Rolnick Kramer Sadighi LLP
RKS is seeking junior litigation associates, generally 2021-2022 law school graduation years, to join our team in northern New Jersey and/or midtown Manhattan. RKS is a premier litigation boutique dedicated to serving the investment management industry. Our clients include hedge funds, mutual funds, credit, real estate and structured finance funds, private equity, and other alternative investment managers. We focus on federal securities fraud and class action opt-out cases; shareholder, credit and debtholder rights actions; and M&A and valuation related litigation, on the plaintiff and the defense side. Ideal candidates will have excellent academic credentials, superior analytical, research and writing skills, exceptional attention to detail and client service, a strong work ethic, intellectual curiosity, good judgment, and a desire to achieve. Experience with federal securities and/or fiduciary duty law, depositions and motion practice, and/or financial industry knowledgehelpful but not required. Base salary $200,000-$250,000 depending on experience. RKS is an equal opportunity employer. Candidates should submit each of a cover letter, resume, academic transcripts, and writing sample to recruiting@rksllp.com. References accepted but not required.
RKS represented Montague Street LP and its affiliates as co-lead plaintiff in a securities class action in the U.S. District Court for the Southern District of New York against Talkspace, Inc., an online therapy platform taken public in June 2021 through a merger with a blank-check special purpose acquisition company (“SPAC”). RKS, along with Robbins Geller Rudman & Dowd LLP, brought claims under (i) Section 10(b) of the Securities Exchange Act of 1934, alleging that defendants made materially false and misleading statements between June 11, 2020 and November 15, 2021, and (ii) Sections 14(a) and 20(a) of the Exchange Act, alleging that the proxy statement to approve the SPAC merger was materially false and misleading.
Plaintiffs alleged that unbeknownst to investors, at the time of the SPAC merger, Talkspace was experiencing substantial operational difficulties, including an inability to match clients with therapists (thereby negatively impacting customer retention), materially increased business-to-consumer customer acquisition costs segment, disappointments in its business-to-business segment, and inadequate internal controls and procedures. In addition, Plaintiffs alleged that Talkspace’s executives and co-founders never intended to remain with Talkspace after the SPAC merger.
With the motion to dismiss fully briefed before the Hon. Paul G. Gardephe, the parties achieved a settlement of the claims for $8.5 million.
Issues Relevant to Investors
Macquarie Infrastructure Corp. v. Moab Partners, L.P.
Investors often rely on company management to identify trends and uncertainties that are likely to materially impact the company’s financial condition. Such disclosures are required by Item 303 of Regulation S-K. Under Item 303, management must provide subjective predictions about what is reasonably likely to happen in the future with the goal of allowing investors to view the company through management’s perspective. But does standard securities fraud liability under Section 10b attach to these disclosures? Or is management free to fail to disclose required items under Item 303 free of private liability to investors who are harmed by the failure?
That is the question raised in the petition in Macquarie Infrastructure Corp. v. Moab Partners L.P. The petitioners in Macquarie assert that there is now circuit split between the Second Circuit on one hand – finding Item 303 nondisclosures actionable and other circuits, who have found Item 303 non-disclosures non-actionable, at least in the absence of an otherwise false or misleading statement not within the Item 303 disclosures.
Impact: Should the Supreme Court address this issue, it will impact the rights and remedies of investors and effect how robust and complete Item 303 disclosures need to be going forward.
E.I. du Pont de Nemours & Co. v. Abbott
“Nonmutual offensive collateral estoppel” may sound like a chess opening or a military maneuver, but it is actually a legal concept that can be critical in cases involving many plaintiffs, many possible trials, with some common and some disparate facts and issues. The petition in E.I. du Pont de Nemours & Co. v. Abbott raises the issue of whether and when nonmutual (meaning only innuring to the benefit or harm of one party), offensive (meaning used offensively by a party to bind another party), collateral (meaning a decision not from the case specifically at issue) estoppel (meaning preventing re-litigation of an issue or fact) applies – in this instance, the principle comes up from a multi-district litigation where thousands of plaintiffs claimed injuries due to chemical releases from petitioner E.I. du Pont de Nemours & Co.(“DuPont”)’s plant. Plaintiffs lived varying distances from the plant, and these different distances and consequent varying damages resulted in a multi-district litigation (“MDL”) instead of a class action. Some cases were chosen for non-binding “bellwether trials”, three of which resulted in plaintiff verdicts – with findings on issues of duty, breach, and foreseeability. Would those findings bind DuPont in the other trials?
While the issue in the petition may seem limited to an MDL context, nonmutual offensive collateral estoppel can matter to investors – especially those who seek to maximize their recovery in securities cases. Opt out cases proceeding in groups, or proceeding after a class action can involve issues of nonmutual offensive collateral estoppel – perhaps most famously, the Vivendi case involves such an issue.
Impact: If the Supreme Court takes up the issue, it will have the chance to discuss the interaction between due process, efficiency, and preclusion in cases that share common threads. Whether the Court limits itself to multi-district litigation, or paints with a broader brush, the decision may well effect investor rights in mass actions.
