Hyzon Motors, a hydrogen fuel cell vehicle development company that merged with a SPAC in July 2021 and that was the subject of a recent scathing short seller report, has been hit with a securities class action lawsuit. The defendants in the lawsuit include two former officers of the SPAC with which Hyzon merged. A copy of the September 30, 2021 complaint filed against Hyzon can be found here.
Decarbonization Plus Acquisition Corporation is a special purpose acquisition company (SPAC). Decarbonization completed an IPO on October 26, 2020. On February 19, 2021, Decarbonization announced its plan to merge with Hyzon Motors USA, a commercial hydrogen fuel cell vehicle developer. The companies completed the merger on July 19, 2021, with Hyzon as the surviving publicly traded company operating under the new name, Hyzon Motors, Inc.
According to the subsequently filed complaint, during the period after the merger was announced and before it closed, the SPAC published a number of statements about the pending vehicle orders Hyzon had received from customers around the world. The proxy statement filed in connection with the proposed merger also included statements about vehicle orders and the expectation that the orders would be fulfilled during 2021. In public statements and financial releases after the merger, Hyzon also included statements about vehicle orders and anticipated 2021 vehicle shipments.
On September 28, 2021, Blue Orca Capital, an investment firm with a short position in Hyzon stock, issued a report raising a number of questions about Hyzon. Among other things, the Blue Orca report claimed that “Hyzon’s largest customer is a fake-looking Chinese shell entity formed 3 days before the deal was announced.” The report also stated that the company’s next largest customer is “not really a customer” but a “channel partner” assisting Hyzon in marketing vehicles to real customers in New Zealand. The report claimed that “phantom big name customers suggest overstated orders and financial projections.” The report stated that former executives had left the company because of concerns about “misrepresentations on customer contracts.”
According to the subsequently filed securities class action complaint, the company’s share price fell 28% on the news.
On September 30, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Western District of New York against Hyzon Motors; the former CEO of Decarbonization (who is also now a director of Hyzon Motors); the former CFO of Decarbonization; the CEO of Hyzon Motors (who was also founder and CEO of the predecessor company, Hyzon Motors USA); and the CFO of Hyzon Motors (who was also CFO of Hyzon Motors USA prior to the merger).
The complaint purports to be filed on behalf of a class of investors who purchased securities of Hyzon Motors or of its predecessor in interest, Decarbonization, between February 9, 2021 (the date the merger was announced) and September 27, 2021 (the last day before the publication of the short seller’s report).
The complaint alleges that the defendants mispresented or failed to disclose that: “(1) Hyzon was misrepresenting the nature of its ‘customer’ contracts and severely embellished its ‘deals’ and ‘partnerships’ with customers; (2) Hyzon could not deliver its announced vehicles in 2021, on its stated timeline; and (3) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”
The plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff seeks to recover damages on behalf of the class.
By my count, the new lawsuit against Hyzon Motors is the 24th SPAC-related securities class action lawsuit that has been filed so far in 2021. It shares a number of features in common with many of the other SPAC-related suits this year.
For starters, the lawsuit involves a company in the alternative fuel vehicle industry. Many of the companies sued this year (and last year as well) are involved in the electric vehicle or other alternative fuel vehicle industry.
Another feature this lawsuit has in common with many of the other SPAC-related securities suits is that it involves a company that experienced a significant stock price drop following the publication of a critical short seller report. By my count, of the 24 SPAC-related securities suits filed this year, at least nine have involved companies that were the subject of a short-seller report. In addition, the high-profile securities lawsuit filed last year against Nikola Corporations also followed after the company was the subject of a short seller report.
One other feature of this lawsuit that is similar to many of the other SPAC-related securities suits is that the named defendants include individuals who served as directors and officers of the SPAC prior to the merger. At least one of the former SPAC executives also now serves as a director of the post-merger company; this individual is one of several individuals who were named as defendants in the complaint in multiple capacities. The current Hyzon Motors executives who are named as defendants in the complaint are also sued in their capacities as executives of the pre-merger company.
