Good news for directors and officers: expressing an honestly held belief that turns out to be objectively false does not automatically constitute liability under Section 11 for materially false or misleading statements.
In Omnicare, Inc. v. Laborers District Counsel Construction Industry Pension Fund (“Omnicare”), the Supreme Court ruled that the pharmaceutical company, Omnicare, was not liable for making false statements under Section 11 because those statements were believed to be true at the time they were made. The statements at issue were these:
- “We believe our contract arrangements with our 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.”
The Supreme Court’s decision rejected the substantial burden that the Sixth Circuit’s position would have ultimately placed on a corporation’s (and its directors’ and officers’) ability to speak freely.
As a reminder (and you can read more in an earlier post on Omnicare, the litigation in Omnicare concerned statements made in its registration statement for its initial public offering of securities; the question at hand was what does it mean for a statement to be false.
Liability under Section 11 of the Securities Act of 1933 is strict. This means that a buyer of the securities does not have to show any intent to deceive on the part of the speaker in order for liability to attach. This puts a lot of pressure on what it means for a statement to be false, and is exactly what the Supreme Court considered in Omnicare.
As a starting point, it’s important to remember that Section 11 creates two modes for liability: misstatements of material facts, or omissions of facts necessary to make statements not misleading.
At stake was the ability of future defendants to win motions to dismiss when plaintiffs pursued liability based on statements made that were objectively false but subjectively true (that is, the person making the false statement believed it to be true at the time he or she made the statement).
The federal circuit courts were split on the matter. The Second, Third and Ninth Circuits held that defendants should win a motion to dismiss even if a statement were objectively false so long as the person making the statement believed that the statement was true at the time it was made.
The Sixth Circuit had held that if a statement was objectively false, defendants would lose their motion to dismiss a case, even if they subjectively believed the statement to be true at the time it was made.
The Supreme Court’s Decision in Omnicare
The opinion issued by the Supreme Courts settles what counts when it comes to whether a statement is false or misleading pursuant to Section 11. The focus of the Court was on opinions, and the decision stated that “because a statement of opinion admits the possibility of error, such a statement remains true—and thus is not an ‘untrue statement of . . . fact’ – even if the opinion turns out to have been wrong.”
The Supreme Court stated, however, that opinions are not wholly immune from Section 11 liability. An easy example is if a speaker states an opinion that is false and knows it to be false.
Critically, when it comes to whether opinions can give rise to Section 11 liability, the Court discussed omissions, too. Specifically, defendants can’t skate by when it comes to Section 11 liability by just writing “we believe” or “in our opinion” in front of everything. This is because omission of material information can also give rise to Section 11 liability.
In other words, defendants are obligated to disclose facts as they know them, including facts that might cause a reasonable reader to disagree with an opinion expressed in the registration statement.
From the opinion:
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.
The good news is the Court doesn’t expect defendants to disclose every single thing they know. However, defendants can’t refrain from sharing facts that would cause an investor to come to a different conclusion than management.
From the opinion:
An opinion statement, however, is not misleading simply because the issuer knows, but fails to disclose, some fact cutting the other way. A reasonable investor does not expect that every fact known to an issuer supports its opinion statement. Moreover, whether an omission makes an expression of opinion misleading always depends on context. Reasonable investors understand opinion statements in light of the surrounding text, and §11 creates liability only for the omission of material facts that cannot be squared with a fair reading of the registration statement as a whole.
The tricky part has always been how much to disclose and to what level of detail. The fact of the matter is that disclosures are already so long that it’s not clear that making them longer will really help shareholders.
For more information and analysis of the decision, check out these resources:
- Supreme Court Limits Liability for Statements of Opinion Contained in Securities Offerings (Source: DLA Piper)
- Supreme Court’s Omnicare Decision Follows Middle Path Advocated by Lane Powell and WLF (Source: Lane Powell)
- Omnicare Decision Clarifies Grounds for Section 11 Liability (Source Morgan Lewis)
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