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
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
Some disclosure items, while large in the absolute, become immaterial relative to the size of the firm
What defense does issuer have under §11?
None, except to argue that the omission/misstatement was not material
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
E.g. industry practice, analyst’s reports
Puffery = statements that are not really believable
Statements tend to be general, optimistic, not specific
Puffery is not actionable
Mere sales puffer is not actionable it’s expected
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
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
Where puffing is the order of the day, literal truth can be profoundly misleading
An opinion is material, but is it a fact?
Securities laws talk about misrepresentation of fact
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.
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
Kaufman: Bespeaks caution doctrine
This is a defense
Cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law
Need meaningful cautionary language
Can’t be boilerplate need to discuss specific risks
EA §21E: statutory safe harbor for certain forward-looking statement made by companies that are subject to the Exchange Act’s continuous reporting provisions
Meaningful cautionary language OR forward-looking statement is immaterial OR plaintiff fails to prove knowing false forward-looking statement
No boilerplate cautionary language must address specific/principal risks
To be meaningful, we have to know what the risks were at that time
Has to be meaningful through the eyes of the person preparing the forecast
Also extends to oral forward-looking statements
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
The threshold requirement for the statutory safe harbor is that the challenged statement must be a “forward-looking statement”
Forward-looking statements include projections, plans, and statements of future economic performance
Transactions not covered under the statutory safe harbor may still seek protection under the judicially created “bespeaks caution” doctrine
As long as the firm reveals the principal risks (in cautionary language), the fact that some other event caused problems cannot be dispositive
The cautionary language does not have to identify the very event that causes the forecast to be inaccurate
Majority hold that the meaningful cautionary language defense is available even though the defendant knows the forward looking statement is misleading.
Minority: if D knows it’s misleading, can’t be “meaningful” cautionary language.
Flanchard
Glickman was misappropriating company money; they didn’t disclose it
Why is this material?
The whole reason for investing in this corporation was to essentially invest in Glickman
So if you had disclosed that he was misappropriating company money, it would indicate that he’s not doing a very good job in real estate investment
And you’re banking on his ability to invest in real estate
And this reflects directly on his integrity
Might also signal a future change in management
Since he sucks t picking real estate, the company might want to go with someone else
You don’t have a duty to disclose your philosophy in running the company
Subpart 400 of Regulation S-K requires disclosure of information that bears on the incentives, integrity, and commitment of the registrant’s management
401(f) calls for disclosure of certain types of adjudications within the past 10 years that are material to an evaluation of the ability or integrity of any director, person nominate to become a director, or executive officer
403(c) requires disclosure of any arrangements, known to the registrant, including any pledge, the operation of which may at a subsequent date result in a change in control of the registrant
Conflict-of-interest transactions (“related party transactions”) are required to be disclosed under Item 404. Berkman case.
Details of any loans by the registrant must be disclosed when made to its executive officers, directors, and director nominees, as well as to members of their immediate families or firms in which such persons have specified interests
406 requires each reporting company to disclose whether it has a code of ethics that covers the principal executive officer, financial officer and accountant, as well as its controller. If it has no such code, it must explain why it has not adopted one
The SEC rules require that the code be filed annually as an exhibit to the issuer’s annual report
The listing requirements of the NYSE and NASDAQ require companies to have a code of ethics
Pending litigation may have to be disclosed if it bears on management’s stewardship of the firm or its overall integrity
Generally, disclosure is adequate if the “basic facts” surrounding the suit are disclosed
But caution is advised, for statements that unduly minimize the likelihood of the suit’s success or magnitude can themselves be materially misleading
W.R. Grace
Grace is an imperial CEO everyone bows down to Mr. Grace
If you have bad governance in a company, you’re probably going to have pretty bad disclosure practices
“Serving as an officer or director of a public company is a privilege which carries with it substantial obligations. If an officer or...