Foley & Lardner LLP partner Todd Murray is quoted in the Bloomberg Law article, “IPO Busts Have Lawyers Watching for Shareholder Stock Drop Suits,” commenting on the likelihood of an increase in shareholder lawsuits following stumbles in several recent initial public offerings.
“We’ve seen a couple recently where companies have gone in, and the expectations have not been there for the investors, so the investors are disappointed,” Murray explained. “Those are maybe just market-driven events, and have nothing to do with misrepresentations at all, but that doesn’t mean that they won’t draw a lawsuit.”
Murray noted that the strict liability doctrine under Section 11 of the Securities Act, which applies to registration statements, plays particularly well into IPO- and SPAC-related class action lawsuits.
“You used to see a lot more Section 11 claims 10 or 15 years ago, but with the current IPO and SPAC market, you might see a trend back in that direction,” he said. “You’ve got to find the right representation to hang your hat on, but a lot of plaintiffs just come in and say, ‘I can trace my shares into the IPO,’ and that gets you over the motion to dismiss phase.”
Murray commented that companies must be extra careful to scrub their financial disclosures for accounting mistakes or issues with internal controls to stave off litigation, as these are a common feature of lawsuits, adding that double-digit percentage decreases are more likely to draw potential plaintiffs’ attention.
Current market conditions should also give companies caution about the potential legal risks that could arise after going public, even if the outlook before the IPO was optimistic, Murray added.