NexPoint Advisors, L.P. v. Highland Capital Management, L.P.
A company goes bankrupt. A plan is put into place to restructure the company. But the plan involves non-bankrupt creditors releasing claims against non-bankrupt entities without consideration. Is that allowed?
At core, this is the question raised in the petition in NextPoint Advisors, L.P. v. Highland Capital Management, L.P.. The issue of third party exculpation in bankruptcy has been at issue for quite some time. Prior to 1978, third party exculpation was not allowed pursuant to the Bankruptcy Code. After changes to the code, today there is a circuit split on whether third party exculpation is permissible. The policy implications and arguments here are significant. Bankruptcy courts often wield broad powers precisely because they need such powers to effectuate a restructuring of a debtor who has sought bankruptcy protection. Limiting their toolbox may have ramifications for restructuring and the ability of bankruptcy law to serve its purpose. On the other hand, those powers surely have limits. Why can a non-bankrupt third party gain exculpation for its acts via a bankruptcy court when it has not sought bankruptcy protection? And where are the limits to this ability? Of relevance, both petitioner and respondent agree that the case should be reviewed and the Supreme Court has asked whether the United States government would like to take a position.
Impact: If the Supreme Court hears this case it will be a significant one for any investor that touches upon bankruptcy issues – which is nearly all. Resolving a circuit split would restore uniformity to the bankruptcy code, but the Court’s opinion will also provide extensive guidance on interpreting the powers of bankruptcy courts and the reach of exculpation provisions in confirmation plans more generally.
RKS is seeking 2020-2021 law school graduates to join our team in midtown Manhattan or northern New Jersey. RKS is a premier litigation boutique dedicated to serving the investment management industry. Our clients include hedge and other investment funds, private equity, and alternative investment managers. We focus on direct action federal and state securities cases, shareholder and creditors’ rights actions, and M&A and valuation related litigation, on the plaintiff and defense side. Ideal candidates will have excellent academic credentials, superior analytical, research and writing skills, exceptional attention to detail and client service, a strong work ethic, intellectual curiosity, good judgment, and a desire to achieve. Federal securities laws, fiduciary duty law, and/or financial industry knowledge helpful but not required. Base salary $200,000-$225,000 depending on year. RKS is an equal opportunity employer. Candidates should please submit a cover letter, resume, academic transcripts, and writing sample to recruiting@rksllp.com.
RKS is seeking a 2019-2021 law school grad to join our team in midtown Manhattan or northern New Jersey. RKS is a premier litigation boutique dedicated to serving the investment management industry. Our clients include hedge funds, mutual funds, credit, real estate and structured finance funds, private equity, and other alternative investment managers. We focus on federal securities fraud and class action opt-out cases; shareholder, credit and debtholder rights actions; and M&A and valuation related litigation, on the plaintiff and the defense side. Ideal candidates will have excellent academic credentials, superior analytical, research and writing skills, exceptional attention to detail and client service, a strong work ethic, intellectual curiosity, good judgment, and a desire to achieve. Experience with finance, federal securities and/or fiduciary duty law, depositions and motion practice helpful but not required. Base salary $200,000-$250,000 depending on experience. RKS is an equal opportunity employer. Candidates should please submit a cover letter, resume, academic transcripts, and writing sample to recruiting@rksllp.com.
Earlier today, the Supreme Court heard argument in Slack Technologies, LLC v. Pirani, which considers the question of whether investors can bring claims based on misleading registration statements and prospectuses issued during the “direct listing” of securities. The justices directly grappled with the issues raised in the brief filed by RKS on behalf of Nokota Capital Management, namely, what level of investor protections should apply when capital is being transferred from insiders to outsiders, and whether the NYSE rule at issue in the case necessarily meant that Slack’s one and only registration statement covered all shares in the listing. The questions posed by the justices did not indicate how the Court is likely to rule. But a number of justices, including Justice Kavanaugh and Justice Kagan, suggested that one option for the Court is to reverse the decision and remand for the lower court to further consider whether Section 12(a)(2) liability, which protects investors in cases of misleading prospectuses, applies in the context of a direct listing. RKS has been following the Slack matter since its origin in the Northern District of California. As one of the rare securities cases that the Supreme Court taken up, the decision will no doubt be impactful to investor rights and how issuers interact with those investing capital.
A full set of the briefing in Pirani v. Slack is available here.
The brief RKS filed on behalf of its client Nokota Capital Management is available here.
April 3, 2023 – Rolnick Kramer Sadighi LLP (“RKS”) today secured a major victory in New Jersey Superior Court in its lawsuit challenging the corporate spin-off of Bausch + Lomb Corporation (“Bausch + Lomb”) from Bausch Health Companies Inc., formerly known as Valeant Pharmaceuticals International, Inc. (“Bausch Health”). The Honorable Margaret Goodzeit, P.J.Ch., largely denied Bausch Health’s motion to dismiss the lawsuit and ruled that RKS’s clients — aggrieved investors pursuing more than $3 billion in federal court against Bausch Health for securities fraud — had stated a valid legal claim that the spin-off constitutes a fraudulent transfer under New Jersey law.
