Waiting on Waitr: How a Louisiana Federal Court Decision May Shape the Oncoming Billion Dollar Wave of SPAC Securities Litigation

Waiting on Waitr: How a Louisiana Federal Court Decision May Shape the Oncoming Billion Dollar Wave of SPAC Securities Litigation

A Louisiana federal court decision expected to be released sometime in April or May 2021 has the potential to shape the oncoming wave of special purpose acquisition company (“SPAC”) securities litigation.^[1]

In the Western District of Louisiana, the court will decide whether a federal securities class action lawsuit will proceed to trial, where the underlying claims derive from the November 2018 SPAC acquisition of the food-delivery service Waitr Inc. by Landcadia Holdings Inc.^[2]

Landcadia, backed by Tilman Fertitta, a Houston-based billionaire restaurateur, and Richard Handler, the New York-based chief executive officer (“CEO”) of Jefferies Financial Group Inc, initiated the acquisition only two weeks before the SPAC’s impending deadline to acquire a target company or instead return its investors’ money.^[3] In short, the acquisition proved disastrous. Since November 2018, the company has gone through multiple CEOs,^[4] laid off over 2,300 employees,^[5] settled a class action lawsuit over misclassifying drivers as independent contractors not employees,^[6] and has lost over 70% of its market value.^[7] Today, shares of Waitr Holdings trade below $3, a substantial loss from its initial offering price of $10, and its all-time high of almost $14 in March 2019.^[8]

The lawsuit alleges that Landcadia made false and misleading statements in the proxy and prospectus statements, giving rise to claims under Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934.^[9] Specifically, the suit alleges that the optimistic statements about Waitr’s health and business prospects were misleading: at the time of the acquisition, Waitr’s existing contracts were not profitable, and the fee structures it used were unsustainable.^[10] The plaintiffs further allege that the Landcadia directors knew this, and planned to hike fees in the future.^[11] When the directors hiked fees, restaurants called for a boycott of Waitr and its “draconian price increases.”^[12]

Interestingly, the plaintiffs do not contend that the acquisition itself was conflicted.^[13] As practitioners^[14] and former SEC Chairman Jay Clayton ^[15] have pointed out, the target acquisition transaction (commonly called the “de-SPAC”) may face greater scrutiny given its incentive structure. SPAC sponsors are only compensated when acquisitions occur,^[16] and as this acquisition was initiated with only two weeks to go before the deadline, this transaction appears to be a strong candidate for judicial review. Nevertheless, the plaintiffs did not pursue this theory, and instead focused on the false and misleading statements.

In response, Landcadia’s counsel has claimed that its statements “are not misrepresentations of fact but merely broad statements of corporate optimism that courts uniformly regard as non-actionable ‘puffery.’”^[17]

The court in Welch v. Meaux will hopefully provide clarity on the matter, which will in turn provide guidance for the looming question facing SPACs today: how will corporate optimism in SPAC securities filings be looked at, especially compared to those disclosures in more traditional securities offerings or transactions?

Given the rise of SPACs, the court’s decision could have far-reaching consequences. In 2019, a record $13.6 billion was raised across fifty-nine SPAC IPOs.^[18] 2020 saw a new record, with $83 billion raised across 248 SPAC IPOs, an increase of over five times the previous year.^[19] 2021 is again on pace to set new records: two months into 2021, SPAC IPOs have already raised half of the 2020 volume.^[20]

Many of these SPACs have targeted companies with highly speculative technologies and business plans.^[21] “Over 90% of zero revenue companies that plan to go public with over a $1 billion valuation in 2021 thus far intend on using a SPAC to do so” as opposed to taking the more traditional IPO route.^[22] The resulting corporate disclosure in these respective SPACs will likely face the same issues encountered by Landcadia: how to properly communicate the faith in an underlying business without misrepresenting its health, prospects and long-term viability?

Given the prominence of highly speculative technologies in SPACs, the court’s decision in the Waitr case could prove to be consequential for the industry going forward.