Given the stakes, in-house counsel inevitably takes on the role of the forward-looking statements disclaimer police. Officers and directors, however, also have a role to play when it comes to ensuring that forward-looking statements do not trigger litigation against the company. My colleague Lenin Lopez, who has personally spent more than his fair share of time as the disclosure police, breaks down the issues in this week’s D&O Notebook. – Priya Huskins
Forward-looking statements—statements that evidence management’s beliefs about what the future holds—can be valuable to analysts and investors. They are also very interesting to plaintiffs’ attorneys, especially if those stated beliefs do not come to bear. In those cases, plaintiffs’ attorneys have a history of challenging whether forward-looking statements were appropriately qualified by disclaimers that were “meaningful.” When successful, these attorneys can be successful in the form of multi-million-dollar settlements.
Disclaimers can provide a safe harbor for forward-looking statements. While commonly seen in public company earnings releases and presentations, these disclaimers are and should be used more broadly. They may be relevant to include in most situations where a public company or a person acting on behalf of the company makes forward-looking statements. (For those unfamiliar with what these disclaimers look like, see the “Cautionary Statements” section at the end of this earnings release from McKesson Corporation.)
To see the importance of the safe harbor, you need only recall the world of securities litigation before the safe harbor was implemented through the Private Securities Litigation Reform Act of 1995 (the PSLRA).
In this blog I will:
- Briefly provide background on the safe harbor provided by the PSLRA.
- Explain why robust forward-looking statements disclaimers are important.
- Share practical advice to help management teams evaluate these disclaimers.
- Provide a few practice pointers to help companies ensure they are positioned to benefit from the intended protections afforded by these disclaimers.
I. Private Securities Litigation Reform Act of 1995:
A Brief History
The PSLRA was implemented to curb frivolous securities lawsuits. Corporations were being dragged into expensive securities lawsuits based simply on stock price drops and allegations that the drops were a result of overly optimistic statements made by the company, as noted in the Report of the Senate Banking, Housing, and Urban Affairs Committee from 2004:
“Although private securities class actions can complement SEC enforcement actions, the evils flowing from abusive securities litigation start with the filing of the complaint and continue through to the final disposition of the action. A complaint alleging violations of the Federal securities laws is easy to craft and can be filed with little or no due diligence. A drop in a public company’s stock price, a failed product development project, or even unpredictable adverse market conditions that affect earnings results for a quarter can trigger numerous securities fraud lawsuits against a company.”
II. Private Securities Litigation Reform Act of 1995: The Safe Harbor
The PSLRA includes safe harbor provisions that generally provide that certain “forward-looking statements” cannot form the basis of a claim of fraud if either of the following conditions are met:
- The forward-looking statements are identified as forward-looking and accompanied by “meaningful cautionary statements that identify factors that could cause actual results to differ from those” in the statements or is otherwise immaterial.
- The plaintiff fails to prove that the forward-looking statements were made without actual knowledge that the statement was false or misleading.
“Forward-looking statements” for purposes of the safe harbor include, among other things, statements containing a projection of revenues (including income loss), earnings (including earnings loss), plans and objectives of management for future operations, as well as any assumptions underlying or relating to any of those statements. For the complete definition of the term “forward-looking statement” for purposes of the PSLRA safe harbor, see 15 U.S.C. § 78u-5(i)(1) or 15 U.S.C. § 77z-2(i)(1).
While the PSLRA itself didn’t necessarily curb the number of federal securities class action suits filed each year, it did provide companies with a viable defense in the face of meritless securities claims challenging forward-looking statements.
Nevertheless, plaintiffs commonly challenge a company’s forward-looking statements by: (i) contending that the forward-looking statements are either not forward-looking or false; and (ii) arguing that the company failed to pair the forward-looking statements with cautionary language that was meaningful. For a discussion of the case law over the 20 years since the enactment of the PSLRA, see this article from Paul, Weiss, Rifkind, Wharton & Garrison LLP.
III. The Importance of Forward-Looking Statements Disclaimers
Since the passage of the PSLRA, federal courts have found that forward-looking statements accompanied by “meaningful cautionary statements” are shielded from liability claims under the federal securities laws.
Companies typically include these “meaningful cautionary statements” in forward-looking statements disclaimers. For example, a manufacturing company may want to include its delivery outlook in an upcoming earnings release. The forward-looking statements disclaimer included in that earnings release should include meaningful cautionary statements about situations that could cause that delivery outlook to not materialize. A meaningful cautionary statement in this case could be:
“…inability to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties (including as a result of a geopolitical crises, natural disaster, public health crises and epidemics/pandemics, regulatory actions or otherwise).”
