Wednesday, June 25, 2014
Harumph. Business as usual at the SCOTUS . . . . As a student and teacher of Basic v. Levinson and its progeny, I guess I had hoped for more from the U.S. Supreme Court's opinion in Halliburton, released two days ago. I haven't yet read all the articles on the case that were published since the release of the opinion (as usual, quite a number), so my thoughts here represent my personal reflections.
After engaging in some self-analysis, I have determined that my disappointment with the Court's opinion stems from the fact that I am a transactional lawyer . . . and the Court's opinion is about procedure. Not that civil and criminal procedure do not impact transactional law. Au contraire. The procedure and substance of Section 10(b)/Rule 10b-5 claims are intertwined in many fascinating ways. I will come back to that somewhat in a minute. But the Court's opinion in Halliburton just doesn't satisfy the transactional lawyer in me.
This also is somewhat true of the SCOTUS opinions in both Dura Pharmaceuticals and Tellabs, which deal with pleading (in)sufficiencies in Section 10(b)/Rule 10b-5 litigation rather than (as in Halliburton) class certification questions. In its class certification focus, Halliburton is much more the sibling of Amgen, which I find infinitely more satisfying because it (like Basic and Matrixx) focuses on materiality, which infuses all disclosure decisions. All of these cases, however, center on a defendant's ability to get dismissal of an action at an early stage, something that defendants in Section 10(b)/Rule 10b-5 cases desperately want to do. The longer the case goes on, the more incentive defendants have to settle--oftentimes (in my experience) foregoing the opportunity to defend themselves against specious claims because of the ongoing drain on financial and human resources.
So, what, if anything, can a transactional lawyer take away from Halliburton (or Dura or Tellabs, for that matter)? For me (and I invite you to share your own views), what the Halliburton opinion may offer is some additional information about the nature of the elements of a successful claim under Section 10(b) and Rule 10b-5. To give good advice, a transactional lawyer must understand the elements of the claims that may later be brought to challenge the transactions he or she suggests and implements. The structure and execution of a transaction and the counsel given to management respond to these elements. As a general matter, a transactional lawyer's value is rooted in his or her ability to efficaciously structure and implement a transaction that achieves the client's objectives. Efficacy typically depends, in part, on litigation avoidance (or, in this day and age, where deal litigation is essentially a given in public company transactions, the avoidance of legal claims that survive motions to dismiss and for summary judgment). This desired effect is achieved through precise lawyering, absent purposeful ambiguity created for very specific purposes in some circumstances.
So, what information does Halliburton specifically convey in this regard? Well, it might have been obvious to some, but because the presumption of reliance under Basic is based on a connection between the defendant's wrongful conduct (misstatement or misleading omission to state material fact) and the price paid to or received by the plaintiff, "[p]rice impact is . . . an essential precondition for any Rule 10b–5 class action." The Court separately notes, citing to its opinion in Amgen, that while materiality also is a precondition to a Section 10(b)/Rule 10b-5 claim, it is not an appropriate matter for consideration at the class certification stage, since "materiality is an objective issue susceptible to common, classwide proof." Accordingly, reliance bears on the predominance requirement at he class certification stage; materiality does not.
Thus, while both reliance and materiality are of concern to firm management when considering the risks of a business transaction that may result in a securities fraud claim under Section 10(b) and Rule 10b-5, uncertainties about materiality present greater potential barriers to dismissal of a future claim (and, therefore, longer-term, more intractable, risk) than uncertainties about reliance. This take-away has limited value in the transactional setting, however, since the risk assessment for transactional disclosures ex ante is unlikely to proceed at this level of detail unless the merits and drawbacks of specific disclosures are being assessed. Hence, my feeling of detachment and dissatisfaction with the Court's opinion, for what that's worth (maybe not much) . . . .