A securities class action suit was recently filed against Eaton Corporation and certain senior executives, alleging the issue of false and misleading statements about the company.
Specifically, the class action lawsuit alleges that Eaton and some of its executives misled investors about the firm’s ability to divest its auto parts manufacturing business, from which it had shifted away in recent years. Founded more than a century ago, it long focused on manufacturing car parts, but in 2008 chose to focus instead on electrical components, and merged with Ireland-based Cooper Industries in 2012. After that point, the executives in the suit told investors they believed the company could divest the auto parts portion of the business tax-free.
What happened next?
It was not until July 2014 when Eaton CEO Alexander Cutler told investors that this wouldn’t be able to happen until late next 2017 due to legal restrictions resulting from the merger. He further noted that Eaton knew about this issue all along.
As such, the class period for this suit is from Nov. 13, 2013, to July 28, 2014, and involves anyone who bought or otherwise obtained shares in Eaton during that period.
Eaton’s stock price closed the 2012 calendar year at around $53 per share, and continued to rise for much of 2013. As of the start of the class period, the average stock price was at about $72, according to Google Finance. The upward trend continued into the following year, with the price peaking at $78.57 a few days before Cutler’s announcement. By Aug. 1, a few days after that announcement, it had dropped to $67.18, a decline of nearly 14 percent. The company’s stock continued to slide until mid-October or so, bottoming out at less than $59. Through the end of July, the company’s stock stood at $63.41, having recovered only somewhat.
A closer look at the issues
The company stood to benefit from moving its headquarters to Ireland because it paid a significantly lower tax rate after doing so, according to a report from the Wall Street Journal at the time. But it would have been hit with a sizable tax liability if it had attempted to spin off that auto parts business prior to the expiration of a five-year period beginning from the date of the relocation (hence the “late 2017” point at which it could actually sell).
After the company merged with Cooper (a deal worth $11.8 billion), electrical manufacturing accounted for almost 60 percent of its sales through the end of the second quarter in 2014, the report said. Sales of those products rose to $1.8 billion at the time, an increase of 4 percent. That, of course, was prior to Cutler’s revelation.
“Any spin-off would result in a very significant tax liability,” Cutler told investors during the 2014 conference call, according to the newspaper. “This five-year prohibition means that there is not really a compelling economic rationale for further business portfolio transformation. … Each of our businesses remain really key contributors to our results.”