In Max Royal LLC v. Atieva, Inc., No. 23-16049, 2024 U.S. App. LEXIS 19910 (9th Cir. Aug. 8, 2024), the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a securities class action brought by investors who purchased shares of the special purpose acquisition company Churchill Capital Corporation IV (“CCIV”) in early 2021 before it merged with Atieva, Inc. d/b/a Lucid Motors (“Lucid”) in July 2021. The three-judge panel held that purchasers of a security of an acquiring company do not have standing under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), to sue the target company for alleged misstatements by the target company made prior to the merger between the two companies. The Court’s decision provides protection to target company executives speaking to the press about their company’s forecasts and capabilities prior to acquisition by tightening the standing requirements for pre-acquisition SPAC investor plaintiffs.
CCIV was formed as a special purpose acquisition company (“SPAC”). Merger negotiations between CCIV and its target company, Lucid, occurred between January 11 and February 22, 2021. Although neither company spoke publicly about the merger negotiations during that time, Lucid’s CEO made public comments about Lucid’s production forecasts and capabilities. The plaintiff investors purchased CCIV stock at various times after the public comments but before the merger was announced, and well before the deal closed. The plaintiff investors alleged that the public comments by the target company were misleading in violation of Section 10(b) and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.
Defendants moved to dismiss the SPAC investors’ claims on grounds that they lacked standing and failed to point to actionable misrepresentations. The United States District Court for the Northern District of California held that that the plaintiffs had standing, but concluded that the investors failed to allege facts showing that the public statements were material in their decisions to purchase CCIV.
The Ninth Circuit affirmed the dismissal, though on an alternative ground. The Court applied the “Birnbaum rule,” which confines standing to assert a private action under Section 10(b) and Rule 10b-5 to “purchasers or sellers of the stock in question.” See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 742 (1975) (adopting the rule established in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952)). The Ninth Circuit held that under the Birnbaum rule, “[b]ecause plaintiffs did not purchase or sell the securities about which the alleged misrepresentations were made, plaintiffs lack standing under Section 10(b).” The Court followed Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd., 54 F.4th 82, 88 (2d Cir. 2022), in which the United States Court of Appeals for the Second Circuit held specifically that “purchasers of a security of an acquiring company do not have standing under Section 10(b) to sue the target company for alleged misstatements the target company made about itself prior to the merger between the two companies,” thus avoiding a Circuit split.
The Court’s decision reaffirms the continued vitality of the Birnbaum rule, limiting the private actions under Section 10(b) and Rule 10b-5 by investors in SPACs and other acquirers against target company executives for pre-merger statements. Regardless, target company executives should still exercise caution in making public comments regarding production outlook while merger negotiations are ongoing.