When Wall Street welcomed Uber and Lyft into the public markets before this season, it was heralded as a defining moment for an whole generation of technology unicorns that, until recently, had mostly eschewed the rite of passage that’s an initial public offering.
However, in the aftermath of their IPOs, both ride-sharing giants have found that life as a public company is not all it’s cracked up to be. Publicly-traded status, naturally, means accountability to investors over all–a tricky proposition given that both companies, within their pursuit for expansion , continue to post heavy losses that raise questions about when they’ll figure out how to attain adulthood.
Lyft, that exploited the marketplace first in late March, has experienced one challenge also confronted by technology behemoths such as Facebook, Twitter and Snap in recent decades. Following going public at $72 per share along with also a valuation exceeding $24 billion, Lyft saw its stock nosedive in a matter of days–and by mid-May, the business was given a proposed class action litigation by investors who claimed their were misled by Lyft’s S-1 prospectus filed ahead of the IPO.
The lawsuit–one of no fewer than three separate class action complaints filed against the business –alleges that Lyft made several inaccurate or deceptive statements in its prospectus. Those include supposedly misrepresenting its share of the North American ride-hailing marketplace (it promised a 39% market share, despite Uber putting claim to 65% share in its S-1) and neglecting to account for a recall of 1,000 electric bikes in its bike-sharing app in New York City. (A spokesperson for Lyft declined to comment for this story.)
Whether the allegations are proven valid, and found to have led to Lyft’s underwhelming stock operation, remains to be seen. However, exactly what ’s apparent is that post-IPO, class action lawsuits are rising –and tech-focused companies like Lyft, whose growth-oriented private versions have frequently failed to translate to success on the public marketplace, have seen themselves especially prone to litigation in the hands of disappointed investors.
“You& & rsquo;t got a lot of hype about these IPOs–a lot of enthusiasm and a lot of revenue growth, but probably not a lot of profits,” according to Jeff Lubitz, executive director of securities class action services in Institutional Shareholder Services (ISS). “When an stock doesn’t even possess the momentum that individuals anticipate, the litigation follows. ”
Lubitz cites ISS information that reveals a rise in IPO-related securities litigation in the last several decades, both in terms of the amount of these lawsuits and their share of securities-related course activities at large. While IPO class activities represented only 4 percent of securities class action lawsuits between 2008 and 2018, that figure has steadily improved during the last decade, climbing to 7.5% (44 of 584 cases filed) at 2018. The trend continued throughout the first half 2019, when 25 of those 280 securities course lawsuits filed in the U.S., or 8.9% of cases, related to IPOs.
Shareholder lawsuits against publicly-traded firms are nothing new; indeed, most fall under guidelines created by the Securities Act of 1933 and the Securities Exchange Act of 1934, two landmark pieces of legislation that have loomed large over the financial markets at the U.S. since the Great Depression. The dot-com bubble in the turn of the century was also met by a tide of such litigation–most especially, a gigantic consolidated class action against more than 300 companies that was eventually settled for $586 million in 2009.
However, the degree to which investors along with plaintiffs’ securities attorneys have used the laws’ provisions forbidding companies from making false or deceptive statements–whether made knowingly or notto prospective shareholders has risen in the past few decades. It’s a dynamic that has especially affected companies from volatile, capital-intensive industries like technology and life sciences, in which valuations that are overheated have often given way to share price performance.
“More companies that are not profitable or hardly profitable are going public, which ’s going to bring about more volatility in the stock, especially after it starts trading,” according to Jason Halper, seat of law firm Cadwalader’s international litigation group, that defends companies in class action securities lawsuits. “When you’ve got a stock price fall as well as the performance is bad, that’s plaintiff-friendly situation. ”
More problems, lawsuits
Meanwhile, the Supreme Court’s Cyan v. Beaver County Employees Retirement Fund decision last season has also shown a blessing to IPO-related lawsuits. The judgment decided that class actions brought under the Securities Act of 1933 can also be filed by state courts as well as national courts–allowing lawsuits to be filed in more plaintiff-friendly country jurisdictions.
With a litigious environment over IPOs than ever before, it’s become increasingly difficult for companies looking to go people to secure the supervisors and officials (D&O) insurance that they require. Insurance deductibles and premiums have been on the rise, with lots of D&O insurance providers being more selective in the deals they underwrite and a few stepping away in the IPO market.
“I’t never noticed a D&O marketplace as we view it now, specifically at the prices and rate environment for these IPO deals,” says Laura Coppola, mind Allianz’s financial lines branch from North America.
Coppola says deductibles and premiums have climbed more than 200% since Allianz entered the North American D&O insurance marketplace in 2015, with the increase “pushed by greater defense costs and quite a creative plaintiffs’ bar” that’s bringing more class action lawsuits than ever.
