Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—S.D.N.Y.: Proxy statement did not misrepresent effects of reverse stock split, (May 16, 2024)
By R. Jason Howard, J.D.
The complaint failed to plausibly allege a reason why common stockholders would vote against their interests.
The Southern District of New York has dismissed a shareholder complaint alleging Exchange Act violations and state law claims brought against MoneyLion Inc., after the court determined that the plaintiffs failed to plausibly allege a violation of the Exchange Act and declined to exercise supplemental jurisdiction over the state law claims (Canaan X L.P. v. MoneyLion Inc., No. 23-cv-6550 (PKC) (S.D.N.Y. May 15, 2024)).
MoneyLion offers banking and finance-related services. MoneyLion acquired Even Financial in February 2022 and the plaintiffs, who were shareholders of Even Financial, received shares of MoneyLion Series A Preferred Convertible Stock as part of the transaction. Holders of the preferred stock were entitled to rights, privileges, and protections that holders of MoneyLion’s common stock did not enjoy, such as an annual dividend and a liquidation preference. The preferred stock certificate of designation contained an “Automatic Conversion” provision providing that preferred stock would be converted into MoneyLion common stock under certain conditions, including if the share price equaled or exceeded $10.00 on any twenty trading days within any consecutive thirty-day trading period.
In November 2023, the NYSE notified MoneyLion that the average closing price of its common stock was less than $1.00 per share over a consecutive thirty-day trading period and that it had six months to regain the minimum price compliance or risk delisting. To increase the share price, MoneyLion issued a proxy statement seeking shareholder approval to permit a reverse stock split. The proxy statement explained that the reverse stock split would affect all shareholders uniformly “and will not affect any stockholder’s percentage ownership interest in the company.” In May 2023, after the price per share of MoneyLion’s common stock had equaled or exceeded $10.00 for the twentieth trading day within a consecutive thirty-day trading period, the Automatic Conversion provision was triggered, and all shares of the preferred stock were converted into newly issued MoneyLion common stock.
The complaint alleged that the proxy statement was false and misleading because the statements within it indicated that the Series A Preferred Convertible Stock would not be affected by the reverse split, and the proxy statement omitted any statement explaining the potential consequences of the split on the preferred stockholders. The plaintiffs alleged that the proxy statement omitted that the purpose and a potential effect of the split was to trigger the Automatic Conversion provision.
The court explained that the proxy statement was clear that the primary objective was to increase the share price of MoneyLion’s common stock. The Automatic Conversion provision was publicly available, and a reasonable investor already possessed information which could have led to the conclusion that the reverse split would trigger the conversion, the court stated. Even if MoneyLion shareholders had been explicitly informed that the split would negatively affect the holders of preferred stock, the complaint failed to plausibly allege a reason why common stockholders would vote against their interests. The court concluded that the plaintiffs failed to plausibly allege that but for the fraudulent statements or omissions, MoneyLion’s shareholders would not have voted in favor of the split.
The court dismissed the plaintiffs claim under Section 14(a) of the Exchange Act and it also declined to exercise supplemental jurisdiction over the state law claims following dismissal of the Exchange Act claim.
The case is No. 23-cv-6550 (PKC).
Judge: Castel, K.
Attorneys: Alexander Talel (Goodwin Procter LLP) for Canaan X L.P. Adam Greene (Davis Polk & Wardwell LLP) for MoneyLion Inc.
Companies: MoneyLion Inc.
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