In re Hexo Corp. Sec. Litig.
Decision Date | 08 March 2021 |
Docket Number | 19 Civ. 10965 (NRB) |
Citation | 524 F.Supp.3d 283 |
Parties | IN RE HEXO CORP. SECURITIES LITIGATION |
Court | U.S. District Court — Southern District of New York |
Before the Court is defendants’ joint motion to dismiss plaintiffs’ First Amended Class Action Complaint ("FAC"). ECF No. 96. In the FAC, lead plaintiffs Timothy Sweeney and John Medley ("plaintiffs") bring claims under Sections 11, 12(a)(2), and 15 of the 1933 Securities Act ("Securities Act"), Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 as promulgated under the Exchange Act.
Plaintiffs are a putative class of individuals and entities that purchased or otherwise acquired HEXO securities between January 23, 2019 and March 30, 2020 (the "Class Period") on the New York Stock Exchange ("NYSE") or the NYSE American exchange, including through or traceable to HEXO's initial public offering ("IPO") on January 25, 2019. Plaintiffs’ claims are asserted against each defendant as follows:
Defendant(s) Role1 Securities Exchange Defined Terms Applicable to Act Act Defendants Claim(s) Claim(s) Asserted Asserted HEXO Corp. Corporation Sections Section Securities Act Defendant ("HEXO") 11, 10(b) 12(a)(2), and Rule Exchange Act Defendant2 15 10b-5 Sebastian HEXO's Sections Section Securities Act Individual St. Louis president, CEO, 11, 10(b) Defendant director, and 12(a)(2), and Rule co-founder 15 10b-5; Securities Act Defendant Section 20(a) Exchange Act Individual Defendant Exchange Act Defendant Adam Miron Co-founder and Sections Securities Act Individual HEXO director 11, Defendant until July 18, 12(a)(2) 2019 15 Securities Act Defendant Michael HEXO director Sections Securities Act Individual Munzar and chairman 11, Defendant 12(a)(2) 15 Securities Act Defendant Jason Ewart HEXO director Sections Securities Act Individual 11, Defendant 12(a)(2) 15 Securities Act Defendant Vincent HEXO director Sections Securities Act Individual Chiara 11, Defendant 12(a)(2) 15 Securities Act Defendant Nathalie HEXO director Sections Securities Act Individual Bourque until February 11, Defendant 6, 2020 12(a)(2) 15 Securities Act Defendant Ed Chaplin HEXO's CFO Sections Section Securities Act Individual until April 30, 11, 10(b) Defendant 2019 12(a)(2), and Rule 15 10b-5, Securities Act Defendant Section 20(a) Exchange Act Individual Defendant Exchange Act Defendant Steve Vice President, Section Exchange Act Individual Burwash Strategic 10(b) Defendant Finance; HEXO's and Rule interim CFO, 10b-5; Exchange Act Defendant May 1-28, 2019; Section CFO, Oct. 5, 20(a) 2019 through Class Period Michael HEXO's CFO from Section Exchange Act Individual Monahan May 28 — 10(b) Defendant October 4, 2019 and Rule 10b-5, Exchange Act Defendant Section 20(a) Underwriter Sections Securities Act Defendants Defendants3 11, 12(a)(2)
[Editor's Note: The preceding image contains the references for footnotes1 ,2 ,3 ].
For the reasons set forth below, the Court grants defendants’ motion to dismiss in its entirety.
This lawsuit arises from HEXO's collapse during the year-and-a-half following Canada's legalization of adult-use recreational cannabis on October 17, 2018 ("Legalization"). HEXO, a Quebec-based cannabis supplier, FAC ¶¶ 1, 81, anticipated that the Legalization would create a new market and increase demand for its products, and engaged in a number of actions in order to capitalize on the anticipated growth in demand. First, HEXO entered into supply agreements with major Canadian cannabis dispensaries, including Quebec's government-run dispensary, Société Québécoise du Canabis (the "SQDC"). The "SQDC Agreement," entered into between HEXO and the SQDC, contained a "take-or-pay" provision, which provided that the SQDC would either order or pay for a certain amount of product from HEXO in the first year following Legalization. Second, between December 2018 and January 2019, HEXO circulated a registration statement and a prospectus, and in January 2019, conducted an IPO. Third, HEXO invested in new greenhouse facilities in order to meet the anticipated growth in demand by acquiring Newstrike, another cannabis company.
