Lucid Motors: Ninth Circuit affirms dismissal under “bright-line rule” regarding SPAC merger

Altieva, Inc., d/b/a Lucid Motors (Lucid) was a privately held electric car manufacturer prior to its acquisition by Churchill Capital Corporation IV (CCIV), a publicly traded special purpose acquisition company (SPAC). Lucid began merger discussions with CCIV in January 2021, which resulted in CCIV’s acquisition of Lucid on February 22, 2021. The plaintiffs were investors in CCIV prior to the merger and they alleged that Lucid and its CEO made materially misleading representations regarding the company’s production targets in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5.  

The district court held that plaintiffs had standing but dismissed the complaint with prejudice on the grounds that plaintiffs had not adequately alleged materiality. On appeal, the Ninth Circuit affirmed the dismissal on the alternative ground that plaintiffs lacked standing. In doing so, the Ninth Circuit relied on the U.S. Supreme Court’s holding in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), which adopted the “Birnbaum” bright-line rule that confines standing in Section 10(b) cases to purchasers and sellers of the stock in question – not the pre-merger security. See Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952). The Ninth Circuit rejected the plaintiffs’ argument that the security purchased by a plaintiff need only be “sufficiently connected to the misstatement” to establish standing, finding that there was no authority for plaintiffs’ proposed standing criteria and that it improperly required a fact-intensive inquiry that the Supreme Court expressly rejected in Blue Chip.

In reaching this conclusion, the Ninth Circuit follows the Second Circuit’s application of the Birnbaum rule in the context of alleged misstatements made in advance of an anticipated merger. In that prior case, Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd., 54 F.4th 82 (2d Cir. 2022), the Second Circuit held that the “sufficiently connected” test was not appropriate and instead adopted the bright-line rule from Blue Chip—even at the risk of being “arbitrary” in some cases, so as to avoid an “endless case-by-case” analysis ultimately required by the plaintiffs’ proposed rule.

The Ninth Circuit also noted that there is no exception to the “Birnbaum” bright-line rule for SPAC transactions and that if Congress wants to treat SPAC acquisitions differently from traditional mergers, it can do so with new legislation.

This decision continues nationwide momentum behind application of the Birnbaum bright-line rule for standing in securities fraud actions, even in the pre-merger SPAC context. 

Authored by Allison M. Wuertz, Jon M. Talotta, and Conrad D. Noronha.