Vancouver's GLG Life Tech Corp., a producer and international supplier of sugar substitute stevia, faces a proposed class action lawsuit alleging that its executives misrepresented material facts and failed to make timely disclosures to investors.
Class action lawsuits launched over allegations of corporate misrepresentations are rare, but lawyers say this kind of lawsuit has the potential to become more common because B.C. changed its Securities Act in 2008 to allow this kind of action.
The lesson for executives, they say, is to ensure management can justify all future revenue and profit projections and to immediately disclose events that jeopardize what the industry calls "forward looking statements."
The TSX halted GLG's shares (TSX:GLG) at $0.66 in May because GLG executives missed the deadline to file financial statements. That's a dramatic drop from 2008, when GLG's share price touched $20* and January 2011, when they were trading at $12*. (*Close adjusted for 2009 stock split.)
Investor Cody MacLeod launched the proposed class action, which has not been certified, August 29 in the BC Supreme Court.
The suit alleges that the company made "unsupportable revenue projections" and repeatedly said in investor conference calls that it was confident that it would meet those unrealistic projections.
MacLeod also alleges that GLG:
•was slow to reveal that its largest customer, Cargill Inc., was cutting back on its purchases of the stevia extract, which GLG produces; and
•failed to reveal challenges in a timely way, such as that its extract had an unpleasant aftertaste.
"They eventually admitted that there was an aftertaste problem in November 2011, when they did their update on their forecasting. That's when they finally shocked everyone with what their numbers were going to be," said Branch McMaster LLP associate Paul Miller, who is MacLeod's lawyer.
"None of this is secret stuff in terms of their problems. GLG disclosed the problems eventually, but it was late in the game."
GLG spokesman Stuart Woolridge told Business in Vancouver that GLG would not comment, but the company subsequently issued a press statement.
It stated, "The company has reviewed the reported allegations and believes they are without merit and stands behind its continuous public disclosure record.
GLG believes that there is no basis for any class action to proceed. If, however, these actions proceed, GLG will defend itself vigorously."
None of the allegations has been proven in court. No defence had been filed as of press time. •
Cargill deal key to GLG rise – and fall
GLG Life Tech (TSX:GLG) went public via a reverse takeover in June 2005. It sprang to prominence in mid-2008, and its share price hit $20 (adjusted close) when it announced that it had signed an agreement to supply US$200 million worth of a controversial sweetener to one of the world's largest companies.
GLG's 10-year renewable contract was to supply stevia leaf extract to Minneapolis, Minnesota-based Cargill Inc., a privately held multinational corporation with a massive food and agriculture division that has 158,000 employees in 66 countries.
GLG expected to supply the US$200 million worth of stevia during the first three years of the contract.
Cargill had been increasing its access to stevia leaves since it announced in 2007 that it planned to market a stevia-based sweetener.
Cargill then teamed up with Coca-Cola Co. (NYSE:KO) to promote Truvia, a stevia-based sweetener, as a healthy food additive.
Since 2008, Coca-Cola has launched new zero-calorie products containing Truvia, including products using its Sprite, Odwalla and Vitaminwater brands.
GLG's agreement with Cargill made GLG Cargill's exclusive supplier of stevia extract that originated in China, where approximately 80% of the world's stevia is grown.
But in 2011, that exclusivity agreement ended.
A division of Cargill signed an agreement in November 2011 with Guilin Layn Natural Ingredients Corp. to serve as Cargill's exclusive manufacturer in China for stevia extract products.
Cargill accounted for 90% of GLG's revenue in 2009 and 47% of GLG's revenue in 2010. So the deterioration in the two companies' relationship was significant for GLG.
By the end of 2011, Truvia had overtaken aspartame and saccharin in the U.S. tabletop sweetener market, to take second place behind sucralose.
GLG class action suits also launched in Ontario and U.S.
Many class action lawsuits against B.C. companies, including GLG, are also filed in Ontario because that's where both the Toronto Stock Exchange and the TSX-Venture Exchange are based.
Ontario has had tougher securities laws forbidding issuing false news in press releases and for other corporate misrepresentations for longer than B.C.
Class action lawsuits, such as that of GLG, are also filed in Ontario because its law automatically includes class members and excludes them only if the person wants to opt out.
In B.C., class members must sign on to be part of a class action. That difference means that class action settlements in Ontario can be higher than in B.C.
"Being sued in Ontario is worse for a B.C. company than being sued in this province because the company is going to have to retain counsel in Ontario and pay a lot more money," said David Jones, lawyer and class action lawsuit expert at Camp, Fiorante Matthews Mogerman Law Corp.
"Bay Street rates are usually higher than rates in Vancouver so it can be expensive."
When companies are also listed on the U.S. stock market, class action lawsuits are usually also launched in that country.
An American law firm has launched a class action lawsuit in the U.S. against GLG, which traded on the Nasdaq Stock Market until it was delisted earlier this year, using similar claims as in the Ontario and B.C. proposed class action suits.
