In prior posts, I have noted the phenomenon of securities class action lawsuit filings following in the wake of antitrust enforcement actions (most recently here). A new securities lawsuit filed just before year-end presents an interesting new variation on this sequence. The new lawsuit, filed against both Capri Holdings Limited and Tapestry, Inc., two high-fashion firms, and certain of their executives, relates back to an enforcement action the FTC filed against the firms to block their plans to merge. As discussed below, the lawsuit involves several interesting features. A copy of the plaintiff’s December 23, 2024, complaint can be found here.
Background
Capri, a high fashion firm, owns several fashion brands, including Michael Kors. Tapestry, also a fashion firm, owns its own brands including Coach and Kate Spade. In July 2023, following months-long negotiations between the two firm’s senior management, Capri’s board approved Tapestry’s proposed acquisition of the company at an acquisition price of $57 per share. In August 2023, the two companies jointly announced their entry into a Merger Agreement. On October 25, 2023, Capri announced that its shareholders have voted to approve the merger.
Though the merger would combine three competitors (Michael Kors, Coach, and Kate Spade), the two companies, according to the subsequently filed securities lawsuit complaint, “repeatedly stated in public filings and press releases that, because their brands purportedly ‘face pressures from both lower- and higher-priced products,’ the acquisition would not stifle competition, and that they expected to obtain antitrust approval.”
Despite the assurances about regulatory approvals, on April 22, 2024, the FTC brought an action to enjoin the merger. The FTC alleged that the merger, if allowed, would “eliminate direct head-to-head competition” between the three fashion name plates. The FTC specifically alleged that the three name plates all compete within the “accessible luxury handbag market,” and that Tapestry’s acquisition of the Michael Kors nameplate would give it a “dominant share of that market,” thereby creating an anticompetitive effect.
In an October 24, 2024, after a seven-day hearing, the court in the antitrust action granted the FTC’s motion for a preliminary injunction and blocked the Capri acquisition. Among other things, the court said that the companies’ representations about the merger’s competitive effects were “not … credible,” citing internal documents that, according to the subsequent securities lawsuit complaint, demonstrated “that defendants had private views and economic understandings during the Class Period that were at odds with their public statements.”
According to the securities suit complaint, the court in the antitrust action cited “hundreds of pages of internal documents revealing that defendants secretly understood that their three brands (i.e., Kate Spade, Coach, and Michael Kors) were close competitors within a well-defined ‘accessible luxury handbag market,’ and that the Capri acquisition would hurt competition” – and indeed that cornering that market was a “key internal rationale for the deal.” The securities complaint alleges that the “true nature” of the regulatory risk associated with the proposed transaction “was known only to defendants as they continually misled investors regarding those adverse facts and the actual likelihood that the Capri Acquisition would be consummated.” According to the securities complaint, following the court’s ruling, the per share price of Capri’s common stock fell almost 50%.
The Lawsuit
On December 23, 2024, a plaintiff shareholder filed a securities class in the United States District Court for the District of Delaware against Capri and certain of its directors and offices, and against Tapestry and certain of its directors and officers. The complaint purports to be filed on behalf of a class of investors who purchased securities of Capri between August 10, 2023 (the date the proposed transaction was announced) and October 24, 2024 (the date of the court’s order in the FTC lawsuit).
The complaint alleges that during the class period, the defendants “misrepresented and failed to disclose adverse facts about Capri’s business, operations, market dynamics, and the prospects for approval of the Capri Acquisition, which were known to defendants to or recklessly disregarded by them,” including:
(a) that the accessible luxury handbag market is a distinct and well-defined market within the overall handbag market and understood as such by the Individual Defendants, as well as by other Capri and Tapestry executives;
(b) that Capri and Tapestry maintained analogous production facilities and supply chains for the accessible luxury handbags that were distinct from production facilities and supply chains used to manufacture luxury or mass market handbags, confirming that the accessible luxury handbag market is distinct from the mass market and luxury handbag markets;
(c) that Capri and Tapestry internally considered Coach and Michael Kors to be each other’s closest and most direct competitors;
(d) that, conversely, Capri and Tapestry did not internally consider their handbag brands to be in direct competition with luxury handbags or mass market handbags;
(e) that a primary internal rationale for the Capri Acquisition was to consolidate prevalent brands within the accessible luxury handbag market so as to reduce competition, increase prices, improve profit margins, and reduce consumer choice with that market; and
(f) that, as a result of (a)-(e) above, the risk of adverse regulatory actions and/or the Capri Acquisition being blocked was materially higher than represented by defendants.
