Can a public company violate the federal securities laws simply by expressing an honestly held opinion that turns out to be wrong? In 2013, the U.S. Court of Appeals for the Sixth Circuit startled the business community by recognizing just such a broad theory of liability under Section 11 of the Securities Act of 1933 for opinions expressed in registration statements. Last week, in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the Supreme Court of the United States restored some consistency to this area by vacating the Sixth Circuit’s judgment. But Omnicare’s narrower theory of liability suggests that litigation over statements of opinion will continue apace, as litigants and lower courts grapple with the question of what factual basis a reasonable investor would take those statements to imply.
At issue in Omnicare were opinion statements in a public company’s registration statement, to the effect that “we believe we are obeying the law” governing payments from pharmaceutical companies.1 The plaintiffs claimed that two such statements by Omnicare violated Section 11, which assigns liability for a registration statement that “contain[s] an untrue statement of a material fact” or “omit[s] to state a material fact . . . necessary to make the statements therein not misleading.”2 The Sixth Circuit agreed with the plaintiffs, holding 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.’ ”3 On this view, the challenged opinion statements were actionable under Section 11 because the Federal Government subsequently accused Omnicare of violating antikickback laws by taking money from drug manufacturers.4
The Supreme Court vacated in an opinion by Justice Kagan, explaining that the Sixth Circuit erred by ignoring Section 11’s dichotomy between misstatements and omissions, and then “wrongly conflat[ing] facts and opinions.”5 A statement of opinion does not express a fact, held the Court, insofar as it communicates a belief rather than a certainty.6 And a pure statement of opinion conveys only one idea with certainty: “that the speaker actually holds the stated belief.”7 Accordingly, the plaintiffs had not adequately alleged that Omnicare’s stated opinion about legal compliance was “an untrue statement of a material fact” under Section 11, even though it turned out to be wrong, because the plaintiffs did not contest that Omnicare’s opinion was honestly held or allege that it was accompanied by untrue supporting facts.8 In so ruling, the Court affirmed existing precedent as to pure statements of opinion requiring pleading of subjective disbelief of the opinion to establish liability for “an untrue statement of a material fact.”
The Court went on to hold, however, that a statement of opinion can be rendered “misleading” under Section 11’s omissions clause by the speaker’s “omitt[ing] to state a material fact . . . necessary to make the statements therein not misleading.”9 Applying an objective standard, the Court concluded that a statement of opinion is misleading if it would imply to a reasonable investor some factual basis that does not actually exist.10 “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.”11 The Court remanded the case for application of its newly announced standard.12
Omnicare leaves the door open to litigation about the omissions clause of Section 11, much of which will take place at the motion-to-dismiss stage. The Court stressed that satisfying the applicable pleading burden will be “no small task” for plaintiffs, who cannot skate by with “conclusory assertions” or allegations “that the issuer failed to reveal [the] basis” for its opinion.13 Instead, “[t]he 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.”14
It remains to be seen how Omnicare’s interpretation of Section 11 will apply in cases involving similarly worded clauses found in Rule 10b-5(b) and other federal statutes or regulations.15 Given the Court’s emphasis on the nature of a registration statement, which is a “formal document” that does not contain “off-the-cuff judgments,” it seems likely that plaintiffs will have a tougher pleading burden when challenging opinion statements made in press releases, at conferences, or on analyst calls. 16 After all, “whether an omission makes an expression of opinion misleading will always depend on context.”17
Lower courts can expect to spend long hours applying Omnicare’s new standard to the prolix complaints that are regularly filed when stock prices drop in the wake of bad news. Public companies hoping to avoid getting caught up in that process might heed Omnicare’s advice that, “to avoid exposure for omissions under § 11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief.”18 The Court indicated the importance of considering a statement of opinion “in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information,” all of which issuers would be well-advised to carefully consider and disclose.19
Alternatively, public companies might “control what they have to disclose . . . by controlling what they say to the market,”20 in recognition of the fact that “[s]ilence, absent a duty to disclose, is not misleading.”21 Such reluctance to opine could contribute to a deepened circuit split over whether a violation of Item 303 can form the basis of a claim under the federal securities laws.22