“I think a lot of [D&O insurers] have said they’re not going to underwrite IPOs right now,” according to Christine Williams, CEO of Aon’s financial solutions team, that brokers D&O insurance trades on behalf of insurance and corporate clients. “Certainly, there are some carriers that don’t even need to set up a lot of funds. ”
It’s not hard to find defense attorneys, insurers and underwriters prepared to accuse the plaintiffs’ pub of “trolling” for class actions against newly-minted general public employers, that under the Securities Act of 1933 are liable to confront such lawsuits for as much as three years following their IPO. However, since Glenn Phillips, a partner at plaintiffs’ litigation firm Milberg Phillips Grossman, place t even the one & ldquo; both the plaintiffs & rsquo; pub isn &; rsquo; it earning the representations that are materially false. ”
“At most good companies like ours, there’s an enormous quantity of due diligence before we file lawsuit,” Phillips says. “It’s not fair to file a lawsuit against a company because you believe they did some thing wrong; you have to understand they did some thing wrong. ”
Phillips’ colleague Robert Wallner, also a partner in the law firm, noted that plaintiffs’ companies are frequently “carrying a risk” in pursuing IPO-related class action litigation–given that such cases can often stretch years and require companies to devote millions of their dollars before a settlement is reached.
“A firm must spend millions of dollars at out-of-pocket and time outlays, and we don’t get paid until [the case] is finished,” Wallner notes. “If a case is dismissed because the judge says the allegations do not meet specific requirements, the law business is possibly out millions of dollars. This pressure builds in forces companies and enormous discipline like us to be selective and careful. ”
As many sources cited, IPO-related course activities never go to trial. In the event the lawsuit is not dismissed outright by the court, then it typically ends up in mediation–that, while enabling compromise, is an expensive, years-long procedure. What’s , the settlements eventually reached in the close of the mediation procedure can underwhelm, for its chunk of damages used to pay attorneys ’ fees.
Facebook, for example settled its IPO class action, which was filed in 2012, at November 2018. The business agreed to pay shareholders $35 million–a triumph for its shareholders a fall in the bucket for a company with a market capitalization.
Uber’s IPO
Which brings us to Uber. While the business has yet to be hit by a class action like its fellow ride-sharing giant, a minumum of one law firm, the California-based Gibbs Law Group, is currently “investigating allegations that shareholders might have overpaid when they bought stock at Uber’s IPO cost,” according to the firm’s website. (Representatives for the two Uber along with Gibbs Law Group did not return requests for comment.)
In its allure to Uber investors, the law firm cites the firm ’s precipitous fall in share price in the aftermath of its public introduction in May–while the inventory proceeds to hover around its own $45 IPO cost for most of the summer, recent revelations of a $5.24 billion second-quarter reduction and slowing revenue growth sent shares spiraling this month. Uber’s stock closed at $33.43 per share on Friday, that could fall the business well under the brink of a 10% decline in cost that most legal sources say represents a harbinger to an impending fraud litigation.
Nevertheless a stock alone is not enough. “You need to be able to point to something at the Uber prospectus and state ‘We now know something was wrong, and the stock dropped [because ],& & rsquo;& & rdquo; says Sean Coffey, a partner at Kramer Levin and seat of the law firm’s complex litigation group. “You have to possess some omissions or misstatements–and even then, when the stock falls, the business can say, ‘Hey, we informed you about this at our [prospectus’] danger variables, this isn’t even a false statement. ’”
To that end, companies are beefing up their threat factor disclosures within their pre-IPO postings like never before in an effort to protect themselves from lawsuits. Uber, for the part, revealed 47 pages worth of potential dangers from the “Risk Factors” section of its S-1, along with sources with knowledge about the company’s pre-IPO underwriting procedure say the company’s authorized counsel made sure to include “each possible entity ” that could conceivably expose the organization to legal action.
Uber’s long risk factors disclosure was clearly informed by the company’s ago as far as corporate governance practices are involved, but its legal advisers were also well aware of the current surroundings fueling shareholder class activities. Using its rivals in Lyft already dealing with one this lawsuit in the aftermath of a similarly unsatisfactory debut on the public markets–along with plaintiffs’ law companies already hovering in search of disgruntled shareholders eager to carry them to task–only time will tell if Uber, too, will find itself caught in years’ values of legal red tape.
“For a high profile business, some stock price decline in the IPO about poses a higher risk of some type of customer lawsuit, since so many individuals are watching their functionality and reading the media policy,” says Peter Doyle, a partner at law firm Proskauer Rose’s litigation department.
As Doyle set it, “It only requires one shareholder, or a single plaintiff lawyer, to bring the claim. ”
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