MATERIALITY DETERMINATION

Introduction

1. TSC industries: An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote

   1. It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available

2. Some disclosure items, while large in the absolute, become immaterial relative to the size of the firm

Truth on the Market

3. What defense does issuer have under §11?

   1. None, except to argue that the omission/misstatement was not material

4. Truth on the market: Can’t be a material false representation if everyone understands that these are not reliable representations based on the information on the market

   1. E.g. industry practice, analyst’s reports

Puffery and Statements of Opinion

5. Puffery = statements that are not really believable

   1. Statements tend to be general, optimistic, not specific

   2. Puffery is not actionable

      1. Mere sales puffer is not actionable it’s expected

6. Everybody knows that someone trying to sell something is going to look and talk on the bright side. You don’t sell a product by bad mouthing it

   1. The heart of a reasonable investor does not begin to flutter when a firm announces that some project or process is proceeding smoothly, and so the announcement will not drive up the price of the firm’s shares to an unsustainable level

      1. Where puffing is the order of the day, literal truth can be profoundly misleading

7. An opinion is material, but is it a fact?

   1. Securities laws talk about misrepresentation of fact

   2. Normally opinion statements are not actionable unless there’s objective evidence available to the person issuing the opinion that is inconsistent with the opinion. Virginia bank case.

Forward-looking statements and Bespeaks Caution

8. The first line of defense for a “missed” forecast under the case law as well as the statutory safe harbor for forward-looking statements is not the reasonableness of its preparer’s efforts but whether the forecast was accompanied by meaningful cautionary language

9. Kaufman: Bespeaks caution doctrine

   1. This is a defense

      1. Cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law

   2. Need meaningful cautionary language

      1. Can’t be boilerplate need to discuss specific risks

Statutory Safe Harbor

10. EA §21E: statutory safe harbor for certain forward-looking statement made by companies that are subject to the Exchange Act’s continuous reporting provisions

    1. Meaningful cautionary language OR forward-looking statement is immaterial OR plaintiff fails to prove knowing false forward-looking statement

       1. No boilerplate cautionary language must address specific/principal risks

       2. To be meaningful, we have to know what the risks were at that time

       3. Has to be meaningful through the eyes of the person preparing the forecast

    2. Also extends to oral forward-looking statements

    3. In addition to being restricted to reporting companies, the safe harbor is not available to forward-looking statements made in connection with certain types of transactions, such as initial public offerings, tender offers, and going-private transactions

    4. The threshold requirement for the statutory safe harbor is that the challenged statement must be a “forward-looking statement”

       1. Forward-looking statements include projections, plans, and statements of future economic performance

11. Transactions not covered under the statutory safe harbor may still seek protection under the judicially created “bespeaks caution” doctrine

12. As long as the firm reveals the principal risks (in cautionary language), the fact that some other event caused problems cannot be dispositive

    1. The cautionary language does not have to identify the very event that causes the forecast to be inaccurate

13. Majority hold that the meaningful cautionary language defense is available even though the defendant knows the forward looking statement is misleading.

    1. Minority: if D knows it’s misleading, can’t be “meaningful” cautionary language.

Management integrity

14. Flanchard

    1. Glickman was misappropriating company money; they didn’t disclose it

    2. Why is this material?

       1. The whole reason for investing in this corporation was to essentially invest in Glickman

          1. So if you had disclosed that he was misappropriating company money, it would indicate that he’s not...

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