SEC rules require public companies to summarize material transaction agreements in their filings and attach the full agreement as an exhibit to such filing or to a later filing. Companies are generally counseled to include a disclaimer regarding such summaries, to the effect that such disclosed information is qualified in its entirety by reference to the full transaction agreement. However, recent developments may necessitate the inclusion of further disclaimers and a different approach to disclosure of transaction agreement provisions altogether.

Item 601 of Regulation S-K sets forth the exhibit disclosure requirements for 1933 Act registration statements and 1934 Act periodic and current reports. Specifically, Item 601(a)(4) of Regulation S-K requires a material contract or plan of acquisition, reorganization, arrangement, liquidation or succession that is executed or becomes effective during the reporting period reflected by a Form 10-Q or Form 10-K to be filed as an exhibit to such report covering the corresponding period. On November 28, 2008, the United States Court of Appeals for the Ninth Circuit issued its opinion in Glazer Capital Mgmt v. Magistri[1], which effectively put public companies on notice regarding potential liability that may arise from the content of transaction agreements filed as exhibits.

In Glazer, a class action complaint was brought by shareholders of InVision Technologies, Inc. (InVision) against the company alleging misstatements in the "representations and warranties" section of a merger agreement that was filed as an exhibit to Form 10-K. Glazer, the lead plaintiff, asserted that InVision violated Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder by filing an agreement that contained three alleged misstatements. InVision argued that Glazer was not entitled to bring a claim because the statements appeared in the representations and warranties section of a private merger agreement and such statements were not intended to confer any rights to Glazer or any other person not party to the merger agreement. The Ninth Circuit rejected InVision's argument and concluded that "the mere context of the statements is not enough to render these statements inactionable as a matter of law." Moreover, the Court reasoned that because the proposed merger described in the agreement was a "very significant event for the company," InVision should have anticipated "intense investor interest in the details of the merger." Thus, the Court concluded that a reasonable investor could rely on the terms of the merger agreement and proceeded to examine the substance of InVision's potential liability.

The Glazer decision is not unique. In a March 1, 2005, Report of Investigation by the SEC concerning The Titan Corporation (Titan Report)[2], the SEC stressed that companies cannot avoid liability simply because the information published was contained in an agreement that was not prepared as a disclosure document. The SEC advised public companies to disclose any additional material facts that would make their disclosure, whether set forth in the disclosure document or reflected in an attachment filed with the SEC, not misleading. The SEC cautioned that "material contractual terms such as representations may be actionable" and noted that it will consider bringing an enforcement action if it determines that "the subject matter of representations and other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted."

The underlying issue in both Glazer and Titan was the existence of material undisclosed facts that were not divulged along with the representations and warranties disclosed to the public. One way to avoid such a problem is to insure that, prior to entering into a transaction agreement and throughout the waiting period while the representations and warranties set forth in the transaction agreement persist, all material undisclosed information is promptly disclosed to the public. However, if the material information cannot be disclosed for any reason, such as an ongoing criminal investigation, disclaimers prominently displayed in the disclosure document relating to the transaction agreement may prove helpful. Such disclaimers may deprive potential plaintiffs from claims that they were reasonable in relying on the representations and warranties set forth in the disclosure document.

Public companies may include disclaimers regarding representations and warranties in transaction agreements filed with the SEC, such as:

  • Please note that the representations and warranties of each party set forth in the [transaction agreement] have been made solely for the benefit of the other party to the [transaction agreement]. You should not rely on such representations and warranties. Such representations and warranties (i) have been qualified by confidential disclosures made to the other party in connection with the [transaction agreement], (ii) are subject to materiality qualifications contained in the [transaction agreement] which may differ from what may be viewed as material by investors, (iii) were made only as of the date of the [transaction agreement] or such other date as is specified in the [transaction agreement], and (iv) may have been included in the [transaction agreement] for the purpose of allocating risk between the parties rather than establishing matters as facts. The [transaction agreement] is included with this filing only to provide investors with information regarding the terms of the [transaction agreement], and not to provide investors with any other factual or disclosure information regarding the parties or their respective businesses.
  • The [transaction agreement] contains representations and warranties that the parties thereto have made to each other as of specific dates. You should not rely on such representations and warranties. The assertions embodied in those representations and warranties were made solely for purposes of the [transaction agreement] and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of the [transaction agreement]. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from what may be viewed as material to stockholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as facts. The assertions embodied in the representations and warranties found in the [transaction agreement] are qualified by information in confidential disclosure schedules that the parties exchanged in connection with signing the original merger agreement. The disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the [transaction agreement]. Moreover, you should read the representations and warranties in the [transaction agreement] not in isolation but in conjunction with the other information about the parties and their subsidiaries that the respective companies include in reports, statements, and other filings they make with the SEC. For the foregoing reasons, you should not rely on the representations and warranties as statements of factual information.