In addition to finding that the plaintiffs had adequately alleged that the May 2022 spin-off of Bausch + Lomb constituted an actual fraudulent conveyance reflecting several “badges of fraud,” the Court also upheld the plaintiffs’ right to enjoin Bausch Health’s proposed dividend of the Bausch + Lomb shares. Page 34 of the Court’s decision states: “A final judgment enjoining the Dividend Distribution could be appropriate because it would preserve the status quo between the parties until the District Court provides a final determination on the merits as to the plaintiffs’ securities fraud actions.”
Lawrence M. Rolnick, a Partner at RKS who represents the plaintiffs, said he was gratified with the decision. “We are pleased that the Court upheld our clients’ right to challenge the transfer of assets to Bausch + Lomb as a fraudulent conveyance and further recognized our right to enjoin the dividend distribution.”
The Court also granted plaintiffs the right to replead certain additional legal theories against the dividend that the Court dismissed as premature because the Court found that defendants currently are under no obligation to proceed with it.
Following Judge Goodzeit’s decision, RKS will pursue the investors’ suit and ensure that Bausch Health cannot improperly thwart its judgment creditors. The case is captioned, GMO Trust, et al. v. Bausch Health Companies Inc., No. SOM-C-12010-22, and will go forward in the Superior Court of New Jersey, Chancery Division, Somerset County.
In an important step in protecting their clients’ interests and preventing Bausch Health Companies (“Bausch Health”) from putting the assets of Bausch + Lomb (“B+L”) beyond the reach of judgment creditors through a corporate spin-off, Rolnick Kramer Sadighi LLP (“RKS”) today secured a vital legal ruling that will allow their clients to pursue fraudulent transfer claims against Bausch Health and B+L in New Jersey state court. United States District Judge Michael A. Shipp granted RKS’s motion to remand their clients’ fraudulent transfer action against Bausch Health and B+L back to state court, holding that Bausch Health and B+L had improperly removed the action to federal court earlier this year. In removing the action, the defendants purported to rely on a 1998 federal law (the Securities Litigation Uniform Standards Act or “SLUSA”), which was designed by Congress to prevent securities fraud strike suits from being filed in state court. Defendants argued that SLUSA barred Plaintiffs’ fraudulent transfer claims. Judge Shipp agreed with RKS that SLUSA does not apply to RKS’s clients’ declaratory judgment action brought pursuant to New Jersey’s fraudulent transfer statute because: (i) the relief RKS seeks on behalf of its clients is a declaration that the spin-off is voidable, such that they may continue to look to B+L’s assets to satisfy their claims against Bausch Health; and (ii) securities fraud is not a factual predicate of the fraudulent transfer claims. RKS’s clients’ fraudulent transfer action will now proceed against Bausch Health and B+L in state court.
The federal case, which is now concluded, is captioned GMO Trust, et al. v. Bausch Health Companies, Inc., et al., No. 22-cv-1823-MAS-LHG (D.N.J.).
On July 14, 2022, the United States Court of Appeals for the Second Circuit issued a decision agreeing with RKS that tens of millions of dollars in profits from the sale of a New York City commercial property should be distributed to investors (represented by RKS) in the commercial mortgage-backed securities (“CMBS”) trust that held the mortgage on the property, rather than retained by a service agent responsible for administering the property. In December 2015, the Peter Cooper Village and Stuyvesant Town (“Stuy Town”) was sold for over $5 billion. The mortgage loans on Stuy Town were held by various CMBS trusts in which RKS clients invested. Although the Second Circuit Court of Appeals found that the special servicer was entitled to retain some portion of the profits, it also found that the special servicer improperly failed to remit a significant amount to investors. As a result of the Second Circuit’s decision, the case has been remanded to trial court to determine what portion of the $67 million at issue should be returned to CMBS investors.
RKS is hiring! We are seeking an associate with 3-5 years of federal securities litigation experience. RKS is a premier litigation boutique located in midtown Manhattan and New Jersey dedicated to serving the investment management industry. We represent hedge, mutual, private equity, credit, real estate, and structured finance funds in a range of complex issues, including securities fraud claims, class action opt-outs, appraisal rights, credit and debtholder rights, and M&A related litigation. Ideal candidates will have excellent academic credentials, superior analytical and writing skills, a strong work ethic, intellectual curiosity, and good judgment. Compensation commensurate with experience; equal opportunity employer. Candidates should submit a resume, cover letter, and writing sample to recruiting@rksllp.com.
RKS is representing shareholders in an action against Talkspace, Inc., pending in the U.S. District Court for the Southern District of New York. The court recently appointed RKS as co-lead counsel, along with Robbins Geller Rudman & Dowd LLP, on behalf of (i) a class of investors asserting claims under Section 10(b) of the Securities Exchange Act of 1934, based on the defendants’ allegedly materially false and misleading statements and omissions made between June 11, 2020 and November 15, 2021, and (ii) a class of investors asserting claims under Sections 14(a) and 20(a) of the Exchange Act, arising out of defendants’ allegedly materially false and misleading statements and omissions in the proxy statement issued in connection with the June 22, 2021 merger between a blank check company and Talkspace.
