Section 11 Actions Based on Statements of Belief

Omnicare is back in court.  This time, it is petitioning the Supreme Court for relief in a legal battle under Section 11 of the Securities Act of 1933, as amended.  The question presented (as quoted from the cert petition) is:

For purposes of a Section 11 claim, may a plaintiff plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false—requiring allegations that the speaker’s actual opinion was different from the one expressed—as the Second, Third, and Ninth Circuits have held?

If this case sounds familiar to you, that may be because co-blogger Ann Lipton already has written about the case here on the BLPB.  As it turns out, Ann and I each have signed onto amicus briefs in the case supporting the same side--the respondents.  The brief that Ann is on can be found here.  The question addressed in that brief is "[w]hether an objectively incorrect statement of opinion is actionable under Section 11 . . . only if it was subjectively disbelieved by the defendant."  Jay Brown's brief, of which I am a named co-author (together with Lyman Johnson and Celia Taylor), is here.  We address "[w]hether, for purposes of issuer liability under Section 11 . . . a statement in a registration statement attempting to characterize a verifiable, present fact about the legal validity of contracts as a 'belief' rather than a fact can shield an issuer from liability."

At issue in the case is the following statement (among others) made in an effective registration statement: “[w]e 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.”  Plaintiffs assert that this statement is actionable because the defendants had in their possession facts indicating that contracts were not legally valid at the time the statement was made.  Our brief endorses that view.  Specifically, we reject the petitioners' arguments that the statement of belief is not actionable because it is an opinion rather than a "fact."  We also argue that, even if the statement of belief is an opinion, it is actionable if it lacked a reasonable basis when made or if the maker possessed undisclosed facts that contradict the accuracy of the statement at the time it was made.  Read the brief for more.

Interestingly, 1933 Act registration statement comments on contracts are in the news this week for another reason.  An article about the Alibaba IPO from Saturday's issue of The Economist notes "that Alibaba does not own the websites that generate its revenues . . . . Instead, the listed firm owns the rights to those revenues, under a type of contract that it believes to be valid but, its prospectus admits, is the subject of 'substantial uncertainties' under Chinese law."  Certainly, this represents a different approach to disclosure than that taken by Omnicare . . . .  [Hat tip to Lyman Johnson for that information and the source]  As habitual BLPB readers may recall, co-blogger Marcia Narine mentioned the weight of the overall "risk factor" disclosures in the Alibaba registration statement in her post on the IPO last week.

In my former life, I used to draft and review disclosure for public offering registration statements.  In performing those services, if I had known, as issuer's counsel, that the legal validity of my client's contracts was at issue for any reason (which assumes thorough due diligence processes and a client that wants to comply with the securities laws by providing accurate and complete information to its counsel, among others), I would like to think that I would have advised (1) not including disclosure about the contracts in the registration statement at all (assuming the failure to make the disclosure did not constitute the omission of a material fact necessary to make the remaining statements of the issuer not misleading) or (2) including disclosure about the contracts in the document, together with any additional information necessary to ensure that the disclosure made is both accurate and complete.  Statements of belief may be appropriate in a registration statement and should not result in Section 11 liability for the issuer when there is honest uncertainty about the matter disclosed that cannot be resolved at the time the registration statement becomes effective.  That honest uncertainty exists when the opinion is not counterfactual and has a reasonable basis.

Of course, it is uncomfortable to air dirty laundry so publicly.  Why would an issuer want to admit that it bases its business on contracts that may not be valid (or binding, or enforceable)?  But that's the bargain an issuer strikes if it desires to access the public markets.  Although the nature of "publicness" is changing (as I noted in earlier posts here and here), enhanced transparency is the name of the game for public companies.  They are best advised to disclose accurately and completely in their public statements lest the cover-up be worse than (or at least a compounding factor to) the crime.