Coty escapes class action lawsuit claims misleading investors with $ 12.5 billion P&G beauty deal

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Coty and a handful of her senior executives and directors managed to evade a class action lawsuit proposed against her last year for allegedly violating U.S. federal securities laws in connection with her P&G Specialty Beauty Business and Kylie acquisitions. Cosmetics. In the lawsuit she filed against the NYSE-listed beauty giant in New York federal court in September 2020, Coty shareholder Crystal Garrett-Evans argued that the defendants were engaging in a scheme and a fraudulent company course that worked [to deceive] to buyers of Coty shares by disseminating false and / or misleading statements and / or concealing material adverse facts about Coty’s business, operations and prospects.

Among the things Coty allegedly misrepresented and / or failed to disclose? While no stranger to beauty brand acquisitions, Garrett-Evans said Coty did not have adequate processes and procedures in place to properly assess and assess his 2016 and 2019 acquisitions of P&G Specialty Beauty. Business and Kylie Cosmetics. As a result, Coty overpaid [them]. More than that, Garrett-Evans claimed in the lawsuit which was filed several months after Forbes reported that Jenner and his team had inflated the size and success of her. [Kylie Cosmetics] company for years that the defendants were either aware or gravely reckless in not knowing that Coty did not have adequate processes and procedures in place to properly assess and appraise acquisitions.

In January 2021, after being named lead plaintiff (because she had the biggest claim for damages), Coty shareholder Susan Nock filed an amended complaint, completely diverting attention from the acquisition. of Kylie Cosmetics by Cotys (the amended complaint was devoid of any mention of Jenners brand), and centering its claims exclusively on its October 2016 purchase of P&G Specialty Beauty Business for $ 12.5 billion, or what Reuters called it the era of “the greatest cosmetics merger in recent history”.

(Ms Nock’s lawyer at Rosen Law told TFL earlier this year that by choosing to focus exclusively on the P&G Specialty Beauty Business deal, they didn’t think the allegations about Kylie Jenners [brand] are not true, but simply that the causes of action related to the P&G Beauty deal were the best for their client at that time.)

After the Coty / P&G deal was struck, Nock argued that Coty was struggling to integrate P & G’s consumer beauty brands and that its business suffered over the next three years, resulting in a depreciation of $ 4 billion worth of [Cotys] goodwill and intangible assets. Meanwhile, Nock claimed that Coty and the other defendants made statements about the acquisition and integration of the P&G business into Coty’s earnings calls and SEC files that omitted material facts necessary for it to be these statements are not misleading.

This spring, the defendants sought to have the amended complaint dismissed in its entirety, arguing in a March 2021 dismissal motion that the plaintiffs had not alleged omissions and scienter (v. August 3, Judge Louis Stanton of the United States District Court for the Southern District of New York agreed.

Mainly, the court sided with Coty and co. as part of their alleged failure to disclose that the company did not have adequate infrastructure to integrate and smoothly support the beauty business it acquired from P&G. Beyond that, the plaintiffs argued that Coty failed to alert shareholders that integration issues existed, including supply chain issues, [and] that they were pervasive and ongoing, not short-term, and that they did not make such disclosures in a timely manner, as they were required to disclose that integration issues had arisen before [it began discussing such issues in] November 9, 2016.

With respect to these disclosures, the court found that Nock had not presented its case, as it had not alleged any specific omission that would make the defendants’ statements about the integration of Coty into the activities of Coty false or misleading. P&G. In fact, Justice Stanton said in his ruling earlier this month that Coty constantly educates investors about integration issues and the negative financial effects those issues are having on the entire company, and by Consequently, Nock has not plausibly alleged any omission of integration on the part of the cosmetics giant and its management.

Likewise, Nock has failed to demonstrate that the defendants misled shareholders through its statements about improving its digital marketing and sales and e-commerce capabilities. The plaintiffs claimed that Coty did not disclose that [it] was unable to capitalize on the new brands acquired during the P&G acquisition because its marketing strategy was outdated and underfunded. The problem with the plaintiffs’ claims, according to the court, is that Coty has repeatedly revealed how many [it] spent on marketing and that [its management] thought it was enough because digital marketing had a better ROI.

In light of these consistent disclosures by Coty, including in various earnings calls in 2017 and 2018, the court determined that Nock does not plausibly allege that the defendants withheld information about the marketing program from investors. Coty.

Finally, the court sided with Coty in relation to the plaintiffs claiming that the company’s financial statements for the second and third quarters of fiscal 2019 were materially false because, in each quarter, Coty did not did not take the $ 3 billion depreciation it would finally announce on July 1. , 2019. In addition to noting that an allegation that the defendants delayed goodwill impairment does not, by itself, reach the level of securities fraud, Justice Stanton found that Nock did not allege facts to justify the inference that the defendants delayed the second impairment. with conscious recklessness or fraudulent intent.

Since the plaintiffs did not plausibly allege actionable omissions on behalf of Coty and the other defendants, the court allowed the company’s motion to dismiss, thereby striking down the amended class action and l case in its entirety.

The case is Crystal Garrett-Evans v. Coty, Inc., et al, 1: 20-cv-07277 (SDNY).

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