The Montague Street Group, consisting of RKS client Montague Street LP and affiliated individuals and entities, was appointed co-lead plaintiff in the action.
New York, NY | March 29, 2022 02:45 PM Eastern Daylight Time
Some of the largest investors in what was once Valeant Pharmaceuticals International, Inc. (now known as Bausch Health Companies Inc.) have filed suit to have the spin-off of the Bausch + Lomb eyecare business voided and declared a fraudulent conveyance. The investors seek to have the transaction voided to the extent necessary to satisfy their pending multi-billion-dollar securities fraud claims against Bausch Health.
The suit, which seeks a declaration from the court that the transfer constitutes a voidable transaction under the New Jersey Voidable Transactions Act, does not require a bankruptcy filing by Bausch Health. Rather, the statute only requires the investors to show that Bausch Health is not receiving reasonably equivalent value in return from Bausch + Lomb, and that the transaction will leave Bausch Health balance sheet insolvent, unable to pay future debts, or undercapitalized.
Bausch Health currently faces twenty-one lawsuits for securities fraud arising from, among other things, its financial restatements in 2015 in connection with its now-defunct relationship with Philidor Rx Services. If the investors prevail in their new action against Bausch Health and Bausch + Lomb, the assets transferred to Bausch + Lomb can be used to satisfy a judgment, even though the suit alleges that those liabilities have not been transferred to Bausch + Lomb as part of the spin-off.
“This case seeks to prevent investors from being deprived of recovering billions of dollars in damages arising from violations of the securities laws that occurred when Bausch Health and Bausch + Lomb were a single company called ‘Valeant Pharmaceuticals International’,” said Rolnick Kramer Sadighi LLP (RKS), counsel for some of the plaintiffs. According to RKS, “Valeant should not be permitted to spin off its most valuable assets into a new company and shield them from longstanding securities fraud claims without receiving reasonably equivalent value in return.”
The investors allege that the spin-off of the Bausch + Lomb eyecare business will leave Bausch Health only marginally solvent and with potentially negative equity value according to several leading securities analysts. As such, the investors allege that Bausch Health likely will be unable to pay the $4.2 billion of pending securities fraud claims against it (with the plaintiffs to the fraudulent conveyance action accounting for over $3 billion). The investors allege that Bausch Health management has systematically misled shareholders and the public about the magnitude of the pending securities fraud claims.
Among the investors who filed suit are GMO Trust, Brahman Capital, Okumus, SunAmerica Asset Management, MSD Partners, Discovery Capital Management, and Maverick Capital.
“The time has come for creditors to challenge transactions in which assets are transferred to create one strong company and one weak company at the expense of creditors. We look forward to a judicial determination that this is a fraudulent conveyance,” said RKS.
The suit is captioned GMO Trust, et al. vs. Bausch Health Companies Inc., et al., Docket No. C-12010-22, pending in the Superior Court of New Jersey, Chancery Division, Somerset County.
RKS achieved a significant victory on behalf of its clients including Soroban Capital, Corvex Management and Incline Global Management, defeating a motion to dismiss RICO and securities fraud claims against Mohawk Industries and its highest-ranking corporate officers.
RKS is pursuing claims on behalf of several funds against Mohawk, the world’s largest manufacturer of flooring products, and its CEO Jeffrey Lorberbaum and CFO Frank Boykin. The actions allege Mohawk concealed from investors that it was: (i) engineering false sales through strategically timed, end-of-quarter, staged deliveries to customers it knew would not accept the deliveries that quarter (if at all); (ii) concealing multiple, material production problems with its high-demand luxury vinyl tile product, while falsely attributing its failure to produce sufficient product to “capacity constraints;” and (iii) manipulating profit margins with excessive production of flooring product, generating a volume that far outstripped customer demand.
RKS asserted claims for common law fraud and RICO on behalf of its professional investor clients arising from these alleged schemes, which include claims for treble damages and attorneys’ fees. The court denied a motion by the defendants to dismiss these claims, handing the shareholders a significant victory and allowing the claims to proceed towards trial in Georgia state business court.
RKS scored a significant victory for its client Starboard Value LP on January 28, 2022, when Chancellor Kathleen St. J. McCormick of the Delaware Court of Chancery denied motions to dismiss all but one claim Starboard has asserted against Quantum Corp., its former CEO, John Gacek, and former board chair, Paul Auvil. Starboard’s claims for breach of contract, fraud, and negligent misrepresentation, among others, will now proceed against both the company and the individual defendants.
As alleged in the complaint, in 2013 and 2014, Starboard, Quantum’s then largest shareholder, entered into two agreements with Quantum, agreeing to forego proxy fights in exchange for several board seats, and the right to select a majority of Quantum’s board members if the company did not meet certain revenue targets for its fiscal year 2015. After entering into these agreements, Quantum, with the assistance of Gacek and Auvil, engaged in a scheme to improperly “pull forward” and recognize revenue contrary to U.S. Generally Accepted Accounting Principles. As a result, Quantum’s reported revenues for fiscal year 2015 appeared to meet the targets when in fact they did not, and Starboard was deceived into believing its rights to appoint a majority of board members had not been triggered, when in fact they had.
