Court Ruling Reinforces Disclosure Standards for Technology Claims in SPAC Mergers: Lessons from Stem Litigation

The SPAC Litigation Landscape

Special purpose acquisition company transactions have drawn increased regulatory and judicial attention as investors and enforcement authorities scrutinize merger-related disclosures. A recent decision from California’s Northern District illustrates how courts apply exacting standards when evaluating technology performance claims and risk warnings in de-SPAC litigation. The December 2025 ruling in the Stem (STEM) securities case (Case No. 3:23-cv-02329-MMC, before Judge Maxine M. Chesney) offers valuable guidance for practitioners navigating disclosure obligations in complex technology mergers.

The court’s order granting full dismissal with prejudice underscores judicial reluctance to permit multiple amendment attempts when plaintiffs cannot establish core fraud elements under federal securities law.

Transaction Background and Core Allegations

Stem, Inc. operates in the energy storage sector, providing software that manages battery systems for commercial applications. The company completed its public listing through a SPAC combination, with transaction documents describing its Athena platform’s capabilities for large-scale energy projects.

Shareholders filed consolidated litigation alleging that merger disclosures contained material misrepresentations. According to the complaint, defendants overstated Athena’s automation level and understated operational challenges in front-of-the-meter deployments. Plaintiffs invoked multiple Exchange Act provisions—Sections 10(b) and 14(a) for affirmative misrepresentation, Section 20(a) for control-person liability, and Section 20A for insider trading based on alleged informational advantages.

The litigation proceeded through two dismissal rounds. After an initial August 2024 dismissal identifying pleading deficiencies, plaintiffs amended their complaint to incorporate additional witness accounts and post-transaction statements from Stem’s former chief executive.

What the Court Actually Examined

Central to the court’s analysis was whether challenged statements could bear the meaning plaintiffs ascribed to them. Defendants’ descriptions of Athena as “automated” referenced specific operational functions rather than claiming complete autonomy across all system operations. The court emphasized that reasonable investors read statements in full context, including accompanying qualifications and disclosures.

When merger documents identified particular automated capabilities—such as bid optimization or dispatch scheduling—while simultaneously disclosing ongoing development efforts and market uncertainties, the court found no actionable contradiction. The opinion reflects a principle familiar in securities litigation: general optimism about technology or market position, when accompanied by appropriate risk warnings, typically does not constitute fraud.

Similarly, statements about market traction and commercial progress were evaluated against the company’s disclosed challenges. Because defendants had warned investors about execution risks, competitive pressures, and technology evolution requirements, the court concluded that subsequent difficulties did not retroactively render earlier statements false.

Why Confidential Witnesses Failed the Pleading Test

Plaintiffs’ amended complaint leaned heavily on confidential witness testimony to establish that internal realities contradicted public representations. However, the court found these accounts insufficient under Private Securities Litigation Reform Act (PSLRA) standards and Rule 9(b)’s particularity requirement.

Several deficiencies undermined the confidential witness allegations:

• Lack of Personal Knowledge: Some witnesses described general corporate challenges without demonstrating direct involvement in disclosure preparation or firsthand observation of the specific facts they reported.
• Temporal Misalignment: Witness accounts often described conditions or observations from periods unconnected to the timing of challenged statements, making it impossible to infer that defendants knew their representations were false when made.
• Insufficient Reliability Indicia: The complaint failed to establish witnesses’ roles, responsibilities, or access to relevant information with enough specificity to permit the court to assess credibility.

This aspect of the ruling reinforces that conclusory allegations—even when labeled as coming from inside sources—cannot substitute for detailed factual pleading that demonstrates both the basis for a witness’s knowledge and the logical connection to alleged misconduct.

The Broader Framework: Proxy and Control-Person Claims

Beyond core fraud allegations under Section 10(b), the court addressed plaintiffs’ proxy statement claims under Section 14(a). Although Section 14(a) contains a negligence standard rather than requiring scienter, the court found that plaintiffs’ allegations were fundamentally fraud-based. When proxy claims sound in fraud, they must satisfy Rule 9(b)’s heightened particularity requirements—which these claims could not meet for the same reasons the Section 10(b) allegations failed.

Plaintiffs also asserted derivative theories of liability. Section 20(a) imposes control-person liability on those who exercise authority over a primary violator, while Section 20A creates a private right of action for contemporaneous traders against insiders who trade while in possession of material nonpublic information. Both provisions require an underlying primary securities law violation. Because the court found no actionable misstatement or omission, these derivative claims necessarily collapsed.

This structural dependency highlights a strategic reality in securities litigation: derivative theories provide no independent path to recovery when threshold pleading requirements for the primary violation remain unmet.

Procedural Posture: The Significance of With-Prejudice Dismissal

The court’s decision to dismiss with prejudice and deny further leave to amend carries important implications. Federal courts typically permit at least one opportunity to cure pleading deficiencies, particularly in complex securities cases where plaintiffs may need discovery to access key facts.

Here, plaintiffs had already received one chance to remedy identified defects. The amended complaint’s failure to address those deficiencies—despite adding confidential witness detail and post-period statements—demonstrated that further amendment would be futile. The court concluded that plaintiffs could not allege additional facts that would render any challenged statement actionable.

With-prejudice dismissal bars re-filing and supports immediate judgment entry, effectively terminating the litigation. This finality distinguishes the ruling from dismissals that permit amendment, which leave open the possibility of renewed litigation based on refined allegations.

Strategic Implications for SPAC Participants

This decision offers several practical lessons for companies, underwriters, and counsel involved in SPAC transactions:

• Precision in Technology Claims: When describing software or system capabilities, specificity provides protection. Rather than claiming comprehensive automation, identify which functions are automated and which require human intervention or ongoing development. Granular descriptions make it harder for plaintiffs to argue that statements were misleadingly broad.
• Integrated Risk Disclosure: Forward-looking statements gain protection when accompanied by meaningful cautionary language addressing the specific risks that could prevent projected outcomes. Generic risk factors offer less defense than tailored warnings that acknowledge known challenges.
• Document Creation Awareness: Statements in merger proxies, investor presentations, and earnings calls all create potential litigation exposure. Ensuring consistency across disclosure channels and maintaining clear bases for factual assertions helps defend against fraud allegations.
• Witness Management: For defendants, creating clear documentation chains and limiting speculative internal communications can prevent later confidential witness allegations from gaining traction. For plaintiffs, recognizing courts’ skepticism toward secondhand or temporally disconnected witness accounts should inform litigation strategy.

Conclusion

The Stem decision reaffirms that federal securities fraud claims face substantial pleading hurdles, particularly in transactions where defendants provided context-rich disclosures alongside promotional language. Courts continue to read statements holistically rather than isolating optimistic phrases, and they require plaintiffs to plead falsity, scienter, and causation with specificity even when challenging technology companies’ forward-looking representations.

For SPAC market participants, the ruling underscores the value of disciplined disclosure practices that balance legitimate business optimism with frank acknowledgment of risks and limitations. As SPAC litigation continues to evolve, careful attention to these standards will remain essential for both transaction planning and dispute resolution.