On January 30, 2024, Judge Susan Illston of the United States District Court for the Northern District of California granted with leave to amend a motion to dismiss a putative securities class action against a battery company and its directors and officers. In Re Enovix Corp. Securities Litigation, No. 23-cv-00071-SI (N.D. Cal. Jan. 30, 2024).Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5(b) promulgated thereunder by failing to disclose that the Company overlooked critical testing of its manufacturing equipment, which led to equipment failure that caused the Company to miss its performance targets.
According to the complaint, the Company has been developing its lithium-ion ("li-ion") technology since 2007 and began manufacturing in 2012. Plaintiffs alleged that in February 2021, the Company announced plans to go public through a de-SPAC merger and announced its "ambitious goal" to develop its own U.S.-based manufacturing line and begin delivering products to customers by the second quarter 2022. According to plaintiffs, the Company released an investor presentation on February 22, 2021, projecting its production line would be able to manufacture one battery every two seconds and produce 500 units per hour, and claiming that the manufacturing equipment used to produce those batteries was already at the "factory acceptance testing" ("FAT") stage and that all manufacturing equipment would be subject to "site acceptance testing" ("SAT") and FAT.
Plaintiffs alleged that due to COVID-related supply chain and travel issues—and in order to speed up delivery of the equipment from China to the U.S.—the Company waived FAT of equipment leaving a facility in China, and that once the equipment arrived in the U.S., the Company did not conduct SAT, none of which was allegedly disclosed to investors. Plaintiffs further alleged that the Company opted against—but did not disclose—sending its U.S. vendors to China to conduct inspections or to bring China-based engineers to the U.S. to conduct testing. Plaintiffs alleged that, in total, between February 22, 2021, and March 25, 2022, defendants made thirteen false or misleading statements or omissions regarding the qualification of its manufacturing equipment, including misrepresentations regarding the FAT and SAT conducted on the manufacturing equipment. Plaintiffs alleged that subsequently, in the second half of 2022, the Company began to gradually reveal that the risks, concealed by defendants' failure to disclose that they had bypassed the FAT and SAT, were materializing. Between 2022 and January 2023, plaintiffs alleged that defendants made various statements indicating that the Company would significantly miss revenue and production projections, that it had terminated its CEO, that the first production line was "nonfunctional from an automation point of view," and that the second production line was only half-built. Plaintiffs alleged that these statements caused a progressive decline in the Company's share price from a close of $17.99 per share on November 1, 2022, to a close of $7.15 on January 4, 2023.
The Court turned first to the alleged affirmative statements regarding the Company's implementation of FAT and SAT. The Court found that the allegations that the Company waived FAT and SAT completely were conclusory at best, noting that the complaint did not assert that the Company "conducted no testing at all." According to the Court, defendants only admitted that, in the midst of a global pandemic, they did not send their vendor-engineers to China, that they did not bring their China-based engineers to the U.S. to conduct testing and that plaintiffs failed to identify any statements that stated or implied the Company would send its engineers to China or bring the engineers from China to California to conduct testing.
Turning next to the alleged omissions, the Court held that these were not actionable, as plaintiffs' theory relied on the Company having waived FAT and SAT entirely, which was not sufficiently alleged in the complaint. The Court held that, contrary to plaintiffs' contention, the PSLRA did not require that every reference to installation of equipment, supply chain constraints and vendor support must contain a caveat that the Company had otherwise waived FAT and SAT. The Court further held that several of the challenged statements constituted risk disclosures that were not actionable because plaintiffs failed to adequately allege that they contained misstatements or omissions of any material information. For example, the Court noted that the risk disclosures did not state or imply that engineers would travel to the vendor's factory in China or that the vendor's engineers would travel to the Company. The Court further noted that "[n]owhere [did] the complaint allege that the risks warned of were beginning to materialize as of . . . the latest date of the various challenged statements" and thus "even taking as true plaintiffs' allegations that the manufacturing problems were materializing in the second half of 2022, and that defendants knew of these problems, this would not have rendered any prior risk disclosures false."
Finally, the Court found that plaintiffs' scienter theory depended entirely on an admission that the complaint did not actually allege defendants made. The Court noted that the complaint alleged that the CEO admitted only to waiving the milestones that involved sending the Company's engineers to the vendor's factory in China and having the vendor's engineers travel to the U.S. to install the manufacturing equipment—not waiving all milestones for the testing of the testing for the first production line. The Court further held that the complaint did not allege with particularity what defendants knew and when, and therefore was insufficient to show that any individual defendant knew any of the challenged statements were false or misleading when made.
Having found that plaintiffs failed to sufficiently allege a primary violation of Section 10(b), the Court also dismissed plaintiffs' derivative claim for control person liability under Section 20(a).
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