In re Lordstown Motors Corp. Stockholders Litigation ( 2022 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: February 28, 2022
Date Decided: March 7, 2022
Raymond J. DiCamillo, Esquire Gregory V. Varallo, Esquire
Kevin M. Gallagher, Esquire Daniel E. Meyer, Esquire
Alexander M. Krischik, Esquire Bernstein Litowitz Berger
Alena V. Smith, Esquire & Grossmann LLP
Richards, Layton & Finger P.A. 500 Delaware Avenue, Suite 901
920 North King Street Wilmington, Delaware 19801
Wilmington, Delaware 19801
RE: In re Lordstown Motors Corp. Stockholders Litigation,
CA. No. 2021-1066-LWW
Dear Counsel:
The defendants have moved to stay this putative class action pending the
resolution of a federal securities class action. I decline to grant a stay. The McWane
doctrine applies with less force in the context of representative litigation and is
particularly inapt here. Although the federal action is first-filed and concerns and
the same business combination, the parties, claims, and remedy sought are different.
Perhaps more importantly, this case raises emerging issues of Delaware law.
Established doctrines of fiduciary duty law are, of course, far from novel. But this
court has had occasion to apply these principles in the context of special purpose
C.A. No. 2021-1066-LWW
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acquisition companies and stockholder redemption rights just once—in a decision
rendered two months ago. This 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.
I. RELEVANT BACKGROUND
On October 23, 2020, Lordstown Motors Corp. (“Legacy LMC”) completed
a business combination with special purpose acquisition company DiamondPeak
Holding Corp. (“DiamondPeak,” and, after the combination, “Lordstown”).1
Disclosures issued in connection with the transaction indicated that Lordstown
would have a first-mover advantage in the burgeoning electric truck market and that
Lordstown had a large and growing backlog of truck orders.2 On March 12, 2021,
an analyst report was published that purported to identify problems faced by
Lordstown.3 A drop in Lordstown’s stock price followed.4
Litigation followed, to say the least.
1
Verified Class Action Compl. (“Compl.”) ¶¶ 6, 13 (Dkt. 1).
2
See id. ¶¶ 5-6.
3
Id. ¶¶ 102-03.
4
See Defs.’ Mot. to Stay Ex. A (“Securities Compl.”) ¶¶ 20-29 (Dkt. 15).
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Starting in March 2021, multiple federal securities class actions were filed in
the United States District Court for the Northern District of Ohio. 5 The cases were
consolidated in June 2021 (the “Securities Action”).6 The defendants named in the
Securities Action complaint are Lordstown, the Lordstown subsidiary that is the
continuation of Legacy LMC, certain of Lordstown and Legacy LMC’s current and
former officers, and Lordstown director David Hamamoto.7 The complaint asserts
various violations of the Securities Act of 1933 and Securities Exchange Act of
1934.8 The claims are brought on behalf of a putative class of persons and entities
who “(a) purchased or otherwise acquired [Lordstown’s] Class A Common
Stock . . . publicly traded warrants . . . or any publicly traded option to purchase or
sell [Lordstown’s] Class A Common Stock, from August 3, 2020, through July 2,
2021. . . and/or (b) held [Lordstown’s] Class A Common Stock as of September 21,
2020.”9
5
Defs.’ Mot. to Stay ¶ 10.
6
See In re Lordstown Motors Corp. Sec. Litig., No. 4:21-cv-00616 (PAG) (N.D. Ohio).
7
Securities Compl. ¶¶ 51-57. Specifically, that complaint names as defendants former
Legacy LMC (and later Lordstown) officers Caimin Flannery, Darren Post, and Rich
Schmidt, and Lordstown officer Shane Brown. Id.; see Compl. ¶ 22.
8
Securities Compl. ¶¶ 451-90.
9
Id. ¶ 442.
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Related derivative actions were also filed in the United States District Court
for the District of Delaware,10 the Northern District of Ohio,11 and in this court.12
The present action (the “Action”) was brought after two Lordstown
(previously DiamondPeak) stockholders obtained documents pursuant to 8 Del. C.
