Foxconn Fires Back, Accuses Lordstown Motors of ‘Shakedown’
YOUNGSTOWN, Ohio – Was Lordstown Motors Corp. the victim of a scheme engineered by Taiwanese tech giant Foxconn to wreck its business? Or, as Foxconn purports in a new court filing, was Foxconn the subject of a “shakedown” by Lordstown Motors to secure cash for the troubled electric-vehicle manufacturer?
Those are dueling arguments before a U.S. Bankruptcy court in Delaware now that Foxconn has submitted its response to a lawsuit Lordstown Motors filed against the company June 27, the same day the EV startup filed for reorganization under Chapter 11.
Foxconn is asking the court to dismiss all counts in Lordstown Motors’ lawsuit, which accuses the global electronics company of fraud.
“The complaint alleges that defendants engaged in a sweeping multiyear scheme to defraud plaintiffs and destroy their business,” say court papers filed by Foxconn attorneys Sept. 29. “That is fiction.”
Lordstown Motors’ complaint alleges that Hon Hai Technology Group, known in the U.S. as Foxconn, and its affiliates failed to live up to commercial and financial commitments it says were part of agreements the parties entered into in 2022.
“Foxconn simply used its variety of contractual arrangements with the company as a tool to maliciously and in bad faith destroy Lordstown’s business – while leveraging resources gained through the partnership to advance its own business interests,” Lordstown Motors said at the time of the filing.
Foxconn fired back in its recent response that such claims are false, and Lordstown Motors’ collapse was the result of mismanagement and incompetence, not Foxconn’s doing.
“At its heart, this adversary proceeding is an attempt by plaintiffs to find a scapegoat for their failures,” Foxconn says in court papers. “They want compensation, not from the founders and management who could not get their idea off the ground and misused and squandered millions of dollars in the process, but from the only investor that has made a demonstrated commitment to try to turn them into a sustainable business,” documents say.
Lordstown Motors purchased the former General Motors Assembly plant in Lordstown for $20 million in 2019. The company, then under the leadership of founder and CEO Stephen Burns, sought to manufacture what it said would be the first all-electric pickup truck for the fleet market, the Endurance.
After a management restructuring in 2021 that included the resignations of Burns and the company’s chief financial officer, Lordstown Motors began its search for a strategic partner because it struggled to find sufficient capital, despite going public through a special purpose acquisition company, or SPAC, in October 2020.
“By 2021, they sought a deep-pocketed partner with the hope to shield them from their business failures,” Foxconn’s response reads. “That partner was Foxconn.”
The parties in September 2021 signed an agreement in principle that called for Foxconn to purchase the Lordstown plant for $230 million. The asset purchase agreement, along with a contract manufacturing deal and an agreement to create a joint venture was completed in May 2022.
Foxconn emphasizes in its response that Lordstown Motors, by its own admission, spent tens of millions of dollars to acquire the complex without a “go-forward plan, the necessary capital, or a strategic partner to assist in bringing their product to market.”
According to Foxconn: “In retrospect, these admissions make quite clear that the plaintiffs’ only definitive plan was to convert Foxconn into the guarantor of their business, and when that plan failed, to shake down Foxconn for money,” the filing says. The “shakedown,” court papers say, began with a “quick property flip, which Lordstown now claims to be a Foxconn fraud with a specious conclusion that the sale was ‘too cheap’ and a ‘fraction of its replacement cost.’ This describes fantasy, not reality.”
Also according to Foxconn’s response, the agreements included contractual obligations such as mandatory arbitration to settle disputes, not litigation.
Lordstown Motors and Foxconn’s relationship changed in November 2022 when the parties scrapped the joint venture and replaced it with an equity deal in which Foxconn would invest $170 million in Lordstown’s operations.
After an initial $52 million investment, Foxconn failed to complete a second round of closing worth $47.3 million, which was due May 8.
Throughout March, Lordstown Motors’ stock slumped and fell under the $1 threshold set by the Nasdaq exchange. In April, Nasdaq issued a delisting notice because Lordstown’s stock, trading under the ticker RIDE, failed to close above the $1 mark for 30 consecutive days.
The impasse reached a crescendo that month when Foxconn told Lordstown Motors it was in violation of the investment agreement because of the delisting notice. As such, Foxconn said, it was not obligated to make a subsequent investment of $47.3 million.
In court papers related to the bankruptcy, Lordstown Motors states that it “attempted to engage Foxconn” to reach a consensual resolution and “just prior” to its bankruptcy filing, Foxconn proposed an alternative transaction in which it would acquire “all or substantially all the assets” of the company through a Chapter 11 plan of reorganization “subject to a competitive sale process carried out in accordance with bidding procedures approved by Foxconn.”
The EV startup says Foxconn’s proposal was contained in a letter, filed under seal, that “was highly conditional and did not legally obligate Foxconn to execute the suggested transaction.”
In a surprising twist, Lordstown Motors announced Friday that it had reached an asset purchase agreement with LAS Capital LLC, whose CEO is none other than Burns, the founder of Lordstown Motors who resigned in 2021.
LAS, an acronym for land, air and sea, placed a bid of $10 million for Lordstown Motors’ assets, which includes battery pack and hub motor lines, and any unfinished or completed models of the Endurance EV pickup.
The company, incorporated in Delaware, boasts three portfolio EV businesses whose CEOs have past connections with Lordstown Motors or Workhorse Group, another EV company Burns established before starting the Lordstown venture.
The bankruptcy court must approve the sale of Lordstown Motors’ assets.
Copyright 2023 The Business Journal, Youngstown, Ohio.