Much of the debate between shareholder plaintiffs and defendant public companies in cases where forward-looking statements disclaimers are challenged revolves around whether the cautionary statements were “meaningful.” Courts have declined to extend the protections afforded by the PSLRA safe harbor where the cautionary statements were merely boilerplate and not necessarily tailored to a company’s particular circumstances.
So, what does meaningful cautionary statement language look like? A recent case against Tesla provides a good example.
Just last year, in Wochos v. Tesla, Inc., –F.3d–, 2021 WL 246210 (9th Cir. Jan. 26, 2021), the Ninth Circuit US Court of Appeals affirmed the general proposition that forward-looking statements accompanied by “meaningful cautionary statements” do not provide the basis for a claim of liability under the federal securities laws. In Wochos, plaintiffs alleged that certain statements regarding Tesla’s Model 3 made by Tesla, its CEO, and CFO in 2017 were false and misleading. The plaintiffs’ theory was that “Tesla announced Model 3 production goals for the end of 2017 that it knew it would not be able to achieve, and it repeatedly reaffirmed that it was on track to reach those targets, even as the end-of-the-year deadline drew closer and as delays grew increasingly significant.” The plaintiffs relied, in part, on allegations that two employees told Tesla’s CEO that meeting the production goals by the end of 2017 was impossible to achieve. Interestingly, the court noted the plaintiffs did not allege whether the company or the CEO ever accepted those employees’ views that the goal was impossible.
One statement that the plaintiffs took issue with was the following, which was included in a filing that Tesla made with Securities and Exchange Commission:
“…preparations at our production facilities are on track to support the ramp of Model 3 production to 5,000 vehicles per week at some point in 2017.”
The plaintiffs argued that Tesla’s statements were not “forward-looking statements” protected by the PSLRA, but rather predictive statements containing embedded assertions concerning present facts that were actionable. The court disagreed.
In finding in favor of Tesla, the court found Tesla’s statements regarding Model 3 production goals were “unquestionably” forward-looking statements, because they referred to a “plan” or “objective of management for future operations,” and this plan or objective “relat[es] to the products” of Tesla. The court explained that for any such statement to be actionable, plaintiffs would have to show that such statement went beyond stating “plans,” “objectives,” and “assumptions” and instead contained an express or implied “concrete” assertion concerning a specific “current or past fact.” The court went on to say that a simple statement that a company is “on track” to achieve an announced objective, or a simple statement that a company knows of no issues that would make a goal impossible to achieve, are merely alternative ways of declaring or reaffirming the objective itself. That is, they have the character of being forward-looking statements.
Further, while the plaintiffs did not directly challenge the adequacy of Tesla’s cautionary statements, the court said in a footnote that in the court’s determination it was “unsurprising, because Tesla’s cautionary statements were detailed and specific.” The court cited Tesla’s forward-looking statements disclaimers included in documents where Tesla made statements regarding Model 3 production goals. For instance, in those forward-looking statements disclaimers, Tesla referred to important “[r]isk [f]actors” that could lead to results that “differ materially from those projected,” such as:
“risk of delays in the manufacture, production, delivery and/or completion of our vehicles…particularly Model 3” and “the ability of suppliers to meet quality and part delivery expectation at increasing volumes.”
“[t]he loss of any single or limited source supplier or the disruption in the supply of components,” that “could lead to product design changes and delays in product deliveries.”
“[Tesla] experienced in the past . . . significant delays or other complications in the design, manufacture, launch and production ramp of new vehicles” and that it “may also experience similar delays . . . in bringing to market and ramping production of new vehicles, such as Model 3.”
In addition to serving as a reminder of the broad protections afforded by the PSLRA safe harbor, Wochos also helps to reinforce the importance of forward-looking statements being accompanied by detailed, specific, and relevant cautionary language. For a more detailed discussion of Wochos, see this memo from Skadden, Arps, Slate, Meagher & Flom LLP.
IV. Practical Considerations for Management Teams
The following are best practices to implement before events where a company representative may be making forward-looking statements on behalf of the company:
Confirm appropriateness of the forward-looking statements disclaimer.
Not all forward-looking statements disclaimers are created equal. Internal counsel should be tasked with confirming that (i) the company’s forward-looking statements disclaimer has been reviewed in advance of the event; and (ii) the disclaimer includes references to the specific risks related to the company which could cause results to differ from the forward-looking statements that are expected to be made.
Review the forward-looking statements disclaimer.
Review the disclaimer through the lens of the specific forward-looking statements that will be made. Does the disclaimer identify factors that could cause actual results to differ from those in the forward-looking statements that you expect to make? If the answer is no or you are unsure, it would be worth discussing with internal counsel.
Confirm who will state at the outset that forward-looking statements will be made and where to find the associated cautionary statements.
