Northern District Of California Holds That SPAC Investors Have Standing To Sue Regarding Alleged Misstatements About A Different Entity, But Dismisses Putative Class Action For Failure To Allege Material Misstatements
Securities Litigation
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  • Northern District Of California Holds That SPAC Investors Have Standing To Sue Regarding Alleged Misstatements About A Different Entity, But Dismisses Putative Class Action For Failure To Allege Material Misstatements

    On January 11, 2023, the United States District Court for the Northern District of California dismissed a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) against an electric vehicle company and its CEO.  In re CCIV/Lucid Motors Sec. Litig., No. 4:21-cv-9323, slip op. (N.D. Cal. Jan. 11, 2023), ECF No. 151.  Plaintiffs, who allegedly purchased shares in a Special Purpose Acquisition Company (“SPAC”) that later merged with the electric vehicle company (with the electric vehicle company becoming the surviving entity of the merger), alleged that, prior to the merger, the company had made misrepresentations and omissions about its value.  Plaintiffs claimed to have invested in the SPAC after the press had announced the SPAC was “in talks” with the electric vehicle company, but before the merger was officially announced by the SPAC and the company themselves.  Following post-merger statements that allegedly contradicted the company’s pre-merger statements, plaintiffs sued, claiming that defendants’ alleged misrepresentations regarding the electric vehicle company’s value had caused them to pay an inflated price for the SPAC’s stock.  The Court held that plaintiffs had standing to sue the electric vehicle company, but dismissed their claims for failure to identify any material misrepresentations because the challenged statements were made before the SPAC and the electric vehicle company had announced or confirmed that they were in merger discussions.

    The Court first addressed defendants’ argument that plaintiffs lacked standing to bring a claim under the Exchange Act because the alleged misstatements concerned a company other than the one in which plaintiffs allegedly purchased shares.  Defendants relied primarily on the Supreme Court’s decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975), but the Court determined that the only standing requirement announced in the Blue Chip decision was that a plaintiff must have purchased or sold securities.  CCIV, slip op. at 8.  The Court also rejected as unpersuasive two Second Circuit decisions holding that a plaintiff must have bought or sold the security about which the alleged misstatement was made.  Id. at 10–12 (discussing Ontario Pub. Serv. Emps. Union Pension Tr. Fund v. Nortel Networks Corp, 369 F.3d 27, 34 (2d Cir. 2004), and Menora Mivtachip Ins. Ltd. v. Frutarom Indus. Ltd., 54 F.4th 82, 88–89 (2d Cir. 2022)).  The Court explained that in its view the Second Circuit had added unnecessary standing requirements not contemplated by the Supreme Court, and that, in addition, the Second Circuit’s requirement that a plaintiff must plead a misstatement to have Section 10(b) standing was inconsistent with Supreme Court precedent permitting certain claims to proceed on a theory of scheme liability in the absence of a misstatement.  Id. at 12–13.  Moreover, the Court pointed out that several courts had relied on dicta in the Second Circuit’s Nortel decision indicating that standing could be found where there was a direct relationship between two companies, such as in the merger context.  Id. at 13–14.  Finally, the Court rejected defendants’ argument that standing should be construed “narrowly,” as the Court explained that, in its view, other elements of Section 10(b) claims—including that a misrepresentation must be material and made “in connection with” the purchase or sale of a security—provided sufficient limiting principles.  Id. at 14–15.

    Indeed, while the Court declined to dismiss plaintiffs’ claims for lack of standing, it held that plaintiffs’ allegations failed to identify any material misrepresentation because all the challenged statements were made at a time when no merger had been announced and negotiations between the SPAC and the electric vehicle company had not been confirmed.  Id. at 16.  The Court explained that when assessing if information related to a potential merger is material, the fact finder must balance the “likelihood” or certainty the transaction will occur and the “magnitude” of the transaction, and that certainty usually takes the form of “indicia of interest in the transaction at the highest corporate levels,” such as “board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries.”  Id. (quoting Basic Inc. v. Levinson, 485 U.S. 224, 239 (1988)).  The Court held that merger discussions alone are not material in the absence of a serious commitment to complete the transaction, and simply because the press may have interpreted certain statements to mean a merger was likely did not itself mean that the merger was in fact likely to take place.  Id. at 17.  Because plaintiffs failed to sufficiently allege that the merger was likely to occur at the time of defendants’ alleged misrepresentations about the electric vehicle company’s performance, the allegations failed to show that the challenged statements were material to plaintiffs’ decision to invest in the SPAC.  Id. at 18.  The Court, however, granted plaintiffs an opportunity to amend if they believed they could allege sufficient facts demonstrating that defendants’ challenged statements could potentially be found to be material.  Id.