That sure didn’t take long.
GT Solar International completed its $500 million IPO on July 23, 2008. Then on August 1, 2008, a mere seven trading days later, the plaintiffs’ lawyers initiated a purported securities class action lawsuit in the United States District Court for the District of New Hampshire against the company and certain of its directors and officers, as well as the offering underwriters.
According to the press release, the proceeds of the IPO went to GT Solar Holdings, which in turn “intended to use the net proceeds … to make a distribution to its shareholders.” The press release also states that:
on July 25, 2008, before the market opened, LDK Solar Co., LTD (“LDK”), GT Solar’s largest customer, issued a press release announcing that it had signed a contract to purchase production equipment from one of GT Solar’s competitors. On this news, GT Solar’s stock price declined to as low as $9.30 per share before closing at $12.59 per share on July 25, 2008, losing 13% of its value in its second day of trading.
According to the complaint, the Registration Statement failed to disclose the true extent of the risks surrounding the Company’s relationship with LDK, including the fact that the Company was at imminent risk of losing out on a contract for future orders from LDK due to delays in shipping production equipment to LDK.
For whatever it may be worth, GT Solar’s amended filing on Form S-1 (here) did disclose the company’s dependence on a very few customers and consequent vulnerability (although there is no specific mention of any particular or imminent issues with LDK Solar); the risk factors in the company’s filing states:
We currently depend on a small number of customers in any given fiscal year for a substantial part of our sales and revenue.
In each fiscal year, we depend on a small number of customers for a substantial part of our sales and revenue. For example, in the fiscal year ended March 31, 2006 (on a combined basis), three customers accounted for 64% of our revenue; in the fiscal year ended March 31, 2007, three customers accounted for 70% of our revenue; and in the fiscal year ended March 31, 2008, one customer accounted for 62% of our revenue. In addition, as of March 31, 2008, we had a $1.3 billion order backlog, of which $769 million was attributable to three customers. As a result, the default in payment by any of our major customers, the loss of existing orders or lack of new orders in a specific financial period, or a change in the product acceptance schedule by such customers in a specific financial period, could significantly reduce our revenues and have a material adverse effect on our financial condition, results of operations, business and/or prospects. We anticipate that our dependence on a limited number of customers in any given fiscal year will continue for the foreseeable future. There is a risk that existing customers will elect not to do business with us in the future or will experience financial difficulties. Furthermore, many of our customers are at an early stage and many are dependent on the equity capital markets to finance their purchase of our products. As a result, these customers could experience financial difficulties and become unable to fulfill their contracts with us. There is also a risk that our customers will attempt to impose new or additional requirements on us that reduce the profitability of those customers for us. If we do not develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business and/or prospects may be materially adversely affected.
The lawsuit on the seventh trading day after GT Solar’s debut may represent some dubious kind of a record. Even Vonage Holding Company made it ten trading days before it was hit with a securities lawsuit (refer here for a more detailed discussion of the Vonage lawsuit). Indeed, Refco, which arguably represents the extreme example of an IPO flame out, was not hit with its first securities suit (about which refer here) until two full months after the company’s ill-fated IPO.
Historically, IPO companies have been more susceptible to securities lawsuits than the population of public companies as a whole. By my count, there have already been eleven securities lawsuits in 2008 alleging misrepresentations or omissions in connection with the defendant company’s IPO, even though 2008 has been an historically low year for IPO activity (although most of these eleven lawsuits relate to companies that completed their IPOs in 2007). Indeed, as I noted in my year-end analysis of the 2007 securities lawsuits (here), 29 of the 172 new securities lawsuits in 2007 were filed against IPO companies.
Because of IPO companies’ heightened susceptibility to securities lawsuits, a public company’s age (in terms of time since the company’s IPO) is one of the most important factors D&O underwriters consider in underwriting and pricing public company risks. The sudden turbulence GT Global has encountered certainly highlights the reason for that emphasis.
For a more detailed discussion of the considerations that D&O underwriters take into account in underwriting public company risk, refer here.