On March 28, 2019, amidst much fanfare, the rideshare company Lyft went public at $72 a share, raising more than $2.2 billion.  In the first trading day following the offering, the company’s share price rose 8.7 percent. However, despite the initial euphoria, Lyft’s share price then began to slump. Lyft shares closed at $58.36 on Thursday afternoon (April 18), representing a decline of nearly 20% from the company’s IPO share price. Apparently, at least one investor who purchased shares is fighting mad about the decline. On April 16, 2019 – just 13 trading days after the IPO– the shareholder filed a securities class action lawsuit against the company in California state court. A copy of the plaintiff’s complaint can be found here. An April 17, 2019 Bloomberg article about the lawsuit can be found here.

The Lawsuit

The complaint was filed in California (San Francisco) Superior Court by Lyft shareholder Bryan Hinson, who claims to have purchased Lyft shares traceable to the offering. The complaint names as defendants the company itself; certain of its directors and officers who signed the company’s Registration Statement; and the offering underwriters. The complaint, which purports to be filed on behalf of all investors who purchased shares in or traceable to the offering, alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.

The complaint alleges that “in what appeared to be a race against” competitor ride share company Uber to be “first to list its shares on a public exchange,” the company went public in late March. The complaint alleges that among the “key selling points to IPO investors” was the company’s “focus on its market share and position.” The complaint also alleges that in the months leading up to the offering, the company acquired a bikeshare company, Motivate, to offer new transportation options to Lyft customers.

The complaint alleges that the Registration statements contained misleading statements about both the company’s market share and the company’s bikeshare initiative. The complaint alleges that the Registration Statement’s representations  was “materially inaccurate, misleading and/or incomplete because they failed to disclose, inter alia, that (1) more than 1,000 bicycles in Lyft’s rideshare program suffered from safety issues that would lead to their recall; and (2) Lyft’s ridesharing market position was overstated.”

Interestingly, the complaint’s allegations that the company overstated its market share in the Registration Statement appears to be based in part on the statements that rival Uber made in its draft S-1 filed with the SEC on April 11, 2019. The complaint alleges that “Uber’s S-1 claimed a market share of greater than 65% in the United States and Canada, a claim that further undermined Lyft’s purported claim of 39% market share.”

Discussion

There is some irony in the complaint’s attempt to suggest that because Lyft was in a race with Uber to be the first to go public, the company may have been a little overly hasty. Whatever else one might say about this complaint, there is no doubt that it was filed hastily.

The plaintiff is going to have an uphill battle establishing that the bikeshare and market share concerns were the cause of the decline in Lyft’s share price.  For example, in an April 15, 2019 article about the post-IPO decline in Lyft’s share price, the Wall Street Journal attributed the decline to “a surprise 12% fall its second day of trading, a handful of downbeat analyst reports and rumors of high short-selling interest in the company.” (The Journal article does, however, mention the problems with the bikeshare program.)

The plaintiff may also have challenges validating that the company did in fact misrepresent its market share. The allegations of market share misrepresentations rely exclusively on two allegations: a statement that after the offering, Lyft’s share price began to decline “as investors raised concerns that Lyft’s reported market share may have been overstated,” and the statement noted above that the market share Uber claimed in its offering documents conflicted with the market share Lyft has claimed in its offering documents. Perhaps in a later amended complaint the plaintiff will add more substance to these allegations, but that allegations of market share misrepresentations as they currently stand are not exactly overwhelming.

There is of course nothing unusual about an IPO company getting hit with a securities class action lawsuit. According to Cornerstone Research’s latest securities litigation report (page 25), since the global financial crisis, around 12% of IPO companies are hit with securities suits in the first year after the offering, and within six years of the offering nearly 25% of IPO companies get sued.  (The percentage of IPO companies getting sued has gone up materially since the late 90s.)  What is unusual about this lawsuit is the fact that it was filed just 13 trading days after the IPO.

One reason IPO companies are susceptible to securities lawsuits is that IPO companies sometimes stumble out of the blocks. However, the stumble drawing the lawsuit usually takes the form of a disappointing first earnings release. Nothing like that happened here. What did happen is that the company’s post-IPO share price declined in the trading days following the offering. The suggestion that share price declined because investors discovered the true facts about Lyft’s bikeshare initiative or its market share seems, well, speculative at best.

It is interesting to note that the plaintiffs’ lawyers chose to file the plaintiff’s complaint in state court rather than in federal court. Readers will of course recall that in March 2018, the U.S. Supreme Court held in the Cyan case that state courts retain concurrent jurisdiction over liability actions under the ’33 Act. The Cornerstone Research report noted that there were 30 securities class actions filed in state courts in 2018 (of which 17 also had parallel federal court class action suits as well). While this plaintiff has launched his action in state court, other claimants may yet file in federal court; other plaintiffs’ firms have published “trolling” press releases seeking to find a Lyft shareholder on whose behalf these other firms could file their own Lyft IPO lawsuit. As a number of plaintiffs’ firms have published press releases, it seems likely there will be other lawsuits, raising the possibility of the kind of multiforum litigation about which observers have been worried since the Cyan decision.

The quick arrival of a securities class action lawsuit does put the current wave of Unicorn company IPOs in an interesting context. Pinterest and Zoom completed their IPOs earlier this week and Uber‘s IPO is coming up. These high-profile offerings clearly garner a lot of attention. As the sequence of events involving Lyft shows, the high-profile nature of these offering can also attract the unwanted attention of the plaintiffs’ lawyers as well.

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