This week, the Supreme Court issued a decision that should provide issuers with significant protections when expressing opinions in registration statements. The Court clarified a number of important principles:
- Issuers are not subject to liability just because an opinion turns out to have been untrue with the benefit of hindsight.
- Untrue statements of opinion will only give rise to liability if: (i) the speaker did not actually hold the opinion, or (ii) the statement was rendered misleading by the failure to disclose facts about the basis for the opinion that would be material to a reasonable investor.
The Court also made clear that statements of opinion must be read in context, and therefore it remains critical to include appropriate disclaimers, risk factors, and hedging language in registration statements. Issuers should also ensure that they have a reasonable basis for their statements of opinion by, among other things, conducting diligence to confirm that the opinion is broadly held at the decision-making level of the organization (and to the extent it is not, it should not be included in the registration statement).
In those circumstances, issuers should be protected from plaintiffs’ law firms seeking to “Monday morning quarterback” opinions that turn out to be untrue.
In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the Supreme Court resolved a split of opinion among the circuit courts concerning when statements of opinion in registration statements may give rise to liability under Section 11 of the Securities Act.
The circuit split arose from a decision by the Sixth Circuit which had held that “a statement of opinion that is ultimately found incorrect—even if believed at the time made—may count as an ‘untrue statement of a material fact’” under Section 11. (Slip op. at 6, emphasis added.) That decision conflicted with prior decisions from other circuits, including Fait v. Regions Financial Corp., 655 F.3d 105, 110 (2d Cir. 2011), in which the Second Circuit held that statements of belief or opinion may give rise to liability under Section 11 “only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed” (emphasis added).
The Supreme Court unanimously ruled that the Sixth Circuit’s analysis was in error and vacated its decision. The Supreme Court analyzed the question of Section 11 liability in “two steps”—first addressing whether the opinion statements in Omnicare’s registration statement were “untrue statement[s] of material fact,” and second addressing whether those opinion statements “may be rendered misleading by the omission of discrete factual representations” (and thereby give rise to liability on an “omissions” theory). (Slip op. at 4-5.)
At the first step, the Court held that “a sincere statement of pure opinion”—such as the statement “we believe we are obeying the law,” when the speaker sincerely believed that to be true at the time the statement was made—is not an “untrue statement of material fact” regardless of whether an investor can ultimately prove the belief to have been wrong. (Id. at 9.) So long as the opinion expressed was sincerely held and clearly couched as a matter of opinion, it cannot be considered an untrue statement of material fact under the Omnicare decision.
But the Court refused to adopt a similar bright-line rule at the second step, finding that silence as to other material information concerning the opinion can nonetheless render the statement misleading on an omission theory. It therefore rejected Omnicare’s argument that a statement of opinion by definition “cannot mislead as to any matter, regardless what related facts the speaker has omitted.” (Id. at 10.) Instead, with regard to omissions liability under Section 11, the Court held:
[A] reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience…. Thus, if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.
(Id. at 11-12, emphasis added.) The Court thus rejected a “good heart, empty head” defense and signaled that issuers cannot put a positive spin on uncertainties while omitting key information about the uncertainty of the opinion being expressed.
The Omnicare decision, while on its face a victory for the issuer and protective of opinion statements, will nonetheless open up new avenues for future litigation concerning the contours of omissions liability arising from statements of opinion. In the event that, in hindsight, an opinion turns out to have been untrue, plaintiffs’ lawyers will likely challenge whether the basis of the opinion was adequately disclosed. Although Omnicare rests on the language of Section 11, plaintiffs may seek to apply Omnicare to claims arising under other provisions of the securities laws, including statements of opinion expressed in places other than registration statements.
Still, there is much in the decision that should be welcome to issuers. The Court’s recognition that, in determining whether statements of opinion are untrue, they should be judged by whether the speaker actually held the stated belief (not by whether the stated belief turned out to be true) eliminates a potential risk that issuers otherwise might have faced. And even with regard to the omissions analysis, the Court made efforts to prevent frivolous claims from going forward even under its newly-enunciated standard, by Fried Frank Client Memorandum 3 requiring that investors do more than merely allege that an omitted fact made a statement of opinion misleading:
The investor must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context. That is no small task for an investor.
(Slip op. at 18.)
In light of the Omnicare decision, issuers would be well advised to continue to use “opinion” language in registration statements to the extent that what they are seeking to express is “a view, not a certainty.” (Id. at 7.) Nevertheless, issuers should not assume that use of phrases such as “we believe” or “we think” (or any other “magic words”) insulate them from potential liability.
Instead, with regard to every statement of opinion in a registration statement, issuers should give careful consideration to how that opinion was formed, the basis for (and any assumptions behind) the view, the extent to which the speaker is knowledgeable about the subject, the extent to which the opinion is broadly held at the decision-making level of the organization, and which facts related to the development of the opinion, if any, should be disclosed. Further, issuers should consider whether there are “any other hedges, disclaimers, or qualifications” (id. at 20) that might be appropriately included in the registration statement to make clear to investors any uncertainties concerning the matter about which the opinions are expressed.
Samuel Groner provided valuable assistance in the research and drafting of this client memorandum.