Friday, January 20, 2023
A couple of months ago, I blogged about Menora Mivtachem Insurance v. Frutarom, 54 F.4th 82 (2d Cir. 2022). There, a public company issued new stock in connection with a merger, and the S-4 contained false information about the target, supplied by the target. The truth came out, the stock price fell, and shareholders sued the target and some of its officers under 10(b). In that context, the Second Circuit held that the plaintiffs, who had purchased shares in the publicly-traded acquirer and not the target itself, did not have "standing" to pursue claims against the target defendants.
The original decision issued on September 30; on November 30, the Second Circuit issued some minor revisions to its ruling (deleting, as far as I can tell, language that suggested that the defendants in a 10(b) action must be agents of the subject company, i.e., that plaintiffs couldn't sue if a stranger to a company made false statements about it and caused plaintiffs to make a purchase of that company's stock).
The plaintiffs sought rehearing, and one of the arguments they made was that the Menora reasoning was so broad that purchasers of shares in a SPAC would be unable to sue managers of a target company for false statements made in connection with the de-SPAC transaction. The Second Circuit denied the petition, and so, right on cue, defendants in the Lucid SPAC case pending in the Northern District of California cited Menora to argue that the plaintiffs had no standing to pursue their claims. The court rejected Menora - and even its predecessor, Nortel - in an extensive analysis of Blue Chip and standing requirements for 10(b) actions:
Blue Chip focused on the unique problem that arises when a plaintiff’s claim is based on inaction and when it is likely that oral testimony will be the primary, or only, evidence. That problem does not exist here or in Nortel. The transactions of plaintiffs in both cases are anchored by the time of the transactions and the amount and value of securities bought or sold....
Based on this Court’s survey, Nortel’s holding regarding standing has been considered in seven decisions outside of the Second Circuit. All but one of these decisions apply Nortel with little or no commentary on the Second Circuit’s reasoning. The one case to address Nortel’s standing analysis (notably, the one court in the Ninth Circuit that has considered Nortel) concludes that the “Second Circuit’s rationale in that decision is problematic” and not supported by extensive reasoning.” Zelman, 376 F. Supp. 2d at 962.
Further, at least two of these decisions are no longer in line with the Second Circuit’s approach after Menora. Nortel had suggested in dicta that if two companies had a “direct relationship” such as that created during a merger, that plaintiffs who purchased one company may have standing to sue based on misrepresentations of the other party to the merger. Menora held that there is no such exception. Two cases outside of the Second Circuit had found plaintiffs had standing under the “direct relationship” exception. It is unclear if, faced with the issue again, these courts would follow the Second Circuit’s current approach....
The Court also sees no benefit from limiting standing as defendants suggest. The goal of such a limitation appears to be to ensure Section 10(b) actions are only brought where a defendant’s conduct is meaningfully related to the plaintiff’s harm. This is already accomplished by the elements of Section 10(b) claims, which include that a misrepresentation must be material and made “in connection with” the purchase or sale of a security. Not only would defendants’ standing rule be redundant, it would conflict with Section 10(b) materiality analysis, under which a misrepresentation is material and actionable where “a reasonable investor’s decision would conceivably have been affected” by it.
In re CCIV/Lucid Motors Securities Litigation, 4:21-cv-09323 (N.D. Cal. Jan. 11, 2023). The court did, however, grant the motion to dismiss on materiality grounds, because when the plaintiff purchased shares in the SPAC, neither the SPAC nor Lucid had acknowledged that a merger was likely. I can't find the decision on Westlaw or Lexis, but here's a Law360 article about it.
Anyhoo, as I've said before, I'm not sure how much longer SPACs will be a thing, but it seems we have a bit of a disagreement among courts that's likely to recur in different contexts.