In my recent year-end wrap up of D&O issues, I speculated that certain current conditions – supply chain woes, labor supply constraints, and economic inflation – could lead to a rash of D&O claims. I actually had examples in my wrap-up article of D&O claims arising from supply chain issues and labor supply concerns, but I didn’t have any inflation-related D&O claims examples – until now. The securities class action lawsuit filed last week against Vertiv Holdings is directly related to the company’s recent inflation-caused earnings miss and ensuing stock price drop. As discussed below, there could be more inflation-related D&O claims to come. A copy of the March 24, 2022 complaint against Vertiv can be found here.
Vertiv makes electronic products that process, store, and transmit data. In the company’s disclosure documents during 2021, the company made several statements concerning the possible impact of economic inflation on the company’s financial results. For example, in its April 2021 report on Form 10-K, the company stated that, as a result of “ongoing supply issues,” the company might experience “costs and delays,” adding that “we may also be unable to offset expected increases in material and component costs with our own price increases without suffering reduced volumes, revenues or operating income.”
Subsequent disclosures during 2021 noted that “supply chain issues have continued to accelerate.” In providing guidance for future reporting periods, the company noted that “supply chain headwinds” continue, but “demand remains strong,” adding that “we anticipate net pricing and inflation actions will provide a tailwind for full year 2022.”
On February 23, 2022, the company reported its financial results for the fourth quarter of 2021, including quarterly earnings of $0.06 per share, compared to analysts’ estimates of $0.28 per share. The company’s CEO attributed the disappointing results to management “consistently underestimate[ing] inflation and supply chain constraints for both time and degree, which dictated a tepid 2021 pricing response.”
During the company’s earnings call, the company’s CFO said that “We significantly underestimated the magnitude of material and freight inflation in the fourth quarter forecast, mostly in America, by approximately $36 million.” He added that “Half of the inflation miss was related to unforeseen supplier de-commits on critical components and our need to execute spot buys and premium freight to meet customer commitments.”
According to the subsequently filed securities class action lawsuit complaint, the company’s share price declined 37% on the news.
On March 24, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Vantiv, its CEO, and its CFO. The complaint purports to be filed on behalf of investors who purchased the company’s shares between April 28, 2021 and February 23, 2022.
The complaint alleges, among other things, that the defendants failed to disclose to investors: “(1) that the Company could not adequately respond to supply chain issues and inflation by increasing its prices; (2) that, as a result of the increasing costs, Vertiv’s earning would be adversely impacted; and (3) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to recover damages on behalf of the class.
This lawsuit has only just been filed and it remains to be seen how it will fare. I will say that when the time comes for the court to consider the plaintiff’s allegations, the court will have a very hard time finding allegations sufficient to satisfy the plaintiff’s obligation to plead scienter with particularity.
Readers reviewing the plaintiff’s allegations undoubtedly observed that this new lawsuit is not only inflation-related, it is also supply chain-related. Indeed, the inflation issues the company experienced were in fact directly tied to the company’s supply chain problems. As I have noted in previous posts on this site, there have in fact been prior lawsuits filed against companies that have experienced supply chain issues. For example, as discussed here, in February, the ongoing global semiconductor supply shortage led to a securities class action lawsuit against the software company Cerence. (In that post, I cited several additional examples of supply chain-related securities suits.)
But while there have been prior supply chain-related suits, none of complaints in those cases expressly referenced inflation issues as a cause of the defendant company’s pre-suit stock price decline. Precise analysts might want to debate with me whether this case is in fact inflation-related or whether it is supply chain-related. It obviously is both. The company’s supply chain problems led to the inflationary impact on the company’s costs. The two concerns were interrelated. The fact is that, while there have been prior suits based on supply chain issues, this is the first one that expressly referenced inflation.
While this case may be the first based expressly on inflation-related allegations, it will not be the last. I say this not because the U.S. economy is facing the highest rates of inflation in forty years. I say this also because of the huge disruption in the energy and commodities markets resulting from the war in the Ukraine.
I note in that regard that this company’s inflation problems took place in the fourth quarter of 2021. I suspect strongly that when companies get around to announcing their results for the first calendar quarter of 2022, many will announce significant impacts during the quarter on their financial results due to supply cost inflation. This will be particularly true of companies that are sensitive to the costs of oil, gas, and other energy products, and also to companies whose operations depend on supply of materials from Russia and Ukraine, such as, for example, wheat, nickel, palladium, uranium, fertilizers, and precious stones and metals. These constraints are likely to continue and to cause problems for some time to come as well.
Many, if not all, companies are going to be impacted by economic inflation in the coming months. Obviously, not every company whose results are impacted by economic inflation will experience a significant share price decline. However, some companies, particularly those whose operations are significantly impacted by supply chain disruption, may see their share prices drop. Some of these companies, like Vantiv, will get hit with securities lawsuits as well.