The recent U.S. Supreme Court decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435 (U.S. Mar. 24, 2015), makes it less likely registered investment companies, and their directors and officers, can be held liable for opinions included in registration statements, even if those opinions later turn out to be incorrect. In order to avoid liability, a registered investment company must have sincerely believed its opinion at the time, and the company must have had a reasonable basis for making the opinion. At the same time, the court’s emphasis on providing bases for opinions may add to the difficulty and expense of preparing registration statements.

The case began in 2005 after Omnicare, a provider of pharmacy services for nursing homes, filed a registration statement for an offering of its common stock in which the company said it believed its practice of accepting rebates from pharmaceutical suppliers was legal under federal and state law. When the federal government later sued Omnicare for violating anti-kickback laws, investors filed suit as well, claiming Omnicare’s opinion about the legality of its rebate practices was an “untrue statement of material fact” in violation of Section 11 of the Securities Act of 1933. The Sixth Circuit agreed, siding with the investors.

On appeal, the Supreme Court ruled differently, noting that Section 11 liability only arises if the company’s registration statement “contained an untrue statement of material fact or omitted to state a material fact required to be stated therein.” Unlike statements of fact, however, opinions convey the possibility of uncertainty, and as a result, the Court said, directors and officers are largely immune to Section 11 liability for opinions. But the Court stressed two important exceptions:

  • A company could be held liable if it expresses an opinion it does not honestly hold. By its nature, a statement of opinion asserts that the speaker “actually holds the stated belief.” Opinions not genuinely held, therefore, would constitute untrue statements of material fact — that is, the company holds an opinion it does not actually hold — and could lead to liability.
  • A company could be held liable if it expresses an opinion it has no reasonable basis for holding. Reasonable investors assume a company’s opinion is backed by an inquiry into the relevant facts, and the resulting opinion “fairly aligns with the information” in the company’s possession. If the real facts are contrary to what a reasonable investor might conclude from the opinion, and the company omits these facts from its registration statement, liability could likewise result.

The Court also gave companies guidance for avoiding liability under Section 11 when expressing opinions in their registration statements: A company can shield itself by either (1) disclosing the facts and other relevant information that form the basis for its opinion, or (2) making clear the extent to which the company is uncertain about its opinion.

Investor lawsuits under Section 11 will no doubt continue, but for prudent companies that heed the Supreme Court’s advice — making sure their opinions are well stated, carefully hedged, and backed by thoughtful inquiry — the decision in Omnicare should leave directors and officers well protected.