Holland & Knight LLP
MONTH-IN-BRIEF (Mar 2024)
Del. Court of Chancery Dismisses $600 Million Shareholder Stock Offer Suit as Special Litigation Committee Met Its Burden of Independence and Reasonable Investigation
By Nastassia Merlino, NYU School of Law
Controlling shareholders of Carvana Co., Ernest Garcia II and Ernest Garcia III, participated in a direct offering by Carvana Co. made in late March 2020 after which Ernest Garcia II sold over $1 billion of his shares. The plaintiff shareholders asserted that the Garcias breached their fiduciary duties by acquiring shares at a depressed price through the direct offering, which allowed them to enrich themselves. As a response, Carvana Co. created a two-person special litigation committee that conducted a seven-month-long investigation and concluded that no wrongdoing occurred. As such, the committee moved to dismiss the lawsuit, and the motion was granted by the Delaware Court of Chancery on March 27, 2024.
Carvana is an online retailer for used cars that also offers financing services and connects customers to insurance providers. Ernest Garcia III co-founded Carvana in 2012 and is its acting CEO, president, and board chairman. Following the COVID-19 pandemic, Carvana had to cut costs and lay off employees, which led to weakening operational performance, causing its stock price to drop 40 percent in one week and leading the company to seek further capital-raising opportunities. On March 26, 2020, Carvana’s CFO proposed twenty-four potential investors to the board of directors for a direct offering. T. Rowe Price Group, the anchor investor, and Tiger Global Management offered $45 per share relative to the $56.55 trading price at close on March 26. The Garcias agreed to contribute $50 million as part of the capital-raising effort despite the direct offering being oversubscribed. Carvana then issued Class A Common Stock as part of its public offering at more than $92 per share on May 18, leading the stock price up to $239.54 by year-end. Ernest Garcia II then sold 5,567,979 shares of the Class A Common Stock between October and December 2020, for $1,239,333,468.02.