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
Discussion
Follow-on securities litigation in the wake of an antitrust enforcement action is an established phenomenon. In numerous prior posts, I have discussed specific situations in which companies caught up in antitrust enforcement actions can become the target of follow-on securities litigation.
For example, as discussed here, numerous companies in the poultry production industry were hit with follow-on securities lawsuits, after a number of companies in the industry were targeted with private antitrust litigation alleging that companies in the industry had engaged in price-fixing.
Similarly, as discussed here, a number of generic drug companies were hit with securities suits after news that the federal antitrust authorities were pursuing criminal antitrust charges against certain companies in the industry on price-fixing charges.
In addition, plaintiffs’ lawyers initiated a number of securities suits against auto parts companies (refer, for example, here) following news that the DOJ and the EU were investigating companies in the auto parts industry for possible collusion and price-fixing.
More recently, in November 2024, and as discussed here, plaintiffs’ lawyers filed a securities class action lawsuit against the card processing company Visa after the DOJ launched an antitrust enforcement action against the company alleging that the company had attempted to monopolize the debit payment market.
And now Capri and Tapestry have both been sued in a securities class action lawsuit following on the FTC’s action intended to try to block their proposed merger.
But while this latest lawsuit follows in the same category of securities suits filed following antitrust enforcement actions, this new suit presents a variant on the pattern. In the prior cases, the companies involved were alleged in the enforcement actions to have violated the antitrust laws through their operations and/or market conduct. Capri and Tapestry, by contrast are not alleged to have violated the antitrust laws through their operations; rather, the alleged antitrust violation was the attempt to merge in a way that the FTC alleged would undermine competition. The context of the proposed merger represents a difference from the prior securities suits that have followed in the wake of antitrust enforcement actions.
There is another interesting feature of this case and that is that even though the suit is only filed on behalf of a proposed class of Capri shareholders, the defendants named in the complaint include not just Capri and its executives, but also include Tapestry and certain of its executives.
This interesting variation potentially raises an interesting D&O insurance coverage question. The issue is whether the claim against Tapestry and its executives represents a “Securities Claim” within the meaning of Tapestry’s D&O insurance policy. The answer to this potential question of course depends of the wording of Tapestry’s policy. However, it is worth noting that in many public company D&O insurance policies, the definition of Securities Claim is tied to actions involving the securities of the Company – that is, of the named insured company. The claims against Tapestry and its executives arguably do not involve or relate to the securities of Tapestry; the claims relate to the securities of Capri. Whether or not the claims against Tapestry and executives qualify as a “Securities Claim” matters, because there would typically be coverage under the policy for Tapestry as a corporate entity only to the extent the claims against it are “Securities Claims” within the meaning of the policy.
As I said, this issue will depend on the specific wording of Tapestry’s policy, and depending on the wording, it many not come up at all. I note the issue here more as a general matter, to illustrate how this issue potentially might come up in this kind of context involving two corporate defendants.
This issue about the potential coverage for the corporate entity points to another issue that these kind of antitrust enforcement actions raise. And that is, as the preceding paragraph suggests, there is coverage under the typical public company D&O insurance policy only for securities claims. The relevance of this observation here is that most antitrust enforcement actions target only the corporate entity — but antitrust enforcement actions against the corporate entity would not trigger the D&O insurance policies’ entity coverage. A follow-on securities claim against a publicly traded company typically would trigger the company’s D&O insurance policy’s entity coverage. In other words, the follow-on suit transforms a matter that would not trigger the policy into something that does trigger the policy. The follow-on suits accordingly are a phenomenon that should be of concern to D&O insurers.