The fact that three of the four individual defendants are named as defendants in multiple capacities raises potentially complicated insurance coverage issues. The allegations against the former SPAC CEO, who is now a director of Hyzon Motors, is sued in both of these capacities, and therefore the allegations against him potentially trigger two different D&O insurance programs, the SPAC’s runoff program and Hyzon Motors’ go-forward D&O program. The allegations against the current Hyzon executives, who were also executives of the pre-merger operating company and how have been sued in both capacities, potentially trigger not only Hyzon’s go-forward insurance program, but also potentially (depending on how Hyzon’s insurance is structured), the former private company’s run-off program. These circumstances illustrate the potential “Tower vs. Tower” insurance coverage problem that Silicon Valley attorney Boris Feldman warned of in a column earlier this year.
In any event, with 24 securities suits now filed this year alone, it is clear that the SPAC-related securities litigation is a significant phenomenon in the securities and corporate litigation arena. Given the over 400 SPACs that are still in the search phase, the likelihood is that the SPAC-related litigation phenomenon is going to be a key feature in the litigation arena for some time to come.
Many Other Kinds of SPAC-Related Litigation: While there have been quite a number of SPAC-related securities suits filed this year, securities suits are from from SPACs only litigation risk. There have been many other kinds of SPAC-related lawsuits filed.
First, there have been hosts of the standard merger objection/mootness fee lawsuits filed, in both federal and state court (as discussed here).
Second, there have been the breach of fiduciary duty/entire fairness lawsuits alleging conflicts of interest between the SPAC sponsor and SPAC executives on the one hand, and SPAC investors on the other hand. I described two examples of this type of lawsuit in a recent post (here, second item at the end of the post).
Third, there have been the speculative and anomalous lawsuit filed against three SPAC alleging that the defendant SPACs named in the complaint are actually Investment Companies within the meaning of the Investment Companies Act of 1940, and that the SPACs failed to register with the SEC in violation of the 1940 Act, discussed further here.
There have also been a number of shareholder derivative lawsuits filed against SPACs, as parallel suits to the securities class action lawsuit previously filed against the same SPACs.
Finally, there is yet another category of lawsuits filed against SPACs, relating to shareholder voting. Two examples of this type of lawsuit were filed last week in the Delaware Court of Chancery. Not only were both of these lawsuits filed by the same plaintiff firm, but each of the suits was filed on behalf of the same named plaintiff.
The first of these recent shareholder lawsuits was filed as a class action lawsuit on behalf of the investors of dMY Technology Group IV, a SPAC that completed its IPO in March 2021. On July 7, 2021 dMY announced its plan to merge with Planet Labs, Inc. A plaintiff shareholder filed the lawsuit in Delaware Chancery Court based on allegations that in order to force both Class A and Class B shareholders to vote together on the proposed merger, the SPACs board had approved a measure to increase the number of authorized shares. The complaint alleges that the Class A shareholders are entitled to a vote separate from the Class B shareholders on the increase in the number of shares, and the lawsuit seeks to enforce this right under the Delaware Corporations Code. The dMY lawsuit complaint can be found here.
A separate lawsuit filed the same day in the Delaware Chancery Court and raising the same basic allegations on behalf of shareholders of CM Life Sciences III Inc, a SPAC. CM Life Sciences completed its IPO in April 2021. It announced its plan to merge with EQRx on August 6, 2021. The complaint seeks to enforce the rights of Class A shareholders to a separate vote, as in the lawsuit filed against dMV. The CM Life Sciences complaint can be found here.
I emphasize the presence (and indeed the proliferation) of these other kinds of SPAC-related litigation just to underscore the fact that securities class action litigation is not the only kind of litigation threat that SPACs face. The fact that I have been so carefully tracked the securities suits could create the impression that the securities cases are the only SPAC suits out there. To the contrary, it is clear that SPACs face a host of litigation threats, not just the threat of a securities class action lawsuit.