Rely Only on This Prospectus . . . Unless We Left Something Out

by Akin Gump Strauss Hauer & Feld LLP
Contact

In a little-noticed part of a December 2013 opinion in the multidistrict Facebook IPO litigation, U.S. District Judge Robert Sweet ruled that plaintiffs could use prospectus language once thought to be a shield against antifraud litigation as a sword to parry an immateriality defense. In reaching this conclusion, Judge Sweet followed a 2010 opinion by U.S. District Judge Jed Rakoff interpreting similar language in litigation over Bank of America’s acquisition of Merrill Lynch. Although the language remains common in securities disclosure documents, issuers and their counsel should consider carefully whether to continue including it.

Facebook IPO and Bank of America Acquisition of Merrill Lynch

Facebook’s 2012 IPO prospectus explicitly instructed investors, “You should not rely on information in public media that is published by third parties.” When investors sued Facebook for failure to disclose the potential impact of increasing mobile usage and product decisions in its registration statement, Facebook argued that news reports about this issue made such nondisclosure immaterial. See In Re Facebook, Inc., IPO Securities and Derivative Litigation, MDL No. 12-2389, slip op. at 77-78 (S.D.N.Y. Dec. 11, 2013). In addressing this argument, Judge Sweet ruled that news reports should not be considered for purposes of the materiality analysis. He explained, “A reasonable investor will not be charged to regard press reports as a reliable source of information after having read such advice.”

To support this ruling, Judge Sweet cited a 2010 opinion by Judge Rakoff, which held that similar language asking investors not to rely on information outside of a proxy statement precluded the defendant from including news reports as evidence to show that misrepresentations were immaterial. In SEC v. Bank of America Corp, 677 F. Supp. 2d 717 (S.D.N.Y. 2010), the SEC claimed Bank of America violated proxy rules in its proxy statement seeking approval from shareholders for Bank of America’s purchase of Merrill Lynch. The proxy statement explained that Merrill was prohibited from paying year-end bonuses without Bank of America’s consent, but failed to mention that Bank of America had already consented in writing to payment of up to $5.8 billion in such bonuses.

Bank of America argued that shareholders already knew that Merrill would pay the bonuses because of widespread media reports, thereby rendering the alleged misrepresentations immaterial in the context of the “total mix” of information available to them. Judge Rakoff rejected this defense on the basis that the proxy statement included the nonreliance language. The disclaimer “totally changed the relevant mix of information for assessing materiality.” He reasoned that, “Since the Bank itself warned investors not to rely on the media, it would be unreasonable for a shareholder to consider the media pronouncements to be part of the relevant mix of information.” In light of the warning language in the proxy statement about outside information, the bank could not argue that news reports were part of the “mix” of information relevant to whether alleged misrepresentations in the proxy statement were material.

The Bank of America decision received considerable attention in the news media, including in The New York Times Dealbook and Business Insider. The following month, the SEC and Bank of America settled the case, along with other claims against Bank of America, for $150 million.

An Old Warning and a New Approach

For decades, offering documents in capital markets transactions have included warnings that investors should rely exclusively on the information contained in the prospectus. The following is a typical formulation, often placed toward the beginning of the document in bold type:

You should rely only on the information contained or incorporated by reference in this document. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this document. Therefore, if anyone does give you information of this sort, you should not rely on it.

Historically, securities lawyers have inserted these disclaimers to protect against the possibility that an agent of the issuer or underwriters might make an inaccurately positive comment about the company in the course of marketing the securities. In the event that the value of the securities declines after the deal closes, investors may sue the issuer or underwriters claiming that the statement violated Rule 10b-5 under the Exchange Act, Section 12(a)(2) of the Securities Act or state antifraud laws. The standard disclaimer may weaken these claims in two ways. First, the disclaimer suggests that the issuer should not have to take responsibility