As Goodwin has previously reported, 2020 and 2021 have seen exponential growth in initial public offerings for Special Purpose Acquisition Companies (“SPACs”), and now those SPACs are looking to deploy that capital in various business combinations (so called “de-SPAC transactions”). See Client Alert Limiting SPAC-Related Litigation Risk: Disclosure And Process Considerations (goodwinlaw.com). In 2020, there were 248 SPAC IPOs that raised total gross proceeds of over $83 billion, and 66 de-SPAC transactions.[1] The first two months of 2021 have increased the already explosive growth, with 232 SPAC IPOs this year, which have raised $74.6 billion in proceeds.[2] Those SPACs (and their sponsors) are now looking for transactions and combinations, and the structure of a SPAC provides a finite timeline for investment. Thus, de-SPAC transactions should dramatically increase over the next two years. And, where there are business combinations, litigation is sure to follow. Indeed there are already signs that the SPAC market is becoming more competitive and presenting additional issues arising from potential dilution and market pressures.[3] Goodwin has previously outlined potential strategies to minimize SPAC litigation and broader market issues.[4]
Perhaps a preview of SPAC litigation to come, a case currently pending in Louisiana federal court involving Waitr.com, Waitr Holdings, Inc., and the de-SPAC transaction that took Waitr public presents numerous of the potential litigation issues from SPACs and de-SPAC transactions (the “Waitr” case).[5] Because the SPAC involved came to market in 2016 and then closed the de-SPAC transaction in 2018, the timeline for the business and litigation issues presented by the de-SPAC are now being litigated. And, in the Waitr case the defendants have teed up and fully briefed a motion to dismiss the plaintiffs’ claims that may serve as a template for claims that could arise from the coming de-SPAC transactions for SPACs that went public and raised capital in 2020 and 2021.
In 2016,[6] Tilman Fertitta and Richard Handler (owner of the Houston Rockets and Chairman and CEO of Jefferies, respectively) formed a SPAC named Landcadia Holdings, Inc. to find a suitable acquisition within 24 months. With two weeks left before the SPAC was to expire on May 16, 2018, Landcadia announced a deal with Waitr.com. In fact, Landcadia shareholder approval was required to extend the deadline from June 1, 2018 to December 14, 2018. Without a merger, Landcadia, Fertitta, and Handler would have to return the $250 million capital raised, and the underwriter, Jefferies, would have to forfeit over $10 million in underwriter fees. The transaction closed in December 2018, it is safe to say the business investment has not performed as hoped. Following Landcadia’s acquisition of Waitr on November 16, 2018, Landcadia changed its name to Waitr and shares of the combined entity began trading on the NASDAQ under the symbol “WTRH.” After trading as high as $13.26 in March 2019 and $13 after the closing of the Waitr de-SPAC transaction, the plaintiffs claim that, on August 8, 2019, the stock traded at $1.89 per share and Waitr’s market capitalization was $134 million, down from $910 million on March 13, 2019. Plaintiffs have asserted claims under Section 14 of the Exchange Act against all defendants and claims under Section 10(b) and Section 20(a) of the Exchange Act against the company and certain officers and directors.[7]
Both the individual defendants and Jeffries have moved to dismiss the claims. The Section 10(b) Defendants claim that the complaint fails to allege any misleading statements, that the statements were “puffery,” and a lack of scienter. The Underwriter Defendants argue that plaintiffs failed to allege that the Underwriters had either solicited proxies or permitted the use of their names in a manner having a “Substantial Connection” to the stockholder vote on the transaction, and thus not a proper Section 14 defendant. They also argued that the allegations failed to show that the underwriters acted with scienter, or even negligence, and thus failed to state a claim. The plaintiffs, of course, dispute those arguments and argue that the complaint sufficiently alleges the required facts. Motion day for the motions to dismiss is now set for April 20, 2021 in Lafayette, Louisiana, in front of Magistrate Judge Kathleen Kay.
What makes Waitr intriguing and a potential preview of future claims is that it contains many hallmarks that are baked into the current SPAC market: a SPAC structure with a backend termination event; sophisticated managers and sponsors; a transaction that closed at the end of the window; an investment that hasn’t performed as hoped; and a disgruntled investor pool. The court’s application of the traditional Section 14 and Section 10(b) case law to the SPAC set of facts takes on even greater significance given the nearly $200 billion raised in SPAC transactions since Lancadia came to market in 2016. (For comparison sake, in 2016, 13 SPACs came to market and raised a total of $3.5 billion;[8] that annual total is less than the weekly average for SPAC capital raised in 2021 thus far.)
Another interesting element of this case and motion is it will show how a traditional securities fraud claim overlays on a de-SPAC transaction. Given the raison d’etre of a SPAC and the incentives of the SPAC and sponsors to close a deal prior to the return of the raised capital, the Waitr transaction presents a unique circumstance in which the alleged securities violation occurred. Namely, the plaintiffs suggest and argue that the issues created by the SPAC’s looming return of capital, the stated goal to close a transaction before the termination of the SPAC and return of capital, and, if no transaction completed, the lost fees, provide sufficient inferences of scienter. These circumstances, and inferences that can be drawn are unique to SPAC litigation and de-SPAC transactions.
Ultimately, the legal issues presented in the Waitr de-SPAC litigation are not unfamiliar legal claims and theories. Rather, the SPAC structure and business model are being argued as contributing to the requisite scienter and recklessness required for the claims. There is a myriad of arguments made by both plaintiffs and defendants that do not implicate the SPAC structure, and the case may be decided under the familiar rubric of securities fraud cases. Or, the Waitr transaction might present a case where disgruntled investors use the structure and business model of the SPAC itself to bolster their claims after poor performance of the investment and resulting claims. But whatever the result, it is an early preview of claims that may arise over the next two years.
[1]See SPACInsider, SPAC IPO Transactions: Summary by Year, available at https://spacinsider.com/stats/
[2]Id. (as of March 9, 2021).
[3]See Bloomberg. Com “The SPACopalyse is Upon Us, Maybe.” March, 8, 2021, SPACs Fall Into a Bear Market - Bloomberg
[4]See Limiting SPAC-Related Litigation Risk: Disclosure And Process Considerations (goodwinlaw.com)
[5]See Welch v. Meaux et al., No. 2:19-CV-1260 (W.D. La. (Lake Charles) J. T Doughty).
[6]This paragraph summarizes the allegations of the Plaintiffs’ Amended Complaint filed October 16, 2020 available at: Amended Complaint, and are not meant to be statements of fact or express any opinion as to truth or falsity of any allegation. For a complete copy of Plaintiffs’ allegations and claims please refer to Plaintiffs’ Amended Complaint. The author does not intend to and has no knowledge of any alleged fact, nor is there any intent or representation as to the truth, falsity or actionability of any allegation, statement or defense or claim. As noted, Defendants have moved to dismiss the allegations, and their motions are available at Jefferies’ Motion To Dismiss, Individual Defendants’ Motion To Dismiss, and Individual Defendants’ Memorandum in Support of Motion to Dismiss.
[7]See Welch v. Meaux et al., No. 2:19-CV-1260 (W.D. La. (Lake Charles), J. T Doughty).
Docket entries 37 (Amended Complaint); 45 and 47 (motions to dismiss); 56 (Plaintiffs response); 63 (reply),
[8]SPACInsider, SPAC IPO Transactions: Summary by Year, available at https://spacinsider.com/stats/