Here at The D&O Diary, we watch securities class action litigation filings closely in order to try to identify trends as they emerge. Recently, we have been watching in particular for coronavirus-related securities litigation filings, and reporting on new filings on this blog. However, it appears that despite all of our vigilance, a coronavirus-related securities class action lawsuit filed last month escaped our notice. This previously overlooked lawsuit is described below. As noted in the discussion section, this case may actually represent a significant example of at least one type of coronavirus-related securities suit that we may see more of in the months ahead.
iAnthus Capital Holdings is a Canadian holding company with interests in different cannabis cultivators, processors and dispensaries. Its shares are listed on the Canadian Stock Exchange and also trade over-the-counter in the U.S.
In May 2018, iAnthus entered into a debenture agreement with Gothan Green Partners (GGP), a private equity firm. The debenture agreement provided iAnthus with $40 million in secured debenture financing and a concurrent $10 million equity financing agreement. In September 2019, GGP entered a $20 million private placement offering of securities notes pursuant to amended debenture agreement between iAnthus and GGP. Both the 2018 and 2019 transactions provided for withholding and escrow of one year’s interest from the transaction proceeds to be available in the event of iAnthus’s default.
In an April 6, 2020 press release (here), iAnthus announced that it did not make applicable interest payments due to GGP under the amended debenture agreement on March 31, 2020. The press release ascribed the company’s inability to make the payments to the “decline in the overall public equity cannabis markets, couple with the extraordinary market conditions that began in Q1 2020 due to the novel coronavirus known as COVID-19 pandemic” that caused liquidity constraints for iAnthus. The press release stated that it had “attempted in good faith to negotiate with the holders of the Secured Debentures for temporary relief from interest payments, but the parties were not able to reach a satisfactory agreement” and as a result “iAnthus and its subsidiaries did not fund the March 31, 2020 interest payment totaling $4.4 million to the holders of the Secured Debentures and Unsecured Debentures.”
According to the subsequently filed securities class action complaint, the price of the company’s stock fell from $0.469 per share on the last trading day before the April 6 press release, but closed on April 6 at $0.179 per share.
On April 15, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against iAnthus, GGP, and certain of the directors and officers of iAnthus. The complaint, a copy of which can be found here, purports to be filed on behalf of purchasers of the common stock of iAnthus between May 14, 2018 and April 6, 2020. The complaint asserts that the defendants violated the liability provisions of the Securities Exchange Act of 1934 and seeks to recover damages on behalf of the plaintiff class.
In his complaint, the plaintiff notes that in its April 6 press release announcing the default, neither iAnthus nor GPP disclosed why the funds that had been escrowed from the debenture transactions were not used to satisfy the interest obligation due on March 31. The money, the complaint notes, was to have been set aside precisely to secure interest obligations and should have been sufficient to make the payments due on March 31. The complaint notes further that the defendants “never disclosed that the escrowed funds had ever been diminished, exhausted or were otherwise unavailable to satisfy the interest payment obligation to GGP.”
The complaint alleges further that investors reasonably relied on “Defendants’ false and misleading statements concerning the intended use of the escrowed funds to protect against default.” If the funds had been exhausted or were otherwise unavailable to make the March interest payments “Defendants intentionally , or recklessly, failed to disclose such information rendering the earlier statements concerning the availability of the escrowed funds materially false and misleading.”
The facts involved in this lawsuit represent an interesting set of circumstances that includes certain features that are likely to recur in other lawsuits likely to be filed based on the economic fallout from the coronavirus outbreak.
According to the April 6 press release, iAnthus defaulted on its obligations under the debentures by failing to make required interest payments because of the “extraordinary market conditions” due to the COVID-19 pandemic.
For many companies, the coronavirus outbreak represents a financial and operational stress test. The severity of the test will challenge the financial and operational weaknesses of many companies. In the months ahead, due to the economic disruption from the coronavirus outbreak, many companies will be unable to make interest payments or otherwise service their debt obligation; unable to satisfy rent obligations or meet other accounts payable obligations; or be unable to pay vendors or suppliers for stock, material, or services.
As these defaults occur, plaintiffs’ lawyers representing disappointed investors, armed with the benefit of hindsight, will allege failure to disclose weaknesses in companies’ financial statements or condition, as well as weaknesses in the company’s products, services or supply chain, that were only revealed because of the pandemic. In particular, I believe we will see a number of lawsuits based on companies’ inability to pay interest or service debt obligations due to the financial disruption arising from the pandemic.
In any event, with the recognition of this previously filed lawsuit as coronavirus-related, the tally of pandemic-related securities class actions now stand as six, including those previously filed against Norwegian Cruise Lines (here), Inovio (here), Zoom (here), Phoenix Tree Holdings Ltd. (here), and SCWorx (here).
In addition, this lawsuit is also the second coronavirus-related securities suit filed against a non-U.S. company with securities trading in the U.S. (The first non-U.S. company to be sued was Phoenix Tree Holdings, Ltd., which is based in China.)
I feel a little shame-faced that I previously failed to identify this lawsuit as coronavirus-related. In my defense you really do have to read pretty deeply into the complaint to find the coronavirus-related allegations. In any event, I am grateful to the loyal reader who pointed out this complaint to me.