On March 24, the U.S. Supreme Court issued its much-anticipated decision in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund, et al. The Court announced important principles for interpreting the application of the two bases for liability under Section 11 of the Securities Act of 1933 to statements of opinion expressed in a registration statement:
A statement of “pure opinion” that turns out to be wrong cannot be a basis for Section 11 liability as “an untrue statement of material fact” if the issuer honestly believed the opinion when making it. The Court observed that Section 11 is not “an invitation to Monday morning quarterback an issuer’s opinions.”
A statement of opinion, however, could be actionable under Section 11 as materially misleading if the registration statement omits material facts about the bases for the issuer’s opinion (such as the scope of its inquiry into the opinion) that a reasonable investor, upon consideration of the totality of information disclosed, would infer from the opinion and such omitted material facts are untrue.
The Omnicare decision has significant implications for the litigation of Section 11 claims challenging statements of opinion and for the preparation of registration statement disclosures. In particular, the decision highlights the importance of including in the disclosures meaningful cautionary statements identifying important facts that could cause actual facts to differ materially from views expressed in an opinion.
Section 11. Section 11 of the Securities Act makes specified persons liable for a false and misleading registration statement under two theories:
- Under what the Court called Section 11’s “false-statement provision," Section 11 imposes liability if the registration statement, when it became effective under the Securities Act, “contained an untrue statement of a material fact.”
- Under Section 11’s “omissions provision,” Section 11 imposes liability if the registration statement “omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”
If a registration statement is deficient under the false-statement provision or the omissions provision, the issuer will be liable under Section 11 unless it can prove that the plaintiff knew of the material misstatement or omission. In contrast to what is effectively a strict liability standard for the issuer, all other potential defendants, including the issuer’s directors and its officers who signed the registration statement, independent accountants and other experts, and underwriters of the offering, have certain limited defenses against Section 11 liability.
Claims against Omnicare. In Omnicare, several pension funds that purchased Omnicare stock in a public offering brought Section 11 claims against the company, a provider of pharmacy services for residents of nursing homes, challenging the following two statements in the registration statement about Omnicare’s compliance with law:
- “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.”
- “We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.”
Omnicare accompanied these statements with cautionary warnings that relevant laws might be construed in a manner inconsistent with the company’s interpretation and application of the laws, and that Omnicare’s business might suffer if it ceased to receive a type of price concession from drug manufacturers about which it said the federal government had expressed “significant concerns.” After Omnicare’s offering, the federal government filed lawsuits against Omnicare which the funds claimed indicated that Omnicare had violated anti-kickback laws in receiving payments from drug manufacturers.
The plaintiffs alleged that the statements of opinion about Omnicare’s legal compliance violated Section 11 because they were (1) untrue statements of a material fact and (2) misleading because Omnicare had omitted material facts necessary to make the statements of opinion not misleading.
In its decision, the Supreme Court found that the lower courts had conflated the two bases of Section 11 liability and improperly had focused solely on whether Omnicare’s opinions were false. The Supreme Court said that it was necessary to evaluate the funds’ claims separately under Section 11’s false-statement provision and the statute’s omissions provision.
False-statement provision. Turning first to the funds’ claim that Omnicare’s opinions constituted an “untrue statement of a material fact,” the Supreme Court held that each statement of opinion affirmed only one “fact” – that the issuer honestly believed the opinion at the time it was made. Thus, each statement of opinion could be false only if the issuer did not actually believe the stated opinion. Under this standard, Omnicare’s opinions regarding its legal compliance could have exposed it to liability only if the company had not actually believed that its operating practices were lawful. Because the funds did not make such an allegation, but instead affirmatively disclaimed any allegation that Omnicare had not honestly proffered the opinions, the Court held that the complaint could not support a Section 11 claim based on a materially false statement of fact. In the Court’s formulation, the false-statement provision “does not allow investors to second-guess inherently subjective and uncertain assessments.”
The Court’s opinion addresses some of the complexities involved in evaluating whether a statement constitutes an opinion for which liability would be precluded under Section 11’s false-statement provision. The Court indicated that a statement qualified with the expression “we believe” or “we think” normally would be identifiable as an expression of opinion. The Court emphasized, however, that its holding on liability preclusion under Section 11’s first clause extended only to “sincere statements of pure opinion.” It noted that some opinions contain “embedded statements of fact” and could be read by investors to affirm not only the “speaker’s state of mind” but also the veracity of the facts underlying the opinion. In such a case, the accuracy of those facts could be tested under the false-statement provision even if the issuer honestly believed the opinion. The Court said that Omnicare’s statements, however, were “pure statements of opinion” which indicated, in essence, that “we believe we are obeying the law,” and did not rest on factual affirmations that would have to be separately evaluated under the false-statement provision.
Omissions provision. The Supreme Court next considered whether Omnicare’s statements of opinion, even if honestly believed, could be actionable under Section 11 on the basis that they omitted material facts necessary to make the opinions not misleading. The Court held that liability could be found under Section 11’s omissions provision for pure statements of opinion because in that provision (unlike the false-statement provision) the word “statements” includes both fact and opinion. An issuer may be liable under this part of Section 11 for an expression of opinion if a reasonable investor, upon consideration of the totality of information relevant to the opinion, would understand the opinion to convey material facts about the basis for the issuer’s opinion that were false.
