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Space Company Momentus Sued by Investor Over Blank-Check Merger

June 17, 2022, 4:01 PM

A Momentus Inc. investor sued the space infrastructure company in Delaware, citing concerns that sponsors of its 2021 blank-check merger pushed a flawed transaction because it was structured to give them a windfall whether the deal worked out or not.

The lawsuit seeks files from the company to probe suspicions that insiders affiliated with Momentus and Stable Road Acquisition Corp., the special purpose acquisition company it combined with, duped investors into approving the deal by falsely hyping its propulsion technology and concealing their own conflicts of interest.

“The truth of the matter is that Momentus is still nowhere near finishing its water propulsion technology, much less commercializing” it, according to the complaint filed Thursday by an individual investor.

But Stable Road’s board was intent on getting “any deal done at all, even if the deal inflicted severe harm on the unaffiliated stockholders,” who were “robbed of their redemption rights” and “tricked into investing in an overvalued company,” the suit says.

Momentus didn’t immediately respond to a request for comment Friday. The company, along with certain top executives, last year paid $8 million to settle Securities and Exchange Commission fraud charges stemming from the merger.

Wave of SPAC Litigation

SPACs, or blank-check companies, are publicly traded entities raising money on the promise of a reverse merger, or de-SPAC, with a private business that can then access public markets without the scrutiny of a traditional initial public offering.

Blank-check transactions exploded in popularity in 2020, leaving regulators to play catch-up, although the trend has waned amid a flurry of challenges that have led many companies to amend their regulatory disclosures. The SEC recently announced a SPAC crackdown.

The Momentus suit is the latest in a wave of Delaware litigation taking aim at the the structural features of SPACs, particularly “founder shares” that cost insiders fractions of a penny but soar in value—usually by a factor of thousands—if a merger is completed. The shares become worthless if a deal falls through.

Just one judge has ruled on those allegations so far, finding that the “mismatched incentives” inherent to SPAC transactions don’t themselves breach any fiduciary duties. But she also suggested judges would closely scrutinize the statements made to investors by SPAC deal backers.

Buried in Footnotes

According to the complaint in Delaware’s Chancery Court, sponsors of its blank-check merger repeatedly used cagey language or outright lied as part of an ongoing effort to confuse investors about whether its patents covered “water-based propulsion"—a potential breakthrough technology—or “generic propellants.”

They also allegedly buried information about their founder shares and other financial interests in footnotes that weren’t properly cross-referenced. Those are exactly the types of misleading statements that are suspicious in the SPAC context, according to the complaint.

“Now that the market has learned of the truth, Momentus’ stock has plummeted to less than 30% of the redemption price,” the suit says.

It seeks documents under a state law giving corporate shareholders broad inspection rights if they credibly suspect wrongdoing. Records cases often reflect an attempt to drum up fiduciary breach claims.

Cause of Action: Section 220 of the Delaware General Corporation Law.

Relief: Disclosure of relevant company records; costs and fees.

Attorneys: The investor is represented by Ashby & Geddes PA and Levi & Korsinsky LLP.

The case is Burk v. Momentus Inc., Del. Ch., No. 2022-0519, complaint filed 6/16/22.

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com