Defendants’ scheme did not come to light until 2018, when the company admitted publicly that its 2015 revenue disclosures had been false. A subsequent SEC investigation found that Quantum increased its reliance on sales tactics, leading to improper revenue recognition, in order to try to avoid the consequences of its agreements with Starboard. The SEC investigation also noted an inappropriate “tone at the top,” which led to Quantum’s misstatement of revenues.
With the Delaware Chancery Court’s order, RKS looks forward to moving the case towards trial to enforce Starboard’s rights and deliver a just result for the benefit of Starboard and its investors.
RKS represents the lead stockholders in a hybrid Delaware fiduciary duty/appraisal rights class action arising from the $3.1 billion acquisition of Momentive Performance Materials by a consortium of foreign buyers. On January 13, 2022, the Delaware Chancery Court denied nearly every component of the defendants' motion to dismiss the complaint, allowing to proceed the vast majority of plaintiffs' claims against most of Momentive's directors and Apollo Global Management.
The vice chancellor ruled from the bench following argument, finding the plaintiffs sufficiently alleged that Apollo, with its 41% stake in Momentive stock, acted as controller of the company and that it engineered this take-under transaction while putting its own interests ahead of the company and its stockholders. Indeed, the merger price of $32.50 per share is substantially below the stock's $42 trading price at the time the merger was signed in September 2018.
Among Apollo's competing interests, as alleged in the complaint, Apollo sought to recover $168 million in performance fees that would have remained trapped and inaccessible until its position in Momentive was liquidated. In addition, Apollo faced exposure to bankruptcy litigation that had been ongoing for years as a result of Momentive's emergence from Chapter 11 in 2014. Moreover, Apollo also is alleged to have benefited from a settlement of that litigation funded by the company, in connection with which Apollo is alleged to have received some $113 million resulting from their participation in a total return swap that in effect gave Apollo economic ownership of Momentive’s senior debt, which was the beneficiary of that settlement payment made shortly before, and as a part of, closing of the merger in May 2019.
The court found the allegations added up and that the plaintiffs were entitled to an overarching inference that Apollo exercised control over the company and even indicated to the outside world, including the buyer, that in fact it had such control, despite its having less than a majority block of shares.
The case will now proceed towards trial as a blended appraisal and fiduciary duty action, seeking to recover for Momentive stockholders the fair value of their shares.
On December 13, a significant group of shareholders of Pershing Square Tontine Holdings, Ltd. (“PSTH”), represented by Rolnick Kramer Sadighi LLP (“RKS”), submitted an amici brief in New York federal court urging dismissal of a complaint contending that SPACs (special purpose acquisition vehicles) are subject to the 1940 Investment Company Act (“ICA”). This issue presents an existential threat to the SPAC market. If SPACs must comply with the ICA, the SPAC market will likely significantly shrink, if not disappear entirely. The SPAC investors represented by RKS desire to continue to make their own investment decisions, including by purchasing shares in SPACs when appropriate for their individual investing objectives.
PSTH raised $4 billion when it went public in 2020. A single PSTH shareholder filed the lawsuit earlier this year, advancing the theory of two law professors that SPACs are actually investment companies. On behalf of the PSTH shareholders, who collectively own more than 1.289 million PSTH shares and nearly 197,000 PSTH warrants, RKS filed an amici brief, arguing that the SEC has never suggested that SPACs are subject to the ICA, despite a steady drumbeat of recent SEC guidance and commentary related to SPACs. RKS also argued, on behalf of the PSTH shareholders, that any new SPAC regulation should properly come from the SEC (or Congress), and not through private litigation. A ruling subjecting SPACs to the ICA would effectively upend the SPAC market, resulting in fewer avenues for individuals who wish to invest in private emerging growth companies that are taken public by merging with SPACs, and usurping the proper regulatory process.
RKS provides strategic litigation solutions to investors and the investment management community. RKS attorneys are trusted partners to clients with more than $4 trillion AUM and have decades of experience in enhancing value for their clients through securities litigation.
In a federal court ruling from earlier this year, Vogel v. Boris, the New York federal court refused to toss out a claim by an LLC member, Vogel, against his two other business partners, alleging that they violated a restrictive covenant in the LLC’s operating agreement prohibiting any member from forming a new SPAC aside from the existing SPAC they had explicitly agreed to be working for: their violation consisted of forming a sponsor for a second SPAC and closing a $250 million IPO, all while squeezing Vogel out of the new SPAC. The court ruled that the allegations sufficiently stated a legal claim to allow the case to proceed further, without deciding the substance of those claims.
