In the latest SPAC-related securities class action lawsuit, a plaintiff shareholder has filed a securities class action lawsuit against a post-SPAC-acquisition biopharma company in which the plaintiff claims that the risk of the company’s post-merger clinical trial setback should have been unearthed in the pre-merger due diligence process. As discussed below, this lawsuit may prefigure some of the likely patterns for future SPAC-related securities litigation.
Health Sciences Acquisition Corporation (HSAC) was a Special Purpose Acquisition Company (SPAC) that completed an Initial Public Offering in May 2019. On October 2, 2019, HSAC announced that it had entered into an agreement to merge with Immunovant Sciences, Ltd., a privately held biopharmaceutical company developing treatments for autoimmune diseases. In the merger, HSAC acquired all of the shares of legacy Immunovant. Upon the merger’s closing, HSAC changed its name to Immunovant, Inc. The merger transaction was completed on December 19, 2019.
Immunovant is developing a human antibody therapy known as IMVT-1401 for the treatment several diseases and illnesses. The treatment is in Phase II clinical trials. On February 2, 2021, Immunovant issued a press release in which it announced “a voluntary pause of dosing in the ongoing clinical trials for IMVT-1401.” The press release further stated the Immunovant “has become aware of a physiological signal consisting of elevated total cholesterol and LDL [low-density lipoproteins] levels in IMVT-1401 treated patients” and “out of an abundance of caution, the Company has decided to voluntarily pause dosing in ongoing clinical studies … in order to inform patients, investigators, and regulators as well as to modify the monitoring program.” According to the subsequently filed securities class action complaint, the price of Immunovant’s shares declined over 42% on the news.
On February 19, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against Immunovant and certain of its directors and officers. A copy of the complaint can be found here. The individual defendants named in the lawsuit include Roderick Wong, who prior to the December 2019 merger transaction was President and CEO of HSAC.
The complaint purports to be filed on behalf of a class of persons who purchased securities of Immunovant or pre-merger Health Sciences between October 2, 2019 (the date the merger was announced) and February 1, 2021 (the day before Immunovant announced that it was voluntarily pausing the dosing in the clinical trials of IMVT-1401).
In her complaint, the plaintiff alleges that the during the class period defendants made false and/or misleading statements and/or failed to disclose that: “(i) HSAC had performed inadequate due diligence into Legacy Immunovant prior to the Merger, and/or ignored or failed to disclose safety issues associated with IMVT-1401; (ii) IMVT-1401 was less safe than the Company had led investors to believe, particularly with respect to treating [certain diseases under investigation]; (iii) the foregoing dimished IMVT-1401’s prospects for regulatory approval, commercial viability, and profitability; and (iv) as a result, the Company’s public statements were materially false and 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 complaint seeks to recover damages on behalf of the plaintiff class.
As many observers have noted, over the last fourteen months, the number of SPAC IPOs has skyrocketed. In addition, as I have also noted (most recently here), there have also been a number of SPAC-related securities class suits filed. By my count, this lawsuit is the third SPAC-related securities class action lawsuit to be filed so far this year. [There have also been a number of individual securities lawsuits filed against SPACs this year, primarily in the form of Section 14(a) lawsuits alleging misrepresentations in the defendant SPAC’s pre-acquisition proxy statement (as, for example, here).]
One of the principal allegations in this lawsuit has to do with the sufficiency of the pre-merger due diligence. The plaintiff’s allegations that the due diligence was insufficient or that the company’s recent clinical trial setback was foreseeable will of course be tested at the motion to dismiss stage. Whether or not these allegations will survive remains to be seen. However, the complaint’s focus does highlight the due diligence issue in connection with SPAC acquisitions.
SPACs are often referred to as an alternative to an IPO for privately held companies. The two processes – that is, of being acquired by a SPAC or completing an IPO – are entirely different. One question that arises is whether the absence in the SPAC acquisition of many of the usual processes in a traditional IPO is whether as a result of a SPAC acquisition the private company can become publicly traded with less scrutiny than the company would undergo in an IPO.
I have been told by lawyers involved in SPAC acquisition transactions that the level of scrutiny and review in a SPAC acquisition transaction is not all that different than in an IPO. However, as this case shows, when a post-merger company hits an obstacle, plaintiffs’ lawyers are going to try to raise the question whether the possibility of the later setback could have or should have been unearthed in the pre-merger diligence process. Indeed, many the SPAC-related securities class action lawsuits that have been filed so far have raised this very kind of allegation.
I suspect there will be more of these lawsuits in the months ahead, particularly as many of the over 400 SPACS that have completed IPOs in the last fourteen months proceed to de-SPAC transactions and as the number of post-merger companies increases. To the extent there are future lawsuits along these lines, the complaint – like the one in this lawsuit against Immunovant – will likely include as defendants former officers of the pre-merger SPAC.
One final note. This lawsuit relates to a SPAC that completed its IPO in 2019, before the SPAC IPO mania that began in 2020 and that has continued this year. The sequence of events that ultimately led to this lawsuit played out across many months following the 2019 SPAC IPO and the lawsuit has only just come in now. The pattern, sequence, and timing of these events are interesting to contemplate in thinking about when future litigation involving the SPAC IPO class of 2020 and 2021 is likely emerge. These considerations make me think that while we may see some SPAC litigation now, we are going to be seeing more of it down the road.