§ 220.13 Their class action complaints were filed in this court on December 8 and
December 13, 2021 and have been consolidated.14 The plaintiffs’ claims are brought
on behalf of a putative class of “all record and beneficial holders of [DiamondPeak]
common stock who continuously held such stock between the [transaction’s] Record
Date of September 21, 2020 and the closing of the de-SPAC Acquisition on October
23, 2020.”15
The plaintiffs’ Verified Class Action Complaint (the “Complaint) advances
one claim against Hamamoto and four other former members of the DiamondPeak
Board16 and another claim against the “Controller Defendants”—defined as
10
In re Lordstown Motors Corp. S’holder Deriv. Litig., No. 21-cv-00604 (D. Del.).
11
Thai v. Burns, No. 4:21-cv-01267 (N.D. Ohio). That action has been stayed pending the
resolution of the Securities Action. See Defs.’ Mot. to Stay ¶ 16.
12
Cormier v. Burns, C.A. No. 2021-1049-LWW (Del. Ch.).
13
Compl. ¶¶ 15-16.
14
See Dkt. 1; Amin v. Hamamoto, C.A. No. 2021-1085-LWW (Dkts. 1, 44).
15
Compl. ¶ 148.
16
Id. ¶¶ 21-26, 158-63. Those individuals are Mark Walsh, Andrew Richardson, Steven
Hash, and Judith Hannaway.
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Diamond Peak Sponsor LLC and two of the former directors.17 I previously
described those claims as follows:
The plaintiff[s] assert[] that the directors of DiamondPeak
breached their fiduciary duties by failing to disclose
certain information about [Legacy LMC’s] purchase
orders and production timeline. The plaintiff[s] further
allege[] that DiamondPeak’s controlling stockholders
acted to advance their own interests by pursuing the
transaction with Legacy LMC to the detriment of minority
stockholders. The putative class of then-DiamondPeak
stockholders were purportedly harmed by not exercising
their redemption rights.18
On January 10 and 18, 2022, the defendants filed one-page motions to dismiss
pursuant to Court of Chancery Rules 12(b)(6) and 23.1.19 On January 19, 2022, the
defendants filed a Motion to Stay this Action pending the resolution of the Securities
Action.20 I heard argument on the Motion to Stay on February 28, 2022.21
II. LEGAL ANALYSIS
The defendants seek to stay this Action pending the resolution of the
Securities Action, relying on McWane Cast Iron Pipe Corp. v. McDowell Wellman
17
Id. ¶¶ 28, 164-71.
18
In re Lordstown Motors Corp. S’holders Litig., 2022 WL 601120, at *2 (Del. Ch.
Feb. 28, 2022).
19
Dkts. 11, 14.
20
Dkt. 20.
21
Dkt. 43.
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Engineering Corp. and its progeny.22 Under the McWane doctrine, the court’s
discretion to grant a stay should be freely exercised where “there is a prior action
pending elsewhere, in a court capable of doing prompt and complete justice,
involving the same parties and the same issues.”23 “[T]hese concepts are impelled
by considerations of comity and the necessities of an orderly and efficient
administration of justice.”24
The defendants contend that allowing the Action to proceed in parallel with
the Securities Action would tax the resources of the court and the parties. They
further assert that the plaintiffs here seek to represent a subset of the stockholder
class represented in the Securities Action and that the breach of fiduciary duty claims
in this Action are premised upon the same statements alleged to be misleading in the
Securities Action.25
In response, the plaintiffs note that the claims in this Action involve novel
issues of Delaware law that are not implicated in the Securities Action. They further
argue that, regardless, none of the McWane factors support staying the Action.26
22
263 A.2d 281 (Del. 1970).
23
Id. at 283.
24
Id.25
See Defs.’ Mot. to Stay ¶¶ 1, 21-22.
26
See Pls.’ Opp’n to Defs.’ Mot. to Stay (“Pls.’ Opp’n”) ¶¶ 7-10 (Dkt. 34).
