In my recent round-up of the Top D&O stories of 2023, I noted that one of the key drivers contributing to the number of securities class action lawsuit filings last year was the presence of macroeconomic factors affecting company operations and financial results. Among these factors was supply chain disruption. While the pandemic-related disruptions that snarled supply chains in 2021 and 2022 appeared to have eased during 2023, the impact from the earlier supply chain disruptions continues to weigh on some businesses.
In the latest example of how the prior supply chain disruption continues to affect businesses and how that can translate into securities litigation, on January 16, 2024, a plaintiff shareholder filed a securities lawsuit against advanced driver assistance system company Mobileye Global, after the company announced that it anticipated lower than expected sales of its key product because its leading customers had built up product in 2023 in order to avoid supply disruptions of the type that resulted from supply chain constraints in 2021 and 2022. This latest lawsuit shows how the consequences from pandemic related supply chain disruptions are continuing to weigh on businesses and result in securities litigation. A copy of the January 16, 2024 complaint can be found here.
Mobileye, which is a Delaware corporation with its principal place of business in Israel, develops and sells advanced driver assistance systems and autonomous driving software and hardware products. Most of the company’s revenue comes from sales of its EyeQ System-on-Chip (SoC) product. Mobileye sells EyeQ SoCs to Tier 1 automotive suppliers who in turn sell to Original Equipment Manufacturers (OEMs). Ford, BMW, and General Motors are OEMs.
During the calendar year 2023, Mobileye reported strong sales of its EyeQ SoCs to its Tier 1 Customers. However, on January 4, 2024, Mobileye issued a press release disclosing that it had “become aware” of a build-up of excess inventory including an estimated 6-7 million units of EyeQ SoCs held by customers. The company stated that this inventory build-up was the result of “supply chain constraints in 2021 and 2022 and a desire to avoid part shortages” and “lower-than-expected production at certain OEMs during 2023.” The company said that the lower expected sales volume of EyeQSoCs would have an impact on its first quarter revenue, which it expected to decline by approximately 50% compared to the year prior quarter, and on its profitability. According to the subsequently filed securities lawsuit complaint, the company’s share price declined nearly 25% on this news.
On January 16, 2024, a plaintiff shareholder filed a securities class action lawsuit against Mobileye and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities during the period January 26, 2023 to January 3, 2024.
The complaint alleges that during the class period the defendants failed to disclose to investors: “(1) that, to avoid the shortages experienced amid supply chain constraints in 2021 and 2022, the Company’s Tier 1 customers had purchased inventory on excess of demand during fiscal 2023; (2) that, as a result, the Company’s customers had excess inventory on hand, including approximately 6-7 million units of EyeQ SoCs; (3) that, due to the build-up of inventory, there was a significant risk that the Tier 1 customers would buy less product, thus adversely impacting the Company’s fiscal 2024 financial results; and (4) 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 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
The pandemic itself now appears to be safely in the rear view mirror (although I am sure I am not the only one who knows a number of people who just in the last few weeks have tested positive for COVID). The pandemic had an enormous impact on the economy in general and on the conduct of business, in particular. As the high-water mark of the pandemic has retreated further into the past, it has certainly seemed as if many of the most disruptive economic and business impacts have eased as well. However, as this case shows, the pandemic’s disruptive effects were sufficiently significant that the consequences continue to reverberate in the marketplace.
In particular, it appears that this company’s customers, in reaction to the pandemic’s supply chain disruption, took precautionary measures in 2023 to protect themselves against future disruptions. This cautious approach resulted in excess inventory build-up for the customers, in turn causing a projected revenue downturn for this company. This sequence of events shows how, though the pandemic itself is now well in the past and retreating further each day, its disruptive effects continue to affect corporate business operations and financial results. The sequence of events suggests that, even though the many of the pandemic’s immediate effects have eased, the further reverberations from the disruptions are continuing to have an impact.
The bottom line seems to be that many of the macroeconomic factors that weighed on businesses in 2023 and that resulted in securities lawsuit filings during the year could continue to have an impact as we head into 2024, and could contribute to the number of securities lawsuit filings this year.
I will say one thing about this lawsuit. When the time comes for the court to assess the adequacy of the allegations in the plaintiff’s complaint, the court will have to look long and hard to find anything in this complaint to satisfy the plaintiff’s obligation to plead scienter.