First off, in the course of its analysis the court provided a succinct summary of the SPAC process:
The first step of the typical SPAC process, according to Vogel, is for those managing the SPAC to create a company to control it, usually a limited liability company, referred to as the "sponsor." The sponsor receives a percentage of the shares raised in the IPO as a fee and puts the shares aside in escrow or trust pending consummation of a potential merger. Once a successful merger has occurred, the sponsor will distribute the shares to the SPAC's managers and/or members based on certain contractual triggers such as, for example, termination of a lockout period or the reaching of a particular share price.
Second, however unusual this set of facts may be, it makes the point that some of the background activity underlying a SPAC transaction is often a creature of contract. Here in Vogel, that contract was an LLC operating agreement, while in other situations, the operative contract may be a subscription agreement underlying a PIPE transaction relating to the SPAC deal. In all events, investors considering their rights in connection with a SPAC transaction should be sure to consider any contractual remedies in addition to any federal securities fraud or state fiduciary duty and common law claims.
As Alison Frankel at Reuters observed, of the 60+ lawsuits filed in New York state court in the first half of this year against SPAC directors for inadequate disclosures, most of them typically settled after the initial complaint was filed, without advancing their claims that the SPAC boards violated their duty of disclosure by withholding key information from their public filings relating to the SPAC transactions. What is motivating the quick settlement? The chance for those defending these claims to pay the lawyers a fee – known as a mootness fee after the accusation of insufficient disclosures becomes “mooted” by the SPAC supplementing its initial disclosures with new, curative information that overcomes the deficiency – and buy litigation peace in return. Frankel noted that these lawsuits ostensibly sought to stop shareholders from voting on the SPAC’s proposed acquisition (consistent with the rationale that such shareholder vote would not be fully informed given the disclosure deficiencies), and yet those lawsuits did not include separate motion papers formally requesting the necessary injunction to halt that vote.
Frankel notes that this spike in SPAC disclosure suits smacks of the “deal tax” litigation that previously populated the Delaware Chancery Court after most public M&A deals were announced, with nearly 95% of all such deals facing disclosure-only lawsuits that typically settled after a therapeutic disclosure cured the alleged deficiency (Delaware had clamped down on such suits in Trulia and its progeny, sending that type of litigation to federal court after being repackaged as Section 14(a) disclosure violations). While this piece appears to inject a strong dose of skepticism into the merits of this particular species of litigation, it should be noted that SPAC litigation has taken on many forms, in many courts, including claims going well beyond the Delaware disclosure-only strike suits of old.
Given the unprecedented surge in SPAC activity in the first half of 2021, SEC Acting Director John Coates has expressed concerned about risks ranging from fees, conflicts and sponsor compensation, to the sheer amount of capital pouring into the SPAC market. Naturally, with this surge has come “unprecedented scrutiny,” and the SEC has been focusing on clearer disclosures and transparency for shareholders.
Among the interesting data Director Coates identified, only about 10% of SPACs have liquidated between 2009 and now, with most SPACs having proceeded to identify acquisition candidates. To put that point in context, SPAC transactions are essentially two-step processes, with the first step as follows:
The basics of a typical SPAC are complex, but can be simplified as follows. A SPAC is a shell company with no operations. It proceeds in two stages. In the first stage, it registers the offer and sale of redeemable securities for cash through a conventional underwriting, sells them primarily to hedge funds and other institutions, and places the proceeds in a trust for a future acquisition of a private operating company. Initial investors also commonly obtain warrants to buy additional stock as at a fixed price, and sponsors of the SPAC obtain a “promote” – greater equity than their cash contribution or commitment would otherwise imply – and their promote is at risk. If the SPAC fails to find and acquire a target within a period of two years, the promote is forfeited and the SPAC liquidates. About ten percent of SPACs have liquidated between 2009 and now.
[citations omitted]. Next, once the SPAC spots its target, it effectuates a reverse merger by which a private company becomes public:
In their second stage, SPACs complete a business combination transaction, in which the SPAC, the target (i.e., the private company to be acquired), or a new shell “holdco” issues equity to target owners, and sometimes to other investors. SPAC shareholders typically have a vote on the so-called “de-SPAC” transaction, and many investors who purchased securities in the first stage SPAC either sell on the secondary market or have their shares redeemed before or shortly after the de-SPAC. After the de-SPAC, the entity carries on its operations as a public company. In this way, SPACs offer private companies an alternative pathway to “go public” and obtain a stock exchange listing, a broader shareholder base, status as a public company with Exchange Act registered securities, and a liquid market for its shares.
Director Coates is careful to note that the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act (PSLRA) does not necessarily insulate projections and other valuation material from liability; while the SPAC market may superficially appear to provide an “out” for sponsors and targets that is not available in conventional IPOs, Director Coates has warned: not so fast. Indeed, the PSLRA’s safe harbor expressly excludes from safe harbor protection those statements made by a “blank check company” as well as IPOs, appearing to also carve out SPACs from its protection. As he puts it: “Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst,” cautioning that any material misrepresentation in a registration statement that is part of a de-SPAC transaction is subject to Section 11 liability under the Securities Act, just as any material misstatement in a proxy statement is subjection to Section 14(a) liability. And beyond just federal securities law claims, Delaware fiduciary duty law applies more strictly where a conflict of interest appears, as is often inherent in SPAC deals.
