Wayfair Let Insiders Buy at Price Depressed by Virus, Suit Says

Wayfair Inc. was sued for records in Delaware by an investor claiming it diluted the ownership of public shareholders by letting private equity insiders buy $535 million worth of stock just before its market value—temporarily depressed by coronavirus fears—nearly tripled.

“Wayfair negotiated the purchase agreement when its stock price was still recovering from a sudden, severe drop caused by market uncertainty regarding the potential impact of the Covid-19 pandemic,” the Chancery Court complaint says. “The sudden and dramatic decline in Wayfair’s stock price was immediately followed by an equally sudden and dramatic recovery.”

The lawsuit, filed Tuesday, targets Wayfair’s sale in April of senior notes to three private equity firms with large stakes and previously undisclosed ties to the online furniture retailer’s founders. The notes were convertible to common stock at $72.50 a share.

Great Hill Partners bought $250 million worth of notes, Charlesbank Capital Partners purchased another $250 million, and Spruce House was issued $35 million worth. The deal also gave Great Hill and Charlesbank the right to appoint a board member each.

Wayfair’s founders and co-chairmen, Nirah Shah and Steven Conine, are limited partners in both Great Hill and Charlesbank, according to the complaint. But those links allegedly weren’t made public until the transaction was in the process of closing.

The company announced the deal in early April, the suit says, just as it was starting to recover from a low of $23.52 per share during the “unprecedented” panic that tore through Wall Street in March, as the market processed the pandemic’s severity.

But the $72.50 price was allegedly well off its annual trading average of $110.61 and its average over the previous 90 days—even including the March crash—of $74.34 a share.

By the time the deal closed April 8, Wayfair stock had already recovered to above the convertible price, according to the complaint. That’s allegedly the same day the links between Wayfair’s leadership and the private equity firms were first disclosed.

Wayfair’s stock has since shot up to more than $190 a share on strong news the company’s management must have seen coming, given that it related to long-term performance, the suit says.

Cause of Action: Section 220 of the Delaware General Corporation Law.

Relief: An order requiring the company to turn over relevant records; costs and fees.

Response: Wayfair had no comment Wednesday.

Attorneys: The plaintiff is represented by Prickett, Jones & Elliott PA and Kessler Topaz Meltzer & Check LLP.

For additional legal resources, visit Bloomberg Law In Focus: Coronavirus (Bloomberg Law Subscription).

The case is Equity-League Pension Trust Fund v. Wayfair, Del. Ch., No. 2020-0501, complaint filed 6/23/20.