries that China could use the infrastructure to spy on communications;
(c) that the materially undisclosed risk that the JV Agreement between Hengtong and Rockley could fail as a result of Hengtong’s acquisition of a majority interest in HMN Tech jeopardized Rockley’s joint venture revenues, launch schedule, business prospects, and ultimately Rockley’s solvency;
(d) that Rockley did not have the customer base or customer commitments that defendants had represented to investors;
(e) that Rockley did not have sufficient customer orders to allow it to develop and commercialize its products, maintain and expand client relationships, reach cash floe break-even, or stave off bankruptcy following the Merger; and
(f) that as a result of (a)-(e) above, the revenue projections and business and operational plans provided to investors regarding Rockley and the commercial viability and timeline of Rockley’s new product lines were materially false and misleading and lacked a reasonable basis in fact.
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 classes of investors.
Readers will recall that that for a brief time, particularly in late 2020 and early 2021, SPAC-related activity reached something of a crescendo. It was a time that, with the benefit of hindsight, was in many instances characterized by an over-abundance of enthusiasm about the future prospects of many of the SPAC merger targets. As time has gone by, the list of failed SPAC business combinations has lengthened. Some readers, viewing the allegations in this complaint, might think they can discern this same pattern here.
There are, however, a few features that arguably distinguish these circumstances in this case. The first is that the SPAC involved here was from the SPAC IPO class of 2019 – that is, it went public at a time before the SPAC frenzy really gained momentum in 2020 and 2021, and arguably before the field of attractive private company targets was thinned by the sheer number of SPACs seeking merger partners.
The second is that both the SPAC and the merger target companies were based outside the U.S. These facts highlight the fact that the SPAC enthusiasm became for a time a global phenomenon, albeit centered on the U.S. due to the availability of the SPAC structure in U.S. markets and under U.S. law. The global profile of the various companies and parties here may be an important backdrop to a further consideration.
The further consideration about these circumstances is the extent to which geopolitical risks factored into the sequence of events. As the allegations in this case exemplify, a growing host of geopolitical risks are complicating the operating environment in which companies must do business. In recent months, the risks have become even more extensive. Today, many companies, particularly those with extensive overseas operations, face a daunting array of geopolitical risks, from the war in Ukraine and the war in Gaza to the trade and political tensions between the U.S. and China. As this case shows, these kinds of business risks can directly affect business operations and results and can also translate into the securities litigation.
Although I led this blog post citing this case as a SPAC-related litigation example, the case may be even more important as an example of the way in which geopolitical risk can translate into a corporate and securities litigation risk. Since the time of the circumstances described in this complaint, the significance of geopolitical risks and the extent to which they may threaten companies’ operations has only grown. It looks increasingly likely as we head into 2024 that geopolitical risk could represent a significant and growing area of corporate and securities litigation risk.
But while I think this case is noteworthy as an example of the ways in which geopolitical risk can translate into securities litigation, it is also, as I noted at the outset, an example of the continuing phenomenon of SPAC-related litigation. By my count, there has been a total of 65 SPAC-related securities lawsuits filed in the U.S. since January 1, 2021, including 11 so far in 2021. (By way of contrast, there were a total of 23 SPAC-related securities suits filed in 2022.)
While the pace of SPAC-related securities suit filings has diminished more recently, the fact is, as this case illustrates, the SPAC-related suits continue to be filed. The number of SPAC-related suit filings clearly is a relevant fact in the total number of securities suits this year. Signs are that the SPAC-related litigation filings are going to continue as we get ready to head into 2024.