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A McWane analysis is an imperfect method to guide my assessment of the
defendants’ motion.27 “[T]his court has proceeded cautiously when facing the
question of whether to defer to a first-filed representative action and has given much
less weight to first-filed status than is required in the non-representative action
context.”28 In the representative litigation setting, the court’s “paramount interest”
is to ensure that “stockholders receive ‘fair and consistent enforcement of their rights
under the law governing the corporation.’”29
Here, the fundamental question is whether this court’s interest in resolving
corporate governance issues under Delaware law prevails over considerations of
comity and practicality. This Action concerns allegations that the defendants
breached their fiduciary duties of loyalty and impaired the exercise of stockholders’
redemption rights in the context of a de-SPAC transaction. Those claims raise
“novel issues” akin to those that this court was presented with in a matter of first
27
Biondi v. Scrushy, 820 A.2d 1148, 1150 (Del. Ch. 2003) (explaining that “the McWane
doctrine does not apply with full force” in representative actions).
28
Id. at 1159; Donald J. Wolfe & Michael A. Pittenger, Corporate and Commercial
Practice in the Delaware Court of Chancery § 5.01 (2021) (observing that “the Court of
Chancery tends to afford decidedly less deference” to the McWane factors when
considering competing stockholder representative suits).
29
Brandin v. Deason, 941 A.2d 1020, 1024 (Del. Ch. 2007) (quoting In re Topps Co.
S’holders Litig., 924 A.2d 951, 953 (Del. Ch. 2007)).
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impression earlier this year.30 The Court of Chancery has “long been chary” about
deferring to a first-filed action pending elsewhere “when a case involves important
questions of our law in an emerging area.”31
None of the remaining factors appropriately considered under McWane
outweigh that vital interest. The parties in this Action and the Securities Action
differ significantly. Although these actions have facts in common, the issues
presented are distinct. And the claims brought here are not a simple repackaging of
securities claims with a Delaware law label.
To start, the Securities Action names only one of the Action’s defendants.
The defendants point to the overlap in defendants here and in the related derivative
actions (though they do not seek a stay in deference to those cases) to support their
position that this Action should not move forward.32 But—insofar as the derivative
actions are even relevant to whether a stay in deference to the Securities Action is
appropriate—those cases seek to recover on behalf of Lordstown while this action
30
See In re MultiPlan Corp. S’holders Litig., --- A.3d ---, 2022 WL 24060, at *1 (Del. Ch.
Jan. 3, 2022) (stating that, until that decision, “Delaware courts ha[d] not previously had
an opportunity to consider the application of our law in the SPAC context”).
31
In re Topps, 924 A.2d at 960; see Brandin, 941 A.2d at 1024-25 (finding that the presence
of novel, complicated, and unsettled issues of Delaware law “strongly favor[ed]” denial of
a motion to stay); Ryan v. Gifford, 918 A.2d 341, 349-50 (Del. Ch. 2007) (noting that
Delaware courts have substantial interests in resolving cases “where the law is novel”).
32
See Defs.’ Mot. to Stay ¶¶ 28-31.
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is brought on behalf of a putative class of former DiamondPeak stockholders. It is
not apparent to me why this court would stand down from hearing class action claims
in deference to derivative actions that might themselves defer to prior-filed securities
claims.
The putative class in the Securities Action is also not equivalent to the class
the plaintiffs seek to represent in this Action. The class proposed in the Securities
Action includes stockholders who “purchased” Lordstown publicly traded warrants,
units, or options to purchase or sell Class A shares from August 3, 2020 through July
2, 2021 “and/or . . . held” Class A shares as of September 21, 2020. 33 This Action,
by contrast, is brought on behalf of a putative class of stockholders who
“continuously held” Lordstown common stock “between the Record Date of
September 21, 2020 and the closing of the de-SPAC Acquisition on October 23,
2020.”34 Members of the stockholder class in this Action also fall within the
Securities Action class (which is not unusual in parallel actions). But, as the
plaintiffs point out, any recovery for the earlier investors included in the Securities
33
Securities Compl. ¶ 442.
34
Compl. ¶ 148.
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Action class—who are the focus of this Action—could be affected by the breadth of
that class period.35
The issues in the actions coincide insofar as the disclosures in DiamondPeak’s
proxy statement require examination. They are otherwise fundamentally different.
The crux of the Securities Action rests on whether Lordstown’s stock price was
“artificially inflated” by false and misleading disclosures.36 The plaintiffs’
Complaint, by contrast, alleges that the defendants harmed the putative class
members by impairing the informed exercise of their redemption rights to the
defendants’ benefit.37 These are quintessential Delaware concerns—not, as the
defendants argue, a rebranding of securities claims about material misstatements as
fiduciary duty claims.
