Lim v. Hightower

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BANDOL LIM, et al., Plaintiffs, v. EDWARD HIGHTOWER, et al., Defendants.

No. 4:23CV1454

United States District Court, N.D. Ohio, Eastern Division

September 30, 2024

MEMORANDUM OF OPINION AND ORDER [RESOLVING ECF NOS 35 AND 35-14]

Benita Y. Pearson United States District Judge

Pending are Defendants Edward Hightower (“Hightower”) Adam Kroll (“Kroll”), and Daniel A Ninivaggi's (“Ninivaggi”) Request for Judicial Notice (ECF No. 35-14) and Motion to Dismiss (ECF No. 35) the amended securities class-action complaint (ECF No. 31) brought by Lead Plaintiffs Andrew and Joshua Strickland, individually and on behalf of all others similarly situated. The Court has been advised, having reviewed the record, the parties' briefs, and the applicable law. For the following reasons, the Court takes Judicial Notice of Exhibits 1-11 (ECF Nos. 35-3 through 35-13) and grants Defendants' Motion to Dismiss (ECF No 35).

I. Background

The above-entitled action concerns statements made by Defendants on behalf of Lordstown Motors Corp. (“LMC”) that Plaintiffs allege misled investors about the state of LMC's partnership with Foxconn, an electronics manufacturer out of Taiwan. See Amended Class Action Complaint (ECF No. 31) at PageID #: 723, ¶ 2. Plaintiffs claim that Defendants failed to disclose significant problems in the partnership leading up to Foxconn's repudiation of the agreement with LMC and the bankruptcy of LMC. See ECF No. 31 at PageID #: 723, ¶ 2.

Hightower has acted as LMC's President and as Chief Executive Officer (“CEO”) beginning in July 2022. See ECF No. 31 at PageID #: 730, ¶ 25. Kroll has served as LMC's Chief Financial Officer (“CFO”) since October 2021. See ECF No. 31 at PageID #: 730, ¶ 26. Ninivaggi served as LMC's CEO from August 2021 to July 2022. See ECF No. 31 at PageID #: 730, ¶ 27.

After Foxconn repudiated its agreement with LMC, LMC filed an Adversary Complaint against Foxconn (ECF No. 31-1 at PageID #: 829-72) alleging fraud and breach of contract, which accused the company of intentionally driving LMC into bankruptcy. See ECF No. 31 at PageID #: 728, ¶ 17.^[1] By failing to disclose the problems in the partnership prior to the bankruptcy proceedings, Plaintiffs allege Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and § 78t(a), and associated Rule 10b-5 of the Securities and Exchange Commission (“SEC”), 17 C.F.R. § 240.10b-5. See ECF No. 31 at PageID #: 723, ¶ 1.

Plaintiffs allege the Class Period begins on August 4, 2022, during LMC's earnings conference call for the second quarter of 2022. See ECF No. 31 at PageID #: 757, ¶ 112.

A. Initial Agreement with Foxconn

In 2018, LMC was founded as an electronic vehicle (“EV”) manufacturing company with the main goal of developing the Endurance, an electric full-size pickup truck. See ECF No. 31 at PageID #: 733, ¶¶ 37-38. While LMC planned to launch sales of Endurance in 2022, the company faced financial setbacks leading to an initial agreement with Foxconn to obtain needed funding. See ECF No. 31 at PageID #: 733, ¶ 39. In September 2021, LMC signed a non-binding Agreement in Principle (ECF No. 31-1 at PageID #: 874-82) with Foxconn which was designed to “combine Foxconn's resources and efficiencies with Lordstown's innovation, technology, manufacturing plant, and human resources to [] develop [ jointly] the next generation of electric vehicles.” ECF No. 31 at PageID #: 734, ¶ 43.

Under the Agreement in Principle, Foxconn would purchase LMC's manufacturing plant for $230 million, $50 million in LMC's common stock, procure LMC's exercisable warrants for $1.7 million in shares of common stock, and enter into a Contract Manufacturing Agreement and Joint Venture Agreement. See ECF No. 31 at PageID #: 734-35, ¶ 44. In compliance with the Agreement in Principle, LMC and Foxconn then executed an Asset Purchase Agreement (ECF No. 31-1 at PageID #: 884-954) for Foxconn to purchase the manufacturing plant, see ECF No. 31 at PageID #: 734-35, ¶ 44, subject to approval from the Committee on Foreign Investment in the United States, see ECF No. 31-1, PageID #: 910.

