Middle District Of Tennessee Certifies Class In Suit Over Healthcare Company’s $1.3 Billion Acquisition Of Diet Company, Finding Price Impact Was Not Disproven
On June 7, 2022, Judge Waverly D. Crenshaw, Jr. of the United States District Court for the Middle District of Tennessee granted a motion for class certification in a putative class action against a healthcare company (the “Company”) and its executives, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Robert Strougo v. Tivity Health Inc. et al., No. 3:20-cv-00165 (M.D. Tenn. June 7, 2022). Plaintiff alleged that the Company misled investors during and after the $1.3 billion acquisition of a well-known diet and nutrition company that closed in the second quarter of 2019 by announcing that the new division created by the merger (the “Nutrition Segment”) was “on track” even though it performed poorly from the time of the acquisition and had significant revenue problems. The Court granted class certification.
Plaintiff alleged that the Company “painted a deceitfully rosy picture” of the impact of its acquisition by stating that its Nutrition Segment “was ‘on track’ and ‘performing well’ despite its poor performance from the onset.” This was misleading according to plaintiff because, although the Company reported that the Nutrition Segment’s adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) were $13.3 million, this amount allegedly failed to take into account an undisclosed $8.3 million loss in the Nutrition Segment before the acquisition, during the first quarter of 2019. On February 19, 2020, plaintiff alleged that the Company disclosed the $8.3 million adjusted EBITDA loss and announced a charge that reduced the value of the goodwill associated with the acquisition. According to plaintiff, these disclosures caused the Company’s stock to drop by $10 per share (45.49%) on February 20, 2020. After the Court denied the Company’s motion to dismiss in 2021, plaintiff moved for class certification.
The Company argued that plaintiff was not entitled to a presumption of reliance under Basic Inc. v. Levinson because plaintiff could not demonstrate that the allegedly misleading statements had any impact on the price of the Company’s securities. The Company first argued that price impact could not be shown because the Company previously made statements referencing, for example, a “weak 2019 diet season,” “mixed results” and that the “response in January started softer than anticipated” without any price impact. The Court rejected these arguments, however, holding that the Company had reassured investors with its other statements and ignored that plaintiff’s “central allegation” was that the Company did not disclose the pre-acquisition $8.9 million loss for almost a year.
To respond to this, the Company proffered the testimony of an expert who concluded that the difference between the mid-points of guidance issued by the Company before the acquisition and revised, lower guidance issued afterward, which was $9 million, meant investors would have known of the pre-acquisition loss of $8.9 million long before the alleged corrective disclosure. Rejecting this testimony as dispositive, the Court held that (i) it was unclear “[w]hy reasonable investors would necessarily take it upon themselves to make the calculation,” particularly when the calculation was buried in “the last page of the Supplemental Material” attached to the Form 8-K, and (ii) the disclosure itself did not explain to investors which columns should be used to perform the calculation that the Company’s expert performed. The Court further held that the Company’s expert focused solely on plaintiff’s claim regarding the undisclosed EBITDA loss and did not address plaintiff’s claims concerning “price impact with respect to the alleged statements and omissions concerning [the Company’s] goodwill and tradename.” The Court held that “[t]he fundamental problem with [the Company’s] argument is that [the Company] fails to accept that it is required to show a complete lack of price impact.” The Court also rejected the Company’s argument that the class should be shortened if it was limited to these other misrepresentations because the Company could present those arguments to rebut loss causation. Rejecting other challenges to class certification and plaintiff’s claims based on “scheme liability” under Section 10(b), the Court granted the motion for class certification.