Debra Borchardt
Tilray (Nasdaq: TLRY) is pushing back against a judge in a shareholder lawsuit that claims the company’s officers defrauded them by overstating the advantages of a partnership with Authentic Brands that dates back to 2019.
The group originally filed the lawsuit in 2020. In September 2021, the judge dismissed the investor’s case, but they regrouped and came back again.
This time the judge only partially dismissed the case. Tilray is arguing that the second attempt wasn’t much different from the first and that the judge should fully dismiss the case again. In particular, the company claims that the confidential witness for the case is merely expressing opinions with no proof to back up the claims and that the accusations are the same as what was dismissed in the first go-round.
Original claims
The case against Tilray claims, “(1) that certain stock sales Mr. (Brendan) Kennedy made under 10b5-1 plans and in connection with tax obligations during the class period were unusual in timing and amount suggesting motive; and (2) that Mr. Kennedy made false statements in order to effectuate the downstream merger with Privateer as a first step in a long-term scheme to position himself to become CEO of an even larger cannabis company if Tilray later merged with another company.”
Tilray pushed back saying “that the stock sales were not in fact suspicious in timing or amount and the ‘long-con’ theory found no support in factual allegations or common sense, therefore the new motive allegations could not meaningfully move the needle in the holistic scienter analysis.”
Stock sales
Tilray argued that the judge didn’t dismiss the claims about the stock sales because he was only looking at the amount of money involved versus the overall picture of the amount of shares Kennedy owned.
Tilray also said that 12 of the 14 stock sales at issue were made under 10b-5 plans, the other two were made in connection with tax withholding obligations, and the timing of the Jan. 24 sale was not suspicious given several other events that happened around the same time, including:
- Expiration of the lockup on his shares
- The vesting of restricted stock units that created a tax obligation
The memorandum filed from Tilray noted, “Moreover, the roughly 640,000 shares Mr. Kennedy is alleged to have sold during the class period represent only 15.7% of his overall direct holdings at the beginning of the class period, and only 3.7% of his overall direct holdings at the end of the class period.”
It went on to say, “It makes no sense that Mr. Kennedy would accumulate and then hold so many shares until after the class period, knowing the stock was artificially inflated and doomed to collapse.” Tilray said that just because the stock sales were in the millions of dollars, it wasn’t fraudulent.
To get an idea of how far the Tilray stock has fallen, common shares closed at $17.54 at the beginning of 2020. By the end of 2020, shares were selling at roughly $8.
News of the Aphria merger caused the shares to skyrocket to a high of $67 in February of 2021. However, it wasn’t to be a long-lived bull run. Share prices came crashing back to earth and closed the year near $7. Lately, the stock was selling at $3.48, while Kennedy remains on the company’s board and is listed as owning more than 6.8 million shares.
Aphria merger
In addition, the investors believed that Kennedy was motivated to lie about the Authentic Brands deal because “he was also pursuing a merger that would make him the head of the largest cannabis company in the world.”
Tilray pushed back saying, “No facts anywhere suggest this was true, and the fact that the Aphria merger was not even conceived as a possibility until October 2019 strongly suggests it was not motivating Mr. Kennedy to lie in the previous 9 months.”
The merger with Aphria ”was not even contemplated until late in the class period, but any such deal was always going to require due diligence – if the goal was to become CEO of a post-merger entity, why would Mr. Kennedy have lied about things he knew due diligence would uncover, potentially tanking the deal before he could achieve this supposed objective?”
The Tilray and Aphria merger was completed in May 2021. The combined company had a market cap of approximately $8.2 billion based on the closing stock prices on April 30, 2021.
In closing
In the Tilray annual report, dated Oct. 7, 2022, the company wrote, “The defendants believe the claims under the SAC (second amended complaint) are also without merit and intend to defend vigorously against them, but there can be no assurances as to the outcome.”