As noted above, forward-looking statements that are accompanied by appropriate cautionary language should provide a safe harbor from liability under the federal securities laws. In the case of written materials, like earnings releases, including a robust written forward-looking statements disclaimer is a must. In the case of oral forward-looking statements, the statements should be accompanied by an oral statement that cautionary language is contained in a “readily available” written document. In practice, this generally translates to a company representative reading something like the following at the outset of a meeting:
“Before starting, I’d like to remind everyone that we’ll be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statement we make today. The factors that could cause our actual results to differ materially are discussed in the company’s most recent 10-K and 10-Q filed with the SEC.”
Remember that it isn’t just external presentations you need to consider for purposes of forward-looking statements disclaimers.
You should be mindful that certain internal presentations should also include an oral statement regarding cautionary language, like the one discussed above. One example is an end-of-quarter company town hall where members of management walk through financial results and share some of the same forward-looking statements with employees that were shared on the quarterly earnings call. Because the presentation is to employees, it is easy to presume that it’s a meeting amongst friends. This may very well be the case, but employees can also be shareholders or prospective shareholders in your company, as well as potential plaintiffs in federal securities lawsuits. If in doubt as to whether a disclaimer is warranted, consult with internal counsel.
V. Practice Pointers for Companies
What follows are a few practice pointers to help ensure your company’s forward-looking statements disclaimers are best positioned to help defend against lawsuits challenging them.
Review your forward-looking statements disclaimers often.
A company is best served to regularly review the cautionary statements included in its forward-looking statements disclaimers. This will help ensure that the cautionary statements reflect the risks and circumstances impacting the company at any given time. While a quarterly review of the forward-looking statements disclaimers is a good practice, reviewing in conjunction with ongoing public disclosures is a best practice. That is, companies should be mindful to consider updating forward-looking statements disclaimers to account for new risks related to its business, market, or other conditions (e.g., the COVID-19 pandemic, global conflict).
Pressure-test forward-looking statements.
This one may be obvious, but it’s still important to stress that there must be a reasonable basis underlying each of the forward-looking statements your company expects to make and to confirm in advance of repeating those statements. For example, if your management team is slated to provide an update on the company’s strategy and financial outlook at a company-sponsored investor day, there should be a robust internal review and confirmation of each forward-looking statement included in the slide presentation, as well as any related scripts and talking points.
Ensure the forward-looking statements are appropriately qualified by cautionary statements.
Forward-looking statements should be accompanied by cautionary statements tailored to your company’s circumstances. These cautionary statements should help investors understand how your forward-looking statements may differ materially from the company’s expectations. For example, if your company is a clinical-stage pharmaceutical company and you expect to make forward-looking statements regarding the timing of clinical trial results as part of an investor presentation, the disclaimer should include cautionary statements that speak to clinical trials. Certain risks that may be appropriate for your disclaimer to reference may include anticipated challenges or delays in conducting your clinical trials; difficulty obtaining scarce raw materials and supplies; resource constraints, including human capital and manufacturing capacity; and regulatory challenges.
The forward-looking statements disclaimer should be reviewed/managed by a cross-functional team.
Most companies delegate management of the forward-looking statements disclaimer to its legal function. As a best practice, companies should ensure that other functions (e.g., Finance, Investor Relations, Accounting) are also involved in the review and commenting process. A robust process will help to establish that the cautionary statements included in your forward-looking statements disclosure can stand up to claims that the disclaimer was not reflective of the current risks and/or circumstances that could impact your business.
State at the outset of events where forward-looking statements will be made that such statements will be made and where to find the associated cautionary statements.
As noted earlier, in the case that your company will be making oral forward-looking statements, ensure that a company representative orally states that the company will be making forward-looking statement and reference that cautionary language is contained in a “readily available” written document. This oral statement should be consistent across different settings. There may be a tendency to truncate the oral statement that is used during earnings calls when it comes to more informal events like a company town hall or fireside chat. That should be avoided.
Include forward-looking statements disclaimers in certain internal presentations and communications.
As discussed earlier, certain internal presentations may call for the inclusion of forward-looking statements disclaimers. Certain internal communications, like company-wide emails, may fall into the same category. Best practice would be to establish guidelines regarding which internal presentations and communications call for these disclaimers. These guidelines can then be shared with the functional teams that organize internal presentations and communications with the instruction that they involve Legal early in the planning process.
Don’t forget about your website and social media presence.
The PSLRA safe harbor is critical in that it significantly reduces the risk of companies being subjected to certain frivolous federal securities lawsuits. Failure to keep an eye on your forward-looking statements disclaimers can result in a court denying your ability to benefit from the PSLRA safe harbor. The practical considerations and practice pointers discussed above should help form the basis to either establish or enhance your internal processes around forward-looking statements disclaimers.
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