The pension funds suing Grubhub Inc. for making false statements about its business that artificially buoyed its stock price before a 43% crash have moved for class certification. Wednesday’s motion argues that the action is well-suited for class treatment because Seventh Circuit courts routinely certify securities law cases that take aim at large, public companies and their executives for making false statements that impact their stock price.
The action was filed in 2019 and centers on events beginning the prior year, when the online food ordering and delivery business entered new markets. Grubhub’s move to rapidly expand into more than 200 new markets was reportedly prompted by a loss of market share to competitors in its existing ones.
During its expansion, Grubhub failed to build sufficient “restaurant density.” Instead, it attracted new diners with promotions and from engaging inexpensive enterprise restaurants. These diners “ordered less frequently and were not nearly as profitable or loyal as Grubhub’s historical diners,” the motion remarks, explaining that “diner quality” was a central focus of investors and discussed regularly on earnings calls.
In 2019, the decrease in diner quality reportedly drove Grubhub to refinance its debt and add non-partnered restaurants, meaning it could add any area restaurant menu to its platforms without a formal agreement. Its move to add non-partnered restaurants marked a departure from its earlier model in addition to being a tactic that Grubhub previously derided. According to the complaint, Grubhub’s new strategy did not work out.
During the April to October 2019 class period, the company and several of its executives allegedly hid their change in tack and the negative outflows therefrom, touting Grubhub’s expansion into new markets as a success. The complaint points to instances where the defendants claimed that Grubhub’s new diners were high quality and even that diner quality was improving.
Also during those months the defendants explained away poor performance metrics, citing other reasons for company stumbles such as the timing of public holidays. Allegedly, the concealment of the real workings at Grubhub drove its share price up to an inflated high of $79 per share.
In October 2019, after two quarters of declining growth, the defendants admitted that it was the result of negative trends in new diner ordering frequency. On this news, the share price tumbled from $58 per share to $33 per share. As proof of the defendants’ misconduct, the complaint points to analyst’s comment regarding the defendants’ lack of candor that stated “‘management will face a steep climb in an effort to regain Street credibility.’”
The lead plaintiffs, who lost money due to the defendants’ alleged missteps now argue that the Illinois federal court should certify the class. They assert that they have met the prerequisites for class certification, including numerosity, commonality, typicality, and adequacy.