31 March 2022

Guarding Its Turf: SPAC-Related Chancery Opinion May Force Companies to Defend Disclosure-Based Claims on Multiple Fronts

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Companies that have endured a corporate trauma are often faced with a two-headed monster of litigation: first, a federal securities class action, typically alleging that misstatements or omissions inflated the company’s stock price because the company failed adequately to predict, or disclose the likelihood of, the trauma; and, second, stockholder litigation claiming that the company’s directors (and sometimes officers) breached their state-law fiduciary duties in subjecting the company to the costs of defending or settling the securities litigation. In order to avoid (or at least defer unless and until necessary) the expense and distraction of litigating identical or overlapping issues in two or more fora, defendants often have sought a stay, by agreement or motion, of the fiduciary duty litigation, pending at least resolution of a threshold motion to dismiss in federal court. This approach has proven beneficial for all involved because it allows the parties to concentrate their resources in the federal proceeding that will determine whether viable disclosure claims have been alleged; if those claims fail, then there may no longer be any basis to pursue the state-law fiduciary duty claim and all can save the resources of litigating those claims in the meantime.

A recent opinion in the Delaware Court of Chancery, however, has created uncertainty regarding this staged approach to dual-faceted stockholder litigation. Vice Chancellor Lori W. Will, in In re Lordstown Motors Corp. Stockholders Litigation, denied the defendants’ motion to stay a putative class action alleging breaches of fiduciary duties pending the resolution of a federal securities class action stemming from many of the same events and disclosures. According to the court, the Delaware case “raises emerging issues of Delaware law” and “the court’s essential role of providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”

Lordstown Motors is one of the more prominent electric vehicle companies to go public via merger with a SPAC (a so-called “de-SPAC”) and, as previously discussed in this space, litigation about these transactions is one of the hot areas in both securities and fiduciary duty litigation. The Lordstown litigation came on the heels of a short-seller report accusing the company of, among other things, falsifying pre-orders for its trucks. The company soon was faced with multiple securities class action lawsuits, stockholder derivative actions, and the class action in the Court of Chancery. That suit alleged that a group of the company’s current and former directors as well as the SPAC’s sponsor breached fiduciary duties by failing to disclose negative information about the legacy Lordstown business prior to the vote of the SPAC’s stockholders to approve the merger and their decision not to exercise the option to redeem their shares.

Regarding the overlap with the pending federal cases, the court conceded that “[t]he issues in the actions coincide insofar as the disclosures in the [SPAC sponsor’s] proxy statement require examination” but nevertheless concluded that the issues “are otherwise fundamentally different” because the securities cases ultimately would turn on whether the company’s stock price has been inflated by the subject disclosures while the Delaware case would hinge on whether those same disclosures had “harmed the putative class members by impairing the informed exercise of their redemption rights to the defendants’ benefit.” Moreover, Vice Chancellor Will emphasized that the Delaware plaintiffs “are pursuing more than a narrow disclosure claim” because the claims “invoke[d] both the duty of loyalty and disclosure duties implicating director loyalty.” In framing the inquiry around the specific legal claims, rather than the common factual issues, the court was able to conclude that the case concerned “quintessential Delaware concerns” and that a stay was therefore not appropriate.

Defendants would be justified in being concerned about the Lordstown opinion.  At the very least, it will encourage plaintiffs’ counsel to pursue litigation in multiple jurisdictions and thereby increase the settlement pressure on defendants. If defendants determine to litigate the core factual allegations – here, the truth or falsity of the disclosures – in each court, they run the risk of conflicting decisions or, worse, an argument that collateral estoppel precludes disputing the issue in one court if it has been decided in another. Moreover, the overlapping putative classes in the securities and fiduciary duty actions present a real possibility of duplicative damages awards. The Lordstown court did not address these concerns in any meaningful way.

Defendants may take some comfort in the court’s stated belief that the case, because it concerns a SPAC/deSPAC transaction, “raises emerging issues of Delaware law,” although that conclusion itself is difficult to square with the court’s earlier observation in the much-publicized MultiPlan opinion that “well-worn fiduciary principles” apply, notwithstanding the structure of such transactions. In addition, it is important to note that Lordstown is a putative class action and not a stockholder derivative action (and the court noted in a footnote that its denial of the stay motion should not be viewed as determinative of a still-pending motion to stay a derivative action also pending before it). Courts frequently have held that defendants should not be required to litigate simultaneously securities class action claims against a company as well as derivative litigation seeking to recover on behalf of the company based on the same underlying conduct. The Lordstown opinion does not hold otherwise.

The widely reported uptick in litigation surrounding SPAC and deSPAC transactions amid more volatile market conditions is likely to continue to present defendants with difficult litigation landscapes similar to that in Lordstown. Whether courts are willing to stay one case (or set of cases) in favor of another, in order to allow for a more orderly resolution of common issues, remains an open question.