As Director Coates aptly summed it up: no one gets a “free pass” from material misstatements in a de-SPAC transaction.
Welcome to our blog’s new SPAC Corner, as we kick-off an ongoing series of posts dedicated to this bourgeoning field of investor litigation.
A natural starting point for our focus on SPACs is to highlight the upcoming September 9 meeting of the SEC’s Investor Advisory Committee (IAC), at which the IAC will be discussing two recommendations to the SEC intended to increase SPAC disclosure and accountability. As laid out here, in the IAC’s August 26, 2021 draft agenda, the IAC is proposing that the SEC (i) regulate SPACs more intensively with enhanced focus and stricter enforcement of existing disclosure rules under the Securities Exchange Act of 1934, (ii) provide an analysis of the players in the various SPAC stages, along with their compensation and incentives.
In laying out its case for greater transparency, the IAC provided the following background statement on SPACs, which provides a concise and neutral enough description of SPAC formation and mechanics that we thought it useful to reproduce a summary statement here:
In simple terms, a SPAC is a type of “blank-check” company that raises capital through an initial public offerings (“IPO”) with the intention to use the proceeds to acquire other companies at a later time.5 Unlike traditional IPOs, SPACs do not have commercial operations at the time of the IPO, which explains why they are referred to as “blankcheck” or “shell” companies. SPACs first appeared in the 1980s but have gained accelerating popularity in recent years, especially since 2020.
SPAC sponsors generally raise money in IPOs for future acquisitions of other private companies. Because finding acquisition targets can take time (typically two years), the cash raised (typically $10 per share) is held in a trust while the sponsors search for a target. After the SPAC completes a merger with the target company, the previously privately held target company becomes a publicly listed operating company. This last step of creating the listed successor company is referred to as a “de-SPAC” transaction. A SPAC is required to keep 90% of its IPO gross proceeds in an escrow account through the date of acquisition. The SPAC should complete acquisitions reaching an aggregate fair market value of at least 80% of the value of the escrow account within 36 months. If the acquisitions cannot be completed within that time, the SPAC must file for an extension or return funds to investors. At the time of de-SPAC transaction, the combined company also must meet stock exchange listing requirements for an operating company.
SPACs can be an attractive option for sponsors because they can raise money rapidly without having to deal with company preparation or company specific disclosure at the time of the IPO. Moreover, SPACs are attractive to targets because they represent a fast, certain route to liquidity without the delay, pricing risk, and market condition risk associated with the typical IPO process. However, the separation in time between the IPO disclosure and the company specific disclosure means that investors do not learn what they are investing in until after the fact and therefore, their invested funds are tied up for a period of time while the investors rely on the sponsors to find an appropriate target. Furthermore, the transactions by their very nature are complex and have some misalignments between the initial investors, sponsors, investors in the target and any intermediate financiers joining the de-SPAC transaction. At the time of the merger, often over two thirds of the SPAC’s shares are tendered for redemption and the sponsor or third parties purchase shares in a private investment in public equity (“PIPE”) transaction to replenish cash the SPAC paid to redeem its shares, diluting the original investors’ slice of the new company’s equity. These complexities and misalignments are why researchers (such as NYU Professor Michael Ohlrogge and others) assert that SPACs can be frustrating and will likely continue to frustrate the shareholder value performance expectations of many of their retail investors.
The IAC went on to discuss the more recent slow-down and evolution in the SPAC market, which has experienced a reduction in the average volume of SPAC IPOs, increased participation of retail investors prior to the de-SPAC transaction, as well as increased pricing for D&O insurance, among other phenomena. With this evolution has come a decreasing number of sufficient SPAC targets, which the IAC fears may spur sponsors to pursue substandard targets.
In addition, the IAC articulated a concern that many in the market have observed about the nature of shareholder votes, noting that a number of stockholders tend to vote to approve the de-SPAC transaction while redeeming their shares, suggesting that such shareholders do not believe in the underlying rationale behind the merger but vote to approve anyway. Such votes have also raised concerns about the adequacy of the disclosures that SPACs have provided in advance of the shareholder vote.
We will continue to monitor the IAC meeting later this week and report on any resultant actions that the SEC may take in response to the IAC’s recommendations.
On the first anniversary of founding a specialty law firm dedicated to recovery opportunities for the investment management community, we are humbled by the trust and confidence our new and existing clients have placed in us.
We thank our clients, colleagues, family and friends for contributing to such a successful first year.
Larry, Marc, and Sheila
RKS
On July 1, 2021, the United States District Court for the Middle District of Tennessee granted a motion to intervene brought by RKS on behalf of its asset manager client, seeking to preserve the clients’ securities fraud claims from being eliminated by the timing requirements of the Securities Exchange Act of 1934. Defrauded investors face complex timing requirements governing when and how to bring claims after their investments have lost value as a result of an alleged fraud. Many investors rely on securities class actions to “toll” their claims. But class actions at times fail to recover anything for defrauded investors, or fail to provide a sufficient recovery for a specific investor with individual claims. And the rules around “tolling” are complicated as well, and can differ by jurisdiction.