That reality renders the cases relied upon by the defendants inapposite. In
Derdiger v. Tallman, a lead plaintiff in a consolidated federal securities action was
appointed to “pursue all available causes of action against all possible defendants
35
The plaintiffs also contend that the proposed Securities Action class is under-inclusive
of the class here because it would not include investors who purchased shares before
August 3, 2020. The Securities Action class, however, also includes investors who “held”
Class A shares as of the September 21, 2020 record date—which is the beginning of the
plaintiffs’ proposed class. Compare Securities Compl. ¶ 442, with Compl. ¶ 148.
36
E.g., Securities Compl. ¶¶ 114, 246, 432.
37
Compl. ¶¶ 161-63, 168-70.
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under all available legal theories.”38 A class action complaint was subsequently filed
in the Court of Chancery, “seeking redress for . . . allegedly false statements made
in connection with [a] merger.”39 The court deferred to the federal action because
the cases “share[d] the same core facts, legal claims, and alleged damages.”40
In Schnell v. Porta Systems Corp., a federal securities complaint alleged “that
the defendants engaged in a conspiracy to conceal adverse material information, to
defraud purchasers, and to maintain an artificially high market price” for a
company’s stock.41 A class action complaint filed in Delaware three weeks later
likewise alleged that the defendants “breached their fiduciary duties owed to the
shareholders in that they made material misrepresentations and failed to correct
those material misrepresentations with subsequent disclosures” and that those
actions “amounted to fraud.”42 In staying the Delaware action, the court explained
that “while the claims in the two courts may be stated in different ways, they [were]
actually the same claims.”43
38
773 A.2d 1005, 1010 (Del. Ch. 2000) (emphasis in original).
39
Id. at 1009.
40
Id. at 1016.
41
1994 WL 148276, at *4 (Del. Ch. Apr. 12, 1994).
42
Id.43
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In this instance, the distinction between the federal claims pleaded in the
Securities Action and the plaintiffs’ Delaware law fiduciary duty claims is not an
“artificial” one.44 Without considering the viability of the plaintiffs’ claims, even a
superficial review of the Complaint makes plain that the plaintiffs are pursuing more
than a narrow disclosure claim.45 The claims advanced “invoke[] both the duty of
loyalty and disclosure duties implicating director loyalty.”46 They are not
“redundant or duplicative of”47 the first-filed securities claims.48
The gap between the claims here and those in the Securities Action widens
when the potential remedies are considered. The defendants argue that any monetary
damages that could be awarded in this Action would be addressed by the relief
sought in the Securities Action. But the bases for measuring the relief (if any) would
be entirely different. The Securities Action seeks to recover damages for losses
allegedly caused by the decline in Lordstown’s stock price from a class period high
44
Derdiger, 773 A.2d at 1016-17 (describing the “forceful[] rejection” of an alleged
distinction between state and federal “misdisclosure claims” in Schnell v. Porta Systems
Corp.).
45
E.g., Compl. ¶¶ 97, 123-25; see MultiPlan, 2022 WL 24060, at *8.
46
MultiPlan, 2022 WL 24060, at *8.
47
Derdiger, 773 A.2d at 1018.
48
It bears mentioning that the defendants have also moved to stay the Cormier action.
Cormier, C.A. No. 2021-1049-LWW, Dkt. 13. This decision should not be viewed as
determinative of that motion, which concerns a subsequently-filed derivative action. See
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of $31.57.49 The plaintiffs’ attempted recovery in this Action, by contrast, could turn
on the $10 redemption price (plus interest) relative to the value the class received in
the de-SPAC transaction.50
III. CONCLUSION
Delaware has a substantial interest in addressing the issues presented by this
case. And there is limited overlap—in terms of the parties, issues, and potential
remedies—between this Action and the Securities Action. The defendants’ Motion
to Stay is denied.
Sincerely yours,
/s/ Lori W. Will
Lori W. Will
Vice Chancellor
49
See Securities Compl. ¶ 434.
50
See Compl. ¶ 147.