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Last November, upstart electric car maker Lordstown Motors was in bad shape.
It was supposed to get a bailout from a $170 million common and preferred stock financing deal with Foxconn. The Asian contract manufacturer has agreed to not only inject cash, but also take over production for the electric car maker.
The bailout failed to keep Lordstown out of bankruptcy. It filed for Chapter 11 on Tuesday and, among other things, accused Foxconn of failing to meet its various financial and operating obligations. Among the many points of contention, one stood out.
As part of the November deal, Foxconn You were supposed to buy 26.9 million shares, or about one-tenth of Lordstown’s equity, at $1.76 per share, for total proceeds of $47.3 million. The purchase was to take place a few months after the transaction was completed through a US National Security Cfius review.
As Lordstown tumbled through the winter and spring, its shares fell below $1, leaving the company at risk of being delisted from the Nasdaq. The agreed purchase price of $1.76 — Lordstown’s share price from November — didn’t sound very exciting for Foxconn.
To avoid delisting, Lordstown resorted to a common stratagem: on May 23 it executed a 1-for-15 reverse stock split to reduce its number of shares, boosting its share price proportionately, but apparently leaving its total equity value unchanged. That is, the accounting movement will not increase or decrease the total market value of the company.
Normally, all relevant metrics for each stock would reset accordingly, including the terms of the deal. But Lordstown has not had an ordinary year.
In the lawsuit it filed on Tuesday against Foxconn: “[on] June 5 [Foxconn] First confirmed in a letter. . . that because of the Company’s 1:15 reverse stock split, it is now entitled to purchase not 10 percent of the Company’s common stock that was agreed upon, but 62.7 percent for the same price of $47.3 million.”
Lordstown effectively argued that Foxconn should pay $26.40 per share ($1.76 x 15) for 1.79 million shares (26.9 million / 15) in a $47.3 million investment that would still be net to the buyer one-tenth of Lordstown, based on adjusted share count.
But after the reverse stock split in May, Lordstown shares were trading around $3.70 — the equivalent of 25 cents a share before the reverse split — and buying at seven times the market price didn’t suit Foxconn.
If the old terms are enforced, Foxconn could buy $47.3 million worth of stock at a par price of $1.76/share, acquiring more than 60 percent of the company, due to the smaller share count after the reverse split.
Foxconn indicated in a letter dated June 5 to Lordstown that the contract, based on its reading, does not require any split adjustment to the purchase of common stock even while such a split adjustment appears for the separate preferred stock component. In other words, if Lordstown and his lawyers wanted such protection, they should or could have bargained for such:
In its defense, Lordstown in its lawsuit this week against Foxconn makes absolutely no reference to any specific contractual protections in the investment agreement. Instead, it says the investment and filing agreement with Cfius considers Foxconn owning less than 20 percent of Lordstown, so the split amendment should be implicit:
It’s unclear whether this newly engineered position was just another attempt to sabotage the deal or get a windfall by stealing control of the company in exchange for what it was supposed to pay for 10% of the shares. But either way, Foxconn’s position was in. “A clear violation of the investment agreement. The company demanded that Foxconn withdraw its absurd argument and close the deal as per the agreed terms.”
Furthermore, if Foxconn’s reading of the contract had been confirmed, Lordstown said it could have simply executed a traditional stock split that would have increased the number of shares and lowered Lordstown’s share price proportionately and then diluted Foxconn significantly by forcing them to pay $1.76 per share. For $47.3 million when Foxconn is only trading a penny or two:
“[Foxconn’s] The situation would have meant that the company could have paid a dividend of 30:1 (which he is entitled to do under the investment agreement) and that FVP would have been required to pay $47.3 million for a fraction of the company’s capital, which is an absurd interpretation of the investment agreement.” .
(Lordstown’s stock price, which is currently unaffected, would be 25 cents ($3.75 / 15). 25 cents divided by 30 would be less than a penny.)
In the event of bankruptcy, Lordstown seeks to sell its remaining assets and intellectual property. Foxconn is, after all, a natural buyer, and they’ll probably figure out multiplication and division to split the difference in this dispute.
November 7 agreement between Lordstown and Foxconn
Lordstown v. Foxconn lawsuit
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