Most informed observers know that IPO companies are more susceptible to securities class action litigation than are more seasoned companies. IPO companies usually have short operating histories and so their post-offering performance can be unpredictable and may include unexpected developments. When IPO companies stumble out of the blocks, they can attract a securities suit just a short time after their debut. An example of this occurred earlier this year when Snap, Inc. was hit with a securities suit two months after its IPO. A more recent example of this sequence involved Blue Apron Holdings, which this past week was hit with a securities suit just seven weeks after its IPO. These cases underscore the securities litigation vulnerability of IPO companies, which in turn has important implications.
The Blue Apron IPO and Lawsuit
The shares of Blue Apron Holdings, a meal-kit delivery company, began trading on the New York Stock Exchange on June 29, 2017. Its share price started slipping almost immediately. Its shares took a significant hit in mid-July, when news emerged that Amazon is aiming to get into the meal-kit business, in apparently direct competition with Blue Apron.
On August 10, 2017, Blue Apron published its first post-IPO earnings release. The market’s reacted negatively, as the company announced a wider-than-expected loss owing to unexpected costs tied to a new delivery fulfillment center, as well as higher wage and labor costs. The stock fell 15% on the news. (Bloomberg quipped following the earning release that the company’s stock was worth less than one of the company’s meals.)
On August 17, 2017, less than two months after the company’s IPO, the company, certain of its directors and officers, and its offering underwriters were hit with a securities class action lawsuit filed in the Eastern District of New York. A copy of the plaintiff’s complaint can be found here.
The complaint alleges “less than two months after going public, on August 10, 2017, Blue Apron shocked the stock market by announcing significant undisclosed problems, lowering its guidance for the second half of 2017, and stating that it planned to change its strategic approach for managing its business for the remainder of 2017.”
The complaint alleges, among other things, that the company’s registration statement failed to disclose that, rather than continuing to increase its advertising spending, the company had already decided to reduce its advertising spending, “which would hurt sales and profit margins in future quarters”; was already experiencing problems delivery problems, with orders “not arriving on time or with all the ingredients needed, which was hurting customer retention”; that the company had run into delays in its new facility in New Jersey, which was resulting in delays in new product rollouts, hampering the company’s ability to attract new customers; and that the company was forced to alter its strategic approach for the rest of 2017.
The complaint alleges that the alleged omission of this information from the company’s registration statement violated Sections 11 and 12 of the Securities Act, and seeks to recover damages for the class of persons who purchased shares in or traceable to the company’s June IPO.
The Snap IPO and Lawsuit
This fast-following IPO lawsuit filed against Blue Apron comes shortly after another quick-on-the-turn lawsuit involving one of the year’s hottest IPOs, Snap, Inc. Snap’s shares started trading on March 2, 2017. Its first post-IPO earnings release, on May 10, 2017, also disappointed investors. Its growth in new users of its messaging and photo sharing services was below expectations, and its share price fell. On May 16, 2017, a Snap shareholder filed a securities class action lawsuit against Snap and certain of its directors and officers in the Central District of California. A copy of the plaintiff’s complaint can be found here. (There have been several other lawsuits subsequently filed against Snap in connection with the IPO.) In the lawsuit, the plaintiffs allege that the company’s registration statement disclosures about the company’s user growth were false and misleading.
IPO Activity and IPO-Related Securities Litigation Activity
The number of company’s launching IPOs has declined from higher levels in 2014, when, according to Renaissance Capital, 275 companies completed IPOs in the U.S. In 2015, only 170 companies completed IPOs in the U.S., and even fewer companies completed IPOs in 2016, when there were 105 U.S. IPOs. 2017 is looking a little bit more promising, as there have been 91 IPOs YTD. The comparable year over year comparison to last year represents an increase of over 50% in the number of U.S. IPOs.
While the number of IPOs has been down during the period 2015 to the present compared to 2014, lawsuit filings against IPO companies remain a significant part of securities class action litigation activity. According to Cornerstone Research’s 2016 securities litigation report (here, figure 16), when both federal and state lawsuit filings are taken into account, there were 35 class action lawsuits filed in 2016 alleging violations of Section 11 of the Securities Act, representing about 12.5% of all federal and state court securities class action lawsuit filings during the year. In 2015, there were 36 federal and state securities class action lawsuits involving Section 11 allegations, representing more than 18% of all federal and state securities class action lawsuit filing. While some of these lawsuits may have involved Secondary Offerings rather than IPOs, most of these suits were IPO-related.
Significantly, the 36 state and federal Section 11 securities class action lawsuits filed in 2015 was the highest annual number of these types of lawsuits during the period 2010 through 2016, although, with 34, 2016 was not far behind. The higher number of these Securities Act lawsuits during 2015 and 2016 may be attributable to the higher level of IPO activity in 2014.
As the lawsuits filed against Snap and Blue Apron show, these types of lawsuits can arise even when IPO activity levels are down. In each case, they were hit with securities lawsuits after their first quarterly earnings release following their debut disappointed investors.
The quick filing of the lawsuits against these companies after their initial disappointing earnings release underscores IPO companies’ unique susceptibility to securities class action litigation. This susceptibility is reinforced by the fact that, owing to the IPO companies recent securities offerings, they are potentially liable to investors under the Securities Act (pursuant to which companies are said to be strictly liable for misrepresentations and omissions in the offering documents). The lower liability standard under the Securities Act makes these kinds of cases particularly attractive to plaintiffs’ lawyers, further reinforcing IPO companies’ securities litigation susceptibility.
One significant practical consequence of all of these considerations is that D&O insurance is particularly important for companies contemplating an IPO. The company’s D&O insurance program could prove to be particularly valuable to IPO companies that stumble out of the blocks or that otherwise acquire a securities suit shortly after their debut. When these kinds of lawsuits arise, it will be particularly important that these companies have a D&O insurance program that has been designed with their unique liability exposures in mind, in order to ensure that the insurance program responds appropriately to the claim.
For that reason it is particularly important that as they enter the path toward an initial public offering for companies to enlist the assistance of a knowledgeable and experienced D&O insurance adviser, to guide them through the process and to make sure that they have the best available insurance in place when their companies goes public. It is particularly important that these companies ensure that their insurance adviser is deeply familiar with both the IPO process and with the potential liabilities, as well as with the insurance considerations and alternatives.