Class Action Lawsuit Targets SPAC In UWM Merger

An investor is seeking class action status for a lawsuit he filed against a specialty purpose acquisition company (SPAC) that merged in January 2021 with United Wholesale Mortgage to take the mortgage lender public.

The lawsuit, filed in the Delaware Chancery Court on March 10 by shareholder Richard Delman, accuses the defendants of “providing false and misleading” information in advance of the merger

The suit was filed on behalf of Delman “and similarly situated current and former stockholders” of Gores Holdings IV Inc., which changed its name to UWM Holdings Corp. following the $16 billion merger.

The lawsuit names as defendants Gores Sponsors IV LLC, AEG Holdings LLC, Alec Gores, Randall Bort, William Patton, Jeffrey Rea, Mark Stone, and Andrew McBride. The six people cited, including billionaire Alec Gores, all served as directors of Gores Sponsor IV. The lawsuit does not name UWM or its billionaire Chairman & CEO Mat Ishbia as defendants.

According to the complaint, a copy of which was provided to NMP by Delman’s attorney, the defendants “allowed their financial interests to override their fiduciary duties and responsibilities as controlling stockholders and directors and officers of a Delaware corporation by forcing through a value-destroying merger with Legacy UWM on the basis of false and misleading disclosures.”

It continues, “Those false and misleading disclosures induced Gores IV’s public stockholders to invest in the merger” instead of redeeming their shares.

The complaint states that, because of the way the deal was structured, the “merger was a losing proposition for Gores IV public stockholders and a tremendous windfall for the defendants. Gores IV public stockholders would have been far better off redeeming their shares for $10 plus accrued interest.”

A news release announcing the planned merger issued Sept. 23, 20202, states that the transaction “values UWM at approximately $16.1 billion, or 9.5x the company’s estimated 2021 adjusted net income of approximately $1.7 billion.”

According to the complaint, while the merger agreement valued the company shares at $10 per share, “there was less than $8.25 (per share) in net cash underlying the Gores IV shares.”

The complaint continues, “It would reasonably follow, therefore, that in negotiating a share exchange, Legacy UWM would inflate its value commensurately to match the implied valuation. Driven by their own financial self-interests, the board fail to disclose this danger in approving the merger and recommending it to public stockholders.”

The lawsuit claims UWM did inflate its value with projections that “Legacy UWM would increase its pro forma tax adjusted income by 77% and its revenues by 61% by the end of 2022.”

The projections “failed to account for the inevitable slowdown of the refinance and origination market, a predictable rise in interest rates, and significant regulatory risks that would require substantial changes to the business,” the lawsuit states.

The complaint adds that, once the merger was completed, UWM “substantially downgraded its revenue projections and revealed details about its business model that made its meteoric projected growth implausible.”

The lawsuit adds that, instead of redeeming their shares for $10.10 per share, Gores IV stockholders saw their shares decline to $7.23 per share on April 20, 2021, just three months after the merger was completed. A year later, on Jan. 21, 2022, UWMC shares closed at $5.29 per share, and as of March 6 of this year, the stock was valued at just $4.76 per share.

UWM has also reported two consecutive quarterly losses.

Calling the deal “abysmal” for Gores IV stockholders, the complaint states that the merger was “a financial windfall for Gores … and the purportedly independent directors.” It states that, on the day the merger was completed, the defendants “reaped a potential return of over $112 million.”

“Due to the conflicts of interest on the part of the board, which drove the board to recommend the merger, provide misleading information in the proxy, and withhold material information from public stockholders,” the merger “requires judicial review for entire fairness,” the complaint states.

The lawsuit lists four counts, including three counts of breach of fiduciary duty and one count of unjust enrichment. It asks the court to approve the complaint as a class action and certify the class; find the defendants liable, and award class members damages in an amount to be determined at trial.