Investing.com -- Microsoft Corp faces a proposed class action lawsuit from shareholders who claim the company failed to disclose slowing growth in its Azure cloud business and billions of dollars in required AI infrastructure spending.

The City of St. Clair Shores Police and Fire Retirement System in Michigan filed the lawsuit Friday in Seattle federal court. The legal action follows a 10% drop in Microsoft shares on January 29, which occurred after the company released its quarterly earnings report a day earlier. The decline erased about $357 billion in market value and marked Microsoft's largest single-day stock drop in nearly six years.

Microsoft stated Monday that it considers the claims "without merit." The Redmond, Washington-based company said it "stands by the integrity of its public statements and will vigorously defend itself in court."

For its fiscal second quarter ending in December, Microsoft reported 39% revenue growth in Azure and other cloud businesses, matching analyst expectations but declining from 40% in the previous quarter. The company projected growth of 37% to 38% for the first three months of 2026.

Capital spending reached $37.5 billion in the second quarter, up nearly 66% from the prior year and exceeding the $34.3 billion analysts had forecast.

The lawsuit states that Microsoft attributed the slower Azure growth and increased spending to capacity constraints as the company shifted resources to AI-related research and development and its Copilot chatbot. Copilot competes with Google's Gemini and OpenAI's ChatGPT. Microsoft maintains a major investment stake in OpenAI.

The defendants include Chief Executive Satya Nadella and Chief Financial Officer Amy Hood. The proposed class period covers May 1, 2025 to January 28, 2026.