A court sided with shareholders trying to stop Tile Shop Holdings Inc.'s delisting process and the company said Monday it would fight to get it done.
Late Friday, a Delaware judge issued a temporary restraining order to prevent the Plymouth-based retailer from completing a process that two investment firms saw as an attempt by the company's founder, Robert Rucker, to regain control over it.
Tile Shop on Oct. 22 announced it would delist from the Nasdaq Stock Market and make fewer disclosures about its financial performance. That step, known as "going dark" in financial jargon, triggered an exodus of institutional shareholders since many mutual funds and other investors are prevented by rules from owning companies that don't meet certain levels of disclosure.
Tile Shop shares fell 68% that day. In the weeks since, Rucker and directors associated with him bought up shares, raising their combined stake in the firm to nearly 50%.
Two shareholders, K-Bar Holdings LLC and Wynnefield Capital Inc., last week sued in Delaware, where Tile Shop is incorporated, to stop the process and prevent further purchases of shares by Rucker and associates. After granting the temporary injunction, the court is expected to set a date for a hearing to hear arguments on the matter.
"The company believes the complaint is without merit and intends to contest the litigation vigorously," Tile Shop said in a statement.
Wynnefield Capital issued a statement saying it was pleased that the judge issued the temporary restraining order. "This is a strong step forward for The Tile Shop's investors, and we look forward to decisively putting a halt to what we allege is Defendants' fraudulent and value destructive behavior."
K-Bar Holdings couldn't be reached for comment.
The order prevented the company from filing with regulators Form 15, the document seeking suspension of quarterly reports to investors.
But Tile Shop did stop the trading of its stock from Nasdaq and moved it to the so-called "Pink Sheets," an over-the-counter trading platform used by firms with stock values below $5 a share. Tile Shop shares closed down 11% to $1.46 on the Nasdaq Friday. The company's peak over the last 12 months was $7.45 in mid-February.
In its lawsuit, Wynnefield Capital portrayed Rucker as taking a series of steps in recent years to reposition himself as controlling owner of the 142-unit chain of remodeling stores. His ownership stake was diluted when the company went public in 2012 and he was ousted as chief executive in 2014 amid a scandal over sourcing contracts with a firm owned by his brother-in-law.
Tile Shop said that the suit "contains numerous false and misleading statements that create a narrative regarding the company's delisting and proposed deregistration that is not true." The company said its store operations were not affected by the litigation around its corporate structure.