Electric vehicle industry executives made big claims about their products last year as their companies were targeted for acquisition during a boom of “blank check” IPO deals.
Nikola Corp was one of the first EV industry players taken public by a special purpose acquisition company (SPAC) to get caught up in securities litigation over its CEO’s statements. An internal probe ultimately found its former chairman, Trevor Milton, who left the company in 2020, made multiple inaccurate statements, according to regulatory filings.
Now, Milton along with executives at six other EV-related companies, or at the SPACs that acquired them, are facing proposed class actions alleging their forward-looking statements intentionally misled investors on topics such as supply chain issues and vehicle deliveries.
The litigation is part of a broader scrutiny of SPAC transactions, but the EV industry’s youth and high-growth expectations have made it a special target for shareholders upset about stock price drops. The suits will test whether overly optimistic forward-looking statements are protected from class actions under a safe harbor in the 1995 Private Securities Litigation Reform Act.
Canoo Inc, Lordstown Motors Corp, Lucid Motors, Nikola Corp, QuantumScape Corp, Romeo Power Inc, and XL Fleet Corp are all facing securities suits. The class actions allege fraud, material misstatements, or disclosure failures in the lead up to a “de-SPAC,” or acquisition by a publicly listed SPAC.
“There’s been a lot of skepticism about EV projections lately, specifically whether the technology actually supports, realistically, the valuations of the companies,” said Robert Malionek, a partner with Latham & Watkins LLP.
SPACs offer an alternative route to initial public offerings to take a target company public. Generally, investors pool funds into a shell company that undergoes an IPO and gains additional investors. The shell company, functioning as an acquisition vehicle, then hunts for a company to merge with within a 24-month period, or else the SPAC is dissolved. The acquisition—which in effect makes the target company a publicly traded company—is known as a de-SPAC transaction. More than 500 SPACs have IPOed since 2020, compared to just 59 in 2019, according to data from SPACinsider.com.
In de-SPACs, both the target company and the acquirer benefit from higher valuations. That brings “more pressure, more temptation, potentially, than in other settings, to paint an inappropriately rosy picture about the prospects for the target,” said Michael Ohlrogge, an assistant professor at New York University Law School.
In one of the most recent suits, Nichols v. Romeo Power Inc., EV battery manufacturer Romeo allegedly overstated its products’ performance capabilities, and claimed it had four battery cell providers to meet its manufacturing capacity and market demand.
After its acquisition, Romeo said it had only two providers, that it wouldn’t be able to ramp up production in 2021, and that investors would have to scale back growth and revenue expectations, according to the complaint.
Romeo didn’t respond to a request for comment on the litigation.
Emerging industries like EVs rely on the ability to forecast future growth and earnings, with the potential for high returns for investors.
That leaves them “potentially vulnerable to stock price drops if they don’t deliver along the lines projected for that,” said Stuart Gleichenhaus, a senior managing director at FTI Consulting, who leads the company’s SPAC intiative.
Not So Safe Harbor?
Parties involved in de-SPAC transactions have relied on the PSLRA safe harbor from class actions related to inaccurate forward-looking statements in order to talk about a target company’s growth prospects in ways they wouldn’t be able to do in an IPO.
The safe harbor requires statements to be identified as forward-looking and accompanied by cautionary statements and that they not be knowingly false. Those caveats are at issue in the EV SPAC-related complaints.
Claims that executives knowingly made false statements have been hard to prove under the 1995 law, but a few of the EV de-SPAC complaints might proceed if the plaintiffs can show the defendants had a financial motivation to mislead, said Kevin LaCroix, an attorney and executive vice president of R-T Specialty LLC, an insurance intermediary firm focused on management liability issues.
One of the most closely watched cases involves Lucid and its planned SPAC acquirer, Churchill Capital Corp IV. Lucid’s CEO had said the electric car maker would deliver 6,000 vehicles to market in early 2021, only to disclose on the day of the merger announcement that it would deliver just 557 vehicles, and not until the second half of 2021, according to the complaint. The deal has yet to finalize.
Lucid Motors said the lawsuits filed against it “are without merit, and we look forward to vigorously contesting them.” Churchill Capital Corp didn’t respond to a request for comment.
Other suits filed in federal courts in California, Delaware, Ohio, and New York, allege executives at either the SPACs or the EV industry targets made false statements that inappropriately boosted stock values. The cases assert the liability safe harbor doesn’t apply since the executives knowingly misrepresented their companies’ prospects.
Nikola is facing a probe by the Securities and Exchange Commission and at least seven proposed class suits alleging that Milton and others executive exaggerated the electric-truck maker’s capabilities. One of the most recent suits, filed in Delaware Chancery Court, says the company fraudulently used doctored video and trick electrical wiring to tout the success of its hydrogen fuel cell model, the Nikola One.
A spokeswoman for Nikola said the company “remains committed to achieving previously disclosed milestones and is committed to complying with the SEC.”
SPAC parties are struggling to find where to draw the line on adequate disclosure.
“There’s a little bit of a damned if you do, damned if you don’t aspect of this,” Malionek said. Withholding pre-merger projections can lead to claims of inadequate disclosure, he said
The SEC might step in if the courts don’t. In an April 8 speech, John Coates, acting director of the SEC’s Division of Corporate Finance, warned that the 1995 law’s protections may not extend to de-SPACs, and was in need of clarification.
“Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst,” Coates said.
The loss of safe harbor protections — whether delivered by a court or the SEC — would be a turning point for future SPAC deals. “If you don’t have the benefit of the safe harbor then there’s just going to be a chilling effect on being able to put out exactly that kind of information to the investors,” Malionek said.
SPAC parties are already reacting to both the litigation and Coates’ remarks, said Gleichenhaus.
SPAC CFOs are putting in more diligence on target companies, and investor presentations now include more risk factors and protective measures than they did just a few months ago, he said.
The cases are Phillips v. Churchill Capital Corporation IV, N.D. Ala., No. 1:21-cv-00539, complaint filed 4/18/21 and Nichols v. Romeo Power inc., S.D.N.Y., No. 1:21-cv-03362, complaint filed 4/16/21.