July 1, 2021

SPAC M&A Litigation: The Specter of Section 11

I recently came across this Woodruff Sawyer blog about SPAC litigation, and it’s definitely a growth industry.  According to the blog, so far 12% of pending or completed SPAC mergers have had M&A lawsuits filed against them, 4% of completed mergers have had derivative lawsuits filed against them, and 7% of completed mergers have had securities class actions filed against them.

While M&A actions represent the largest volume of claims so far, the blog says they are less troubling than securities disclosure claims. That’s because securities claims are rising – only 7 had been filed in all of 2019 & 2020, but 11 were filed during the first quarter of 2021 alone.  The blog explains that the problem with these lawsuits is that while most class actions involve 10b-5 claims, these SPAC suits are vulnerable to Section 11 claims:

Classic securities class action lawsuits involve plaintiffs bringing claims when public companies disclose information that then leads to a precipitous stock drop. These lawsuits allege that the company had made material misstatements or omissions in their earlier public statements, including their SEC filings.

Many of these will be brought as what is known as 10(b) suits. While they are serious and take time and money to defend, these cases are often won by defendants on a motion to dismiss—meaning no settlement will be paid to plaintiffs.

Newly public companies that went public via a de-SPAC transaction are not just vulnerable because, like all new public companies, their management may be less practiced at the rigors of public company life, including forecasting. They are also vulnerable because most will have filed an S-1 registration statement shortly after completing the de-SPAC transaction to register the shares of the SPAC sponsors and the PIPE shares.

Registration statements have a three-year statute of limitations. So, for example, a company can be sued for misstatements or omissions in the S-1 up to three years after going public if the stock price falls below the registration statement price.

Registration statement-related suits are commonly referred to as Section 11 lawsuits, and they have been on the rise. This type of suit is particularly difficult for defendants to win a motion to dismiss because the company has strict liability for the disclosures in its registration statements.

The blog says that the good news is that federal forum bylaws have been effective in pushing Section 11 claims out of state courts, and that so far, most of the SPAC class actions have involved 10b-5 claims.

Update: Marsh & McLennan’s Ann Longmore pointed me to this article from Allison Frankel on which details “merger objection” style suits that are being filed in relation to SPAC and de-SPAC transactions in New York & quickly settled in exchange for supplemental disclosures & “mootness fee” payments.

John Jenkins