Unfortunately for HEXO, demand for cannabis — in particular, by the SQDC — fell far short of expectations, and this was reflected in HEXO's performance. Following a series of setbacks suffered by HEXO, plaintiffs brought this suit, asserting Securities Act and Exchange Act claims against HEXO, individual directors and officers of HEXO, and underwriters of the IPO. Central to plaintiffs’ federal securities claims are (a) the SQDC Agreement; (b) HEXO's offering prospectus; and (c) HEXO's acquisition of Newstrike, each of which are described in greater detail below.
Canada legalized adult-use recreational cannabis on October 17, 2018. FAC ¶ 86. In Quebec, the recreational cannabis market is controlled by the government-run cannabis dispensary, the SQDC. On April 11, 2018, in anticipation of the increased demand for its product following Legalization, HEXO entered into a five-year supply agreement with the SQDC, the SQDC Agreement, to become the preferred supplier of the SQDC, which had an option to renew for a sixth year.5 FAC ¶¶ 13, 82.
The SQDC Agreement provided, in relevant part, that the SQDC would purchase from HEXO 20,000 kilograms of cannabis during the first year after Legalization, i.e., October 17, 2018 through October 17, 2019 ("Purchase Obligation"). FAC ¶¶ 13, 84. This provision was subject to a "take-or-pay ("ToP") feature," which allows a supplier to collect payment even if the purchaser does not fulfill its contractual purchase obligation. Declaration of Todd Batson ("Batson Decl."), ECF No. 115, Ex. 4 at 16.6 Based on the Purchase Obligation, using a price of $5.457 per gram – the price for cannabis at the time — plaintiffs estimate that the SQDC Agreement should have generated over $100 million in revenues for HEXO in the first year following Legalization. FAC ¶¶ 13, 86. Per the SQDC Agreement, in the second and third years that cannabis was legal, the SQDC was expected to purchase from HEXO volumes of 35,000 kilograms and 45,000 kilograms respectively (however the second and third years were not governed by a ToP provision). FAC ¶¶ 13, 84. Purchase volumes for the final two years of the contract would be based on the volumes in the first three years. FAC ¶¶ 13, 84.
Two months after Legalization, on December 20, 2018, in anticipation of its IPO, HEXO filed a Registration Statement on Form F-108 with the SEC (the "Registration Statement"), which was signed by the Securities Act Individual Defendants. FAC ¶ 90. The Registration Statement registered $600 million worth of HEXO shares for trading on the Toronto Stock Exchange and NYSE American Exchange. Id.
On January 25, 2019, HEXO filed a prospectus with the SEC (the "Prospectus"), which incorporated the Registration Statement, and which stated that HEXO would conduct an IPO of 7.7 million shares (which ultimately amounted to 8.8 million shares including the underwriters’ over-allotment). FAC ¶¶ 15, 92. The shares were to be listed in the United States on the NYSE American exchange at $5.15 per share. FAC ¶ 15.9 The IPO was underwritten by the Underwriter Defendants. FAC ¶ 184.
The Prospectus described the SQDC Agreement, providing details about the SQDC's...
To continue reading
Request your trial- McFarlane v. Altice USA, Inc.
-
Bond v. Clover Health Invs., Corp.
...most significant factors that make an investment in the registrant or offering speculative or risky.’ " In re HEXO Corp. Sec. Litig. , 524 F. Supp. 3d 283, 302 (S.D.N.Y. 2021) (quoting In re Proshares Trust II Sec. Litig. , No. 19 Civ. 886, 2020 WL 71007, at *9 (S.D.N.Y. Jan. 3, 2020) ). Th......
-
In re Chembio Diagnostics, Inc. Sec. Litig.
...in fraud where, inter alia , the claims were identical to the plaintiff's Section 10(b) claims); In re HEXO Corp. Sec. Litig. , 524 F. Supp. 3d 283, 299 n.17 (S.D.N.Y. 2021) (holding separation of Securities Act and Exchange Act claims did not prevent the court from finding the Securities A......
-
Garnett v. RLX Tech.
... ... Commission ("SEC") declared the registration ... statement effective. Id. ¶ 67 ... is plausible on its face." Bell Atl. Corp ... Twombly, 550 U.S. 544, 570 (2007). A claim will only ... In re Sanofi ... Sec. Litig., 87 F.Supp.3d 510, 527 (S.D.N.Y. 2015) ... (quoting In re Morgan ... pursue Section 12(a)(2) claims. See, e.g., In re HEXO ... Corp. Sec. Litig., 524 F.Supp.3d 283, 304 (S.D.N.Y ... ...