Foxconn Proposed Buying Lordstown Motors Before It Filed Bankruptcy
LORDSTOWN, Ohio – Before Lordstown Motors Corp. filed Chapter 11 bankruptcy, before the EV startup also filed a companion lawsuit June 27 accusing Foxconn of “fraudulent conduct [that destroyed] the business of an American startup,” the Taiwanese company pushed Lordstown Motors to enter a Chapter 11 sale process that Foxconn could control – potentially eliminating all other bidders.
That previously unknown fact was disclosed by Lordstown Motors in court documents filed this week in opposition to Foxconn’s motion that seeks to dismiss the Chapter 11 case or convert it to Chapter 7 liquidation.
Foxconn asserts that Lordstown Motors filed Chapter 11 in “bad faith and without a valid bankruptcy purpose” to gain “a tactical litigation advantage.”
The dismiss-or-liquidate motion – filed by Hon Hai Technology Group, Foxconn EV Technology Inc. and Foxconn EV System LLC – calls Lordstown Motors “a fundamentally flawed and failed business model that, by the debtor’s own admission, has no prospect of a turnaround or return to operations.”
The motion will be argued Monday before U.S. Judge Mary F. Walrath.
Lordstown Motors and Foxconn fell out over the contract manufacturing and investment agreement the companies signed in May 2022 as part of Foxconn’s $230 million purchase of the Lordstown plant. They reached an impasse in April when Foxconn told Lordstown Motors it was in violation of the investment agreement because of a delisting notice received from Nasdaq. As such, Foxconn said, it was not obligated to make a subsequent investment of $47.3 million.
In court papers, 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.”
The Chapter 11 petition and adversary fraud complaint against Foxconn soon followed.
In opposing Foxconn’s dismiss-or-liquidate motion, Lordstown Motors says Foxconn recognized the benefits of Chapter 11 “when it proposed buying all of the company’s assets through a [court ordered] sale in bankruptcy. Foxconn made the rational and reasonable judgment that the best way to buy a distressed business such as this one is with a free and clear order issued by a bankruptcy court. Other potential buyers should not be deprived of the same opportunity.”
Lordstown Motors asserts it has received 13 indications of interest that could culminate in assets sale. The would-be buyers have not been identified. It’s unknown if Foxconn is among them.
“Four [indications of interest] are for the acquisition of all or substantially all the company’s assets. Four others are for a subset of the debtor’s assets. And five are from liquidators who would like to buy some or all the assets either for an upfront cash fee or for a fee and a shared participation in the proceeds from their sale,” states a declaration by Jeffrey Finger, managing partner at the Jefferies LLC restructuring firm.
Joining Lordstown Motors in opposition to Foxconn’s dismiss-or-liquidate motion is the Official Committee of Unsecured Creditors, which represents 30 creditors owed a combined $19.4 million. One of these creditors is Foxconn EV System LLC – the operator of the 6.2 million-square-foot plant that LMC sold to Foxconn. It is owed $161,001.95, according to court papers.
In making its position known to Walrath, the committee noted its duty to ensure unsecured creditors are “quickly paid in full,” which would be best served by an expedited bankruptcy sale.
“… While Foxconn evidently believes that [the Lordstown bankruptcy cases] are all about Foxconn, reality is much more complex,” the committee states. It cites the Karma litigation, in which the California startup was seeking $900 million in damages from Lordstown on claims its trade secrets were stolen. That case was settled Aug. 15, with Lordstown agreeing to pay Karma, pending court approval, $40 million.
“Numerous shareholder lawsuits” remain that could expose Lordstown “to tens or hundreds of millions of dollars in additional liabilities,” the committee says. Benefits of keeping the company in Chapter 11 include “respite from multiple shareholder lawsuits … and the subordination of equity interests.”
Bids for the company’s assets are due Sept. 8, and objections by Sept. 14. The stalking horse deadline, which would set the low bar for bids, is today.
Should Walrath rule against Foxconn on Aug. 28 – enabling the Chapter 11 case to proceed – the fraud lawsuit that Lordstown filed June 28 against Foxconn will remain inactive. Foxconn has yet to respond to the EV startup’s allegations. And on that point, Foxconn and Lordstown Motors actually agree.
Foxconn’s response deadline was initially July 31. The parties subsequently agreed to a Sept. 1 deadline. Further discussions ensued, and on Tuesday the deadline was reset for Sept. 29 – just three business days before the Oct. 5 final sale hearing date set by the judge.
What does that portend? As of now, there’s no telling.
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