Eastern District Of New York Grants Motion To Dismiss Proposed Securities Class Action Complaint Against Battery Recycling Company That Went Public Through A Merger With A SPAC  

Shearman & Sterling LLP

Shearman & Sterling LLP

On October 6, 2023, Judge Hector Gonzalez of the United States District Court for the Eastern District of New York granted a motion to dismiss a putative securities class action against a battery recycling company and the former officers and directors of the SPAC that merged with the Company in 2021, alleging violations of Sections 11 and 15 of the Securities Act of 1933 and Section 14(a) the Securities Exchange Act of 1934. Lanigan Grp., Inc. v. Li-Cycle Holdings Corp., 22-cv-02222 (HG) (RML) (E.D.N.Y. Oct. 6, 2023). Plaintiff alleged that the Company and the SPAC made false and materially misleading statements in the SPAC’s proxy statement and prospectus and the Company’s registration statement (collectively, the “Proxy Materials”) about the Company’s accounting practices, revenues and accounts receivable. The Court dismissed plaintiff’s complaint for failure to adequately allege falsity, loss causation, and lack of statutory standing under Section 11 with leave to file a motion to amend.

The SPAC was formed in July 2020 and became a publicly traded company through an IPO in September 2020. According to the complaint, the Company recycles lithium-ion batteries and processes the materials within those batteries to produce new lithium-ion batteries. The Company and the SPAC announced a merger in February 2021 and completed the merger in August 2021. Plaintiff alleged that the Proxy Materials contained false and materially misleading’ statements about the Company’s accounting practices, revenues and accounts receivable. Plaintiff’s allegations were based in part on a short seller report published in March 2022, alleging that the Company’s revenues were based on a “gimmick” because the Company’s “largest customer . . . is not really a customer but merely a broker providing working capital financing to the Company while [attempting] to sell [the Company’s] product to end customers.” On this basis, plaintiff alleged that the Proxy Materials misrepresented the nature of the Company’s relationship with its largest customer, contained misstatements about the Company’s estimated revenue calculations and the Company’s alleged practice of pulling forward revenues, and misrepresented the Company’s compliance with IFRS accounting standards.

The Court first determined that the Section 11 and Section 14(a) claims sounded in fraud because they were based on allegations classically associated with fraud and that the heightened pleading standards of Rule 9(b) of the Federal Rules of Civil Procedure therefore applied. With respect to the Section 14(a) claim, the Court further held that the PSLRA’s heighted pleading requirements applied such that plaintiff was required to “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.”

Turning to the allegations, the Court held that the complaint did not meet the particularity requirements of the PSLRA, noting that, while plaintiff’s complaint included lengthy excerpts of the Proxy Materials, plaintiff never identified with any specificity what portions of those documents or excerpts it takes issue with. The Court further found that the relationship with its largest customer was sufficiently disclosed in the Proxy Materials as a “marketing relationship.” With respect to the revenue recognition claims, the Court held that the Proxy Materials sufficiently disclosed that its revenue recognition was based on price estimates rather than actual sales prices and that the revenue was recognized as soon as the products were delivered to its largest customer. Finally, the Court held that, while alleged violations of accounting standards can support a Securities Act claim, plaintiff must identify in what manner those provisions were violated. The Court held that plaintiff failed to allege how any accounting standards were violated.

The Court also held that plaintiff failed to adequately allege loss causation, providing a second reason to dismiss plaintiff’s Section 14(a) claim, because plaintiff failed to allege that the short seller report revealed any new factual information regarding the Company’s alleged negligence.” In other words, rather than revealing new information, the short seller report merely “sensationalized” publicly available information and was not corrective.

Finally, the Court held that plaintiff lacked standing to pursue Section 11 claims. The Court explained that a plaintiff must have purchased shares traceable to the allegedly misleading Proxy Materials. Here, plaintiff purchased shares of the SPAC prior to the merger (and the issuance of the allegedly misleading Proxy Materials) and plaintiff therefore did not have statutory standing to sue under Section 11.

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Lanigan Grp., Inc. v. Li-Cycle Holdings Corp.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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