The Court premised its analysis upon the long-established principle that “whether a statement is ‘misleading’ depends on the perspective of a reasonable investor,” which is an “objective” inquiry. The Court proceeded to observe that 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.” If those inferred facts are both material and false, then the “opinion statement will mislead its audience” and support a Section 11 claim.
As an example, the Court considered an issuer’s statement of opinion about legal compliance, such as that made by Omnicare. The Court said that the opinion could be misleadingly incomplete if the issuer fails to disclose material facts relevant to the opinion, such as that a federal regulator had expressed a contrary view on the legal issue addressed in the opinion, and a reasonable investor would have inferred from the opinion that the issuer did not know of a regulatory position inconsistent with its opinion.
The Court, however, imposed limits on those facts which might be inferred from an opinion and, if false, render the opinion actionable. First, the factual inferences must be those which a “reasonable” investor would draw. As the Court noted, a “reasonable investor does not expect that every fact known to an issuer supports its opinion statement.” Second, the Court emphasized that, in determining what factual inferences might be drawn by a “reasonable” investor, the opinion must be considered in “context,” which demands consideration of the “surrounding text, including hedges, disclaimers, and apparently conflicting information,” as well as “customs and practices of the relevant industry.” Accordingly, factual inferences that might be drawn from an opinion and render it misleading “when viewed in a vacuum may not do so once that statement is considered . . . in a broader frame.” Third, the Court observed that an issuer could avoid the risk of misleading investors based on factual inferences by “divulg[ing] an opinion’s basis, or else make clear the real tentativeness of its belief.”
In the Omnicare case, neither lower court had considered whether the complaint’s allegations supported the claim that the opinions at issue violated Section 11 because a reasonable investor would have inferred from the opinions material facts that were false. The Supreme Court remanded the case for consideration of the funds’ claims under Section 11’s omissions provision.
Implications of the Omnicare decision
Claims premised on an asserted untrue statement of fact. The Omnicare decision likely will have little impact on the volume of Section 11 claims premised on an opinion that allegedly was not honestly believed. Although not an issue addressed by the Supreme Court, circuit courts consistently have held that, because such claims sound in fraud, the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure apply to the claims. Accordingly, the trend in the plaintiffs’ bar, as illustrated by the pleading in theOmnicare case itself, is to disclaim any suggestion that the Section 11 claim is premised on a knowingly false statement. Because the Omnicare decision explicitly requires, for pleading a false statement of opinion, that the plaintiff allege a knowingly disbelieved opinion, which would have to meet the stringent pleading requirements for a fraud claim, we expect the plaintiffs’ bar to avoid making such claims absent exceptional circumstances.
Claims premised on an allegedly misleading opinion. The Omnicare decision is likely to result in more Section 11 claims premised on supposedly misleading opinion statements, and potentially in a greater number of Section 11 claims that survive at least an initial motion to dismiss.
The Omnicare decision dramatically alters the standards for reviewing Section 11 claims premised on opinions in those federal circuits, such as the Second Circuit and the Ninth Circuit, that had required plaintiffs to allege both that a statement of opinion was not only “objectively” false but also “subjectively” false in that it was disbelieved by the speaker. In those circuits, plaintiffs had to allege facts raising an inference of dishonesty, which often proved an insurmountable hurdle. That bulwark against Section 11 claims directed at opinions is now no longer available. Moreover, the question of what facts a “reasonable” investor might infer from an opinion – like the issue of what facts a “reasonable” investor might consider material – may prove notoriously fact-specific and not amenable to ready resolution on a motion to dismiss or for summary judgment. The Supreme Court suggested that its ruling would not likely open the floodgates to litigation because a plaintiff must still satisfy the “facial plausibility” pleading standard of Rule 8(a) of the Federal Rules of Civil Procedure and thus “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” misleading to a reasonable investor “reading the statement fairly and in context.”
We anticipate that, in many cases, distilling those factual inferences that a reasonable investor might draw from an opinion and assessing whether such inferences are negated or otherwise limited by the “broader frame” of other disclosures will lead to an extended exchange of motions before disposition of a claim. In addition, we expect that courts, assessing plaintiffs’ claims only for facial plausibility (the pleading standard under Rule 8(a)), will find the factual issues too intractable to resolve at an early stage.
Implications for preparing disclosure. The Supreme Court emphasized the importance of evaluating factual inferences that reasonable investors may draw from an opinion statement in the “broader frame.” This emphasis illustrates the importance of drafting registration statements to include, in the words of the Securities Act safe harbor for forward-looking statements, “meaningful cautionary statements identifying important facts that could cause actual results to differ materially from those” in an opinion. Disclosures that meaningfully “bespeak caution” to investors are likely to substantially thwart claims that an opinion was rendered materially misleading by the omission of facts concerning the basis for the issuer’s statement. Some issuers may choose to respond to Omnicare by adding disclosures about the bases for opinions. Doing so may create a new set of risks, so issuers should exercise care and use cautionary language to limit the chances that those disclosures themselves will become grounds for an omissions claim. Because many issuers incorporate by reference their periodic reports and other Exchange Act filings into their registration statements, we advise similar care in drafting those filings. We also recommend alerting disclosure committees and other persons who are involved in preparing SEC disclosures on the need for enhanced care in disclosing expressions of opinion in light of the standard of liability articulated by the Supreme Court in Omnicare.