B. The Joint Venture Agreement (“JVA”) (ECF No. 31-1 at PageID #: 991-1052)

The joint venture was formed with 55% to be owned by Foxconn and 45% by LMC, requiring Foxconn to contribute $55 million. See ECF No. 31 at PageID #: 738, ¶¶ 56-57; PageID #: 740, ¶ 64. According to the Adversary Complaint, Foxconn delayed the development of the JVA between November 10, 2021 and May 11, 2022 before finally relenting and executing the agreement. See Doc 1 at Page 11, ¶ 33 in No. 23-50414-MFW; ECF No. 31 at PageID #: 737, ¶¶ 52-53. The parties experienced further delays and disagreements surrounding budgeting, with Foxconn attempting to implement a clause in the JVA requiring LMC to get Foxconn's approval for all purchases under the joint venture. See ECF No. 31 at PageID #: 739, ¶ 59. Plaintiffs' confidential witness (“CW-1”), a former employee of LMC and employee of Foxconn at the time of the disputed events, alleges Foxconn created “roadblocks” for LMC beginning in late 2022 and that he believed Foxconn intended to force LMC into bankruptcy. See ECF No. 31 at PageID #: 739-40, ¶¶ 61-63; PageID #: 743-45, ¶¶ 73-75. Foxconn also failed to provide LMC with the data for its Model C and Model E vehicles as stipulated under the JVA and continued to delay fulfilling its commitments. See ECF No. 31 at PageID #: 740-41, ¶¶ 64-66. Foxconn delayed approving LMC's draft budget and providing the agreed upon funds for several months, stating it disagreed with the proposal. See ECF No. 31 at PageID #: 743, ¶¶ 71-72. During these delays, Hightower travelled to Taiwan at Foxconn Chairman Young Liu's request. Hightower met with the chairman of Foxconn, but the CEO of Foxtron, a Foxconn affiliate in Taiwan, “refused to meet with him.” ECF No. 31 at PageID #: 742, ¶ 69. Throughout the delays, Foxconn publicly characterized the partnership as successful, stating its investment in LMC served to “strengthen our development and design capabilities.” Foxconn's Third Quarter 2022 Investor Conference (ECF No. 35-3) at PageID #: 1265. Under the JVA, Foxconn and LMC began production of the Endurance vehicle in September 2022. See ECF No. 31 at PageID #: 801-802, ¶ 188).

Regarding manufacturing, LMC disclosed that the Endurance's production cost was “well above our anticipated selling price” and that production would be limited “through 2023 or possibly longer.” LMC's Form 10-K filed on February 28, 2022 (ECF No. 35-5) at PageID #: 1299.

C. The Investment Agreement (“IA”)(ECF No. 31-1 at PageID #: 1054-1114)

On October 14, 2022, LMC sent a letter confronting Foxconn about its breaches of the JVA, notably the failure to provide the Model C and Model E designs by October 2022. See ECF No. 31 at PageID #: 743, ¶ 72. As a result, Foxconn requested that the companies restructure their agreement, proposing a direct investment agreement with Foxconn and Softbank, a large multi-national technology investor. See ECF No. 31 at PageID #: 745, ¶¶ 76-77. After implementing the IA, Foxconn characterized its “cooperation” with LMC as “progressing quite smoothly.” Foxconn's Third Quarter 2022 Investor Conference (ECF No. 35-3) at PageID #: 1267. Foxconn Ventures PTE Ltd., a subsidiary of Foxconn and Softbank, agreed to invest a total of approximately $170 million in LMC under the IA, providing substantially greater funding for LMC. See ECF No. 31 at PageID #: 745, ¶¶ 77-78. The companies executed the IA on November 7, 2022. LMC and Foxconn subsequently amended the IA to allow the proceeds from Foxconn's purchase of preferred stock to be used either for a Softbank-backed EV program or for a substitute program developed by LMC. See ECF No. 31 at PageID #: 747-48, ¶¶ 84-85. On December 22, 2022, the companies rescinded that amendment, and replaced it with Amendment No. 1 to Investment Agreement (ECF No. 31-1 at PageID #: 1119-20), which amended Section 5.12 of the IA and continued to allow funding for a joint EV program. See ECF No. 31 at PageID #: 748, ¶ 87.

The IA required Foxconn to file a request to the Committee on Foreign Investment in the United States. This was filed two weeks late as a result of the issues surrounding the formation of the agreement. See ECF No. 31 at PageID #: 748-49, ¶ 88. Under the IA, as amended, Foxconn confirmed its “continued intent” to “utilize Lordstown Motors Corp. as its preferred North American vehicle development partner.” ECF No. 31-1 at PageID #: 1089, § 5.03(f). Between December 2022 and March 2023, LMC completed several manufacturing milestones including completion of the first phase of the new vehicle development work. See ECF No. 31 at PageID #: 749, ¶ 89. Foxconn again delayed providing funding to LMC. See ECF No. 31 at PageID #: 749, ¶ 91. Plaintiffs' confidential witnesses (“CW-2” and “CW-3”) allege these delays in funding led to little work being done at LMC's Michigan location and caused suppliers to back out of deals between December 2022 and March 2023. See ECF No. 31 at PageID #: 750, ¶ 94.

D. Foxconn's Repudiation

In March 2023, the value of LMC stock dropped below $1.00 per share. On April 19, 2023, the NASDAQ stock market issued LMC a notice informing the company that it had 180 days to return the stock price to the required minimum according to the listing qualification rules. See ECF No. 31 at PageID #: 751 ¶ 95. On April 21, 2023, Foxconn sent a notice of default stating the company would terminate the IA, as amended, if the stock price did not rise by May 21, 2023 See ECF No. 31 at PageID #: 751, ¶ 96. LMC disputed the notice of default, stating the NASDAQ notice did not constitute a breach of their agreement and that Foxconn's...