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In this “D&O Diary” blog, Kevin LaCroix analyzes two recent dismissals that show that SPAC-related securities class actions aren’t always cut & dry. In a January 10th ruling involving DraftKings, the court found that a complaint based on a short seller report wasn’t adequate to move past the pleadings stage. And in a January 11th ruling involving Lucid Motors, the court dismissed a case based on statements made prior to the announcement of merger discussions. Here’s Kevin’s analysis:

Judge Engelmayer’s skepticism of the plaintiff’s allegations here based on nothing more than the short seller report suggests that the plaintiffs in these other cases could face an uphill battle in trying to establish that their complaints meet the fundamental pleading requirements To be sure, Judge Engelmayer did not say that complaints based on short seller reports could never meet the requirements – but the standards are high, and Judge Engelmayer’s analysis suggests that many of the short-seller based complaints may not make it past the pleading stage.

The court’s ruling in the Lucid case is interesting because the underlying allegations related to statements made by the CEO of the merger target company, before the merger was completed . Many of the SPAC-related securities suits have involved allegations based on alleged pre-merger statements. However, what arguably makes the Lucid case distinct is that the supposedly misleading statements were made not only pre-merger, but before the later merger had even been announced. Moreover, the widespread public conjecture about a possible merger was “speculative” (and for that matter could not even be attributed to the defendants). While the court’s ruling underscores the challenge of basing securities claims on statements made before a merger is announced, the ruling arguably has less relevance to claims based on alleged statements after the merger announcement.

One final observation is that with the dismissals granted in these and other SPAC-related securities suits, the alternative vehicle of Delaware state court direct action breach of fiduciary duty cases (like, for example, the Gig3 case in which the Delaware Court of Chancery recently denied the motion to dismiss, as discussed here), may look to the plaintiffs’ lawyers like a more attractive option that the pursuit of securities class action lawsuits.

– Liz Dunshee