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Last November, burgeoning electric vehicle maker Lordstown Motors fared poorly.
It was supposed to be a rescue through a $170 million common and preferred stock financing deal with Foxconn. The Asian contract manufacturer not only agreed to inject money, but also to take over production for the electric vehicle manufacturer.
The rescue attempt failed to save Lordstown from bankruptcy. She filed for Chapter 11 Tuesday, accusing Foxconn of failing to meet its various financial and operational obligations, among other things. Of several points of contention, one stood out.
As part of the November deal, Foxconn was to purchase 26.9 million shares, or about a tenth of Lordstown’s equity, at $1.76 per share for total proceeds of $47.3 million. That purchase would not come until months later, after the deal passed the US Cfius’ national safety review.
As conditions deteriorated in Lordstown during the winter and spring, share prices fell well below $1, putting the company at risk of being delisted from the Nasdaq. The agreed purchase price of $1.76 — Lordstown’s share price in November — didn’t look so good for Foxconn.
And to avoid delisting, Lordstown resorted to a common trick: On May 23, the company performed a 1:15 reverse stock split to reduce the number of its shares, increasing the share price proportionately, but increasing the overall value of equity obviously left unchanged. That is, the accounting change would neither increase nor decrease the company’s total market capitalization.
Normally, all related per-share metrics, including contract terms, would simply be adjusted accordingly. But Lordstown did not have a normal year.
Its lawsuit filed against Foxconn on Tuesday said: “[on] June 5th [Foxconn] asserted for the first time in a letter. . . that as a result of the 1:15 reverse stock split, the Company was now entitled to acquire 62.7 percent of the Company’s common stock instead of the agreed 10 percent, at the same price of $47.3 million.”
Lordstown has effectively argued that Foxconn should pay $26.40 per share ($1.76 x 15) for 1.79 million shares (26.9 million / 15), an investment of $47.3 million US dollars, which would still bring the buyer one-tenth of Lordstown based on the adjusted share count.
But after May’s reverse stock split, Lordstown’s shares were trading around $3.70 — equivalent to 25 cents a share before the reverse stock split — and buying at seven times market price wasn’t attractive to Foxconn.
However, had the old terms held, Foxconn could buy $47.3 million worth of shares at a nominal price of $1.76 per share and retain more than 60 percent of the company since the share count would be fewer after the reverse split is.
Foxconn noted in a June 5 letter to Lordstown that its interpretation of the agreement does not provide for a split adjustment for the common stock purchase, although such a split adjustment will be made for the separate preferred stock component. In other words, if Lordstown and his attorneys wanted such protection, they should or could have negotiated:
In his defense, Lordstown doesn’t fully point to specific contractual protections in the investment agreement in his lawsuit against Foxconn this week. Rather, it states that the investment agreement and filings with Cfius provide for Foxconn to own less than 20 percent of Lordstown, so a split adjustment must then be implied:
“It’s unclear if this newly created position was just another attempt to sabotage the deal or to secure a lucky break by stealing control of the company for the amount it was supposed to pay for 10% of the shares. But either way, Foxconn’s position was in clear violation of the investment agreement. The company demanded that Foxconn withdraw its absurd argument and complete the transaction on the agreed terms.”
Furthermore, if Foxconn’s reading of the contract had been upheld, Lordstown could have simply performed a traditional stock split, increasing the number of shares and lowering Lordstown’s share price proportionately, and then massively diluting Foxconn by making them pay 1.76 would have forced $47.3 million per share if Foxconn’s trading price was just a penny or two:
“[Foxconn’s] would mean the company could have paid a stock dividend of 30:1 (which it is entitled to under the Investment Agreement), and FVP would have had to pay $47.3 million for a mere fraction of the company’s common stock. That’s an absurd one Interpretation of the Investment Agreement.”
(Lordstown’s unaffected stock price would currently be 25 cents ($3.75/15). 25 cents divided by 30 would be less than a penny.)
In the event of bankruptcy, Lordstown will attempt to sell its remaining assets and intellectual property. After all, Foxconn is a natural buyer, and maybe they figure out the multiplication and division to split the difference in this dispute.
Agreement of November 7th between Lordstown and Foxconn
Lordstown v. Foxconn lawsuit