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SmileDirectClub Stockholder Class Action Lawsuit Overview:
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Who: SmileDirectClub stockholders want the company and its directors to face a class action lawsuit over securities fraud
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Why: The lawsuit was struck down in May, but the stockholders say they should be able to sue for claims that insiders profited from a securities deal that immediately followed the company’s IPO.
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Where: The lawsuit is pending in Delaware.
Stockholders in SmileDirectClub have urged a Delaware Supreme Court panel to reverse an earlier decision, saying they should be able to sue for claims insiders profited from a securities deal that immediately followed the company’s IPO.
The class action lawsuit was struck down in May by Vice Chancellor Morgan T. Zurn who sided with the company’s directors, saying the stockholders knew about the pending deal before they bought shares in the company.
However, the stockholders argue that SmileDirectClub’s directors had a fiduciary duty not to follow through with a deal that cost the shareholders money, Law360 reports.
The deal, which saw SmileDirectClub acquire around $700 million in units of an LLC subsidiary that owned SmileDirectClub’s underlying business, was completed on the back of SmileDirectClub’s $1.3 billion IPO. Around $630 million went to insiders and SmileDirectClub’s share prices nosedived.
Counsel for SmileDirectClub Edward B. Micheletti said the terms of the deal and the potential for stockholder dilution were published in the publicly filed prospectus, before the IPO, Law360 reports.
“The IPO price was clearly set before the prospectus was issued,” Micheletti told Law360. “The IPO price was clearly being used for the insider purchases. When the IPO launched, the day after the prospectus was issued, and the stockholders bought their shares, they bought after the terms were set.”
He added that the stockholder plaintiffs had bought their stock “knowing everything that was going to happen, and everything they’re complaining about today. It’s quintessential claim buying.”
Stockholders Say Their Claims Should Be Allowed to Continue
Vice Chancellor Morgan T. Zurn sided with the company and dismissed the class action lawsuit saying the plaintiffs were not stockholders at the time of the transaction, which he ruled was when the transaction commitment was made.
However the stockholders, represented by Jeffrey S. Abraham, say their claims of unjust enrichment, breaches of fiduciary duty and aiding and abetting should be allowed to continue as an intent to commit a transaction cannot “constitute the transaction itself.”
“That has never been held by Delaware. An intent to proceed with the transaction does not and can’t constitute the transaction itself and has never been held by present or past Delaware courts,” Abraham argued.
Abraham told the judges that the transaction in question occurred when the deal went through, after the stockholders had a stake in the company, adding “I don’t see how a transaction could take place before the time of the transaction, or before I have a contract legally binding me to complete the transaction.”
SmileDirectClub is currently facing a separate class action lawsuit filed by a consumer who alleges that the company kept sending annoying marketing texts to people around the country, even after being told to stop. Lead plaintiff Jennifer Holt is alleging the company violated the Telephone Consumer Protection Act (TCPA).
Do you think the shareholders have a claim against SmileDirectClub? Let us know in the comments section below!
The stockholders are represented by Blake A. Bennett of Cooch and Taylor PA; Lee Squitieri of Squitieri & Fearon LLP; Donald J. Enright, Elizabeth K. Tripodi and Jordan Cafritz of Levi & Korsinsky LLP; Stephen E. Jenkins and Richard D. Heins of Ashby & Geddes PA; P. Bradford deLeeuw of deLeeuw Law LLC; and Jeffrey S. Abraham and Michael J. Klein of Abraham Fruchter & Twersky LLP.
The SmileDirectClub Stockholder Class Action Lawsuit is In re: SmileDirectClub Inc. Derivative Litigation, Case No. 205,2021, before the Supreme Court of the State of Delaware.
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