The case at issue, a class action involving allegations of fraud by Envision Healthcare Inc., is pending in federal district court in Tennessee, which is part of the Sixth Circuit covers federal courts in. The Sixth Circuit Court of Appeals (which covers federal courts in Kentucky, Michigan, Ohio, and Tennessee) currently applies the most restrictive view in the country on whether the filing of a class action tolls the statute of limitations from running on individual claims. The July 1 opinion confirms that by intervening in the class case, an individual class member can preserve its valuable individual claims while remaining a passive member of the class. The decision marks the first time a court has given full guidance on the issue, and where intervention was endorsed as a viable way to protect a class member’s individual claims.
The opinion is a win for defrauded investors. The decision allows a passive class member to maintain a viable individual claim if class certification is denied, and also preserves the investor’s right to opt-out of the class action if class certification is granted or if a settlement is reached, thereby not forcing an individual class member to accept what may be an insufficient recovery (or no recovery at all) from the class settlement. RKS is proud to partner with its asset manager clients to ensure they receive the best possible recoveries.
RKS provides strategic litigation solutions to the investment management community. RKS attorneys are trusted partners to clients with more than $4 trillion AUM and have decades of experience in enhancing value for their clients through securities litigation.
On Wednesday, the Third Circuit sided with investors in Bahaa Aly v. Valeant Pharmaceuticals International, Inc., No. 19-3326, an important case involving American Pipe tolling. In holding that American Pipe tolling applies to individual actions filed before the issue of class certification is decided, the Third Circuit agreed with and expressly relied on many of the points made by RKS on behalf of amicus curiae Fir Tree Capital Management LP, including a comprehensive study of recent class actions conducted by RKS attorneys. The Third Circuit’s decision is a critical win for investment managers, who frequently rely onAmerican Pipe tolling when opting out of class actions.
RKS is creating value for shareholders who were previously underrepresented in an action against Spectrum Brands Holdings, Inc., where the firm was appointed lead counsel on behalf of a subclass of investors who purchased stock of defendant HRG Group, Inc. between January 26, 2017 and November 19, 2018. Long-time client Jet Capital Master Fund LP (“Jet”) was appointed lead plaintiff for the subclass.
Jet previously objected to a $39 million securities class action settlement in this action. In denying final approval of the settlement, the Court found that lead plaintiffs did not adequately notify or represent investors who had purchased the stock of defendant HRG.
RKS is pleased to welcome Matthew Peller, formerly of Sullivan & Cromwell LLP, as Senior Counsel to the firm. Matt brings more than 14 years of experience litigating complex securities fraud, shareholder derivative and other financial industry related matters in federal and state courts across the country. Matt graduated from Cornell University and Cornell Law School, and was a Judicial Clerk for Hon. Roger L. Gregory, Chief Judge of the U.S. Court of Appeals for the Fourth Circuit. Matt’s experience, insights and dedication further strengthen the RKS team’s ability to design and deliver outstanding strategic litigation recovery and return strategies for our investment management clients.
RKS represented a substantial stockholder seeking fair value for his shares in Surterra, a company specializing in cannabis-based products. The matter proceeded as a Delaware appraisal action which permits, under certain circumstances, a shareholder to receive the “fair value” of his or her shares. This case arose after Florida-based Surterra merged with New England Treatment Access (NETA), a Massachusetts marijuana company with retail operations for recreational as well as medicinal use. Surterra's founder and former CEO engaged RKS for its expertise in appraisal actions in order to insure he received fair value for his shares of Surterra common stock in connection with that merger. The case posed unique valuation issues centered on the proper approach to valuing shares in a company specializing in cannabis-based products, where the consideration for the underlying merger was a combination of cash, stock and debt. Moreover, cannabis appraisals present the unique challenge of valuing a highly lucrative asset that is nevertheless currently illegal under US law. The parties ultimately reached a confidential settlement resolving these novel valuation issues.
RKS is currently representing long-time client Special Situations Funds as co-lead counsel for a class of public investors in the securities of Chembio a point-of-care medical diagnostics company. SSF's complaint alleges:
Chembio is alleged to have sold more than $30 million of inflated stock directly to the public, while representing in the offering documents that the DPP Test was "100% effective" and touting the Company's FDA "Emergency Use Authorization" to market the Test. Unbeknownst to investors, however, was at the very same time Chembio knew or should have known that the DPP Test actually did not effectively detect COVID antibodies and that the FDA was planning to revoke the Company's Authorization to sell its DPP Test. When the truth about the DPP Test was revealed in June 2020, the price of Chembio's stock plummeted, destroying hundreds of millions of shareholder value.
RKS provides strategic, bespoke litigation solutions to the investment management community to deliver outstanding results and increase investment returns. RKS attorneys are trusted partners to clients with more than $4 trillion AUM, and have decades of experience in value-enhancing litigation, including federal securities matters like the Chembio lawsuit as well as structured finance, creditor and debtholder rights, and valuation and shareholder rights litigation.