In an eagerly anticipated and widely monitored decision, the U.S. Supreme Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fundconcluded in a unanimous 9-0 vote that under Section 11 of the U.S. Securities Act of 1933, as amended (Securities Act), material statements of opinion are actionable only if: (i) the statements are objectively false, and (ii) the entity disclosing the statement did not actually hold the stated belief.
In a decision written by Justice Elena Kagan (with concurring opinions from Justices Antonin Scalia and Clarence Thomas), the U.S. Supreme Court resolved a U.S. circuit court split on Section 11 liability and struck a middle ground between the positions advanced by plaintiffs and defendants in the case. One of the more quotable passages from the U.S. Supreme Court's opinion is that the Securities Act is not a "an invitation to Monday morning quarterback an issuer's opinions."
The case has been and will likely be extensively written on and discussed by numerous Supreme Court observers, legal practitioners and academia, so we will not reproduce the procedural history, context of the case, other relevant case law or related details here. Instead, we will try to identify a few practical takeaways that could allow current and potential issuers that will disclose information in registration statements to avoid pitfalls after Omnicare, as time will tell whether this truly expands or limits the grounds for bringing causes of action on the basis of insufficient disclosure.
- To mitigate potential omissions liability, issuers should consider setting forth the bases for opinion statements in registration statements that are necessary to prevent any potential confusion. The Court also wrote that an issuer will not need to disclose all facts supporting or undercutting its expressed opinion (which would make the disclosure long-winded and essentially useless). The normal principles of materiality under the Securities Exchange Act of 1934 Rule 10b-5 still apply, as a reasonable investor clearly would not expect that every fact known to an issuer supports its opinion statement. While this should not be breaking news, issuers should be on notice to provide appropriate qualifiers, as well as any industry reports, expert opinions and/or related third party verified parties (to the extent necessary and proper in a materiality context) to temper some of the more "bullish" statements made in a registration statement.
- Issuers also should consider whether there are any material assumptions underlying their opinions that would not be readily apparent or too difficult to infer from the context of the opinion. These statements must be within the reliable yet sometimes blurry standard of being material to a "reasonable" investor. In Omnicare, the U.S. Supreme Court emphasized the importance of context, with the suggestion of including “hedges, disclaimers, or qualifications". Best practices when drafting public offering documents should start with representatives of the issuer confirming that there is a reasonable basis to actually make the statement. Then, issuers are encouraged to continue to accompany opinion statements (e.g., when disclosing certain strengths and strategies of the issuer in a description of the business, or providing forecast information in the Management's Discussion and Analysis) with language making clear the opinions’ uncertainty or limited nature or scope, or including some sort of disclaimer or qualifier for these statements.
- There is some relief in that a statement of opinion does not constitute an “untrue statement of… fact” merely because the stated opinion turns out to be incorrect. The Court recognized that reasonable investors should be in a position to understand and appreciate the distinction between statements presented as an opinion or belief, and those made as statements of fact. To do so, issuers should disclose an opinion’s basis or make clear the "real tentativeness" of its belief. The Court reiterated that Section 11’s requirements should not dissuade issuers from providing opinions or beliefs in registration statements that could prove useful to potential investors and, in a roundabout way, would be required to be disclosed under the Rule 10b-5 materiality standard in any event.
- Aside from the disclosed opinion statements, what about material omissions? For omissions, the Court suggested that courts should consider whether the alleged omission rendered the material statements misleading, because the excluded facts could show that an issuer lacked the basis for making those statements that a reasonable investor would expect. As such, an issuer should assess whether a statement that is omitted would rise to the level of becoming a statement that is not only material and should be disclosed, but also whether this omission is actually needed as a relevant "backup" to other disclosures so as to render those materially inaccurate.
By toeing the middle ground, Omnicare should not represent anything drastically new for issuers who are preparing information to be incorporated in a registration statement. However, it should serve as a reminder and reinforcement that best practices in due diligence and drafting can go a long way in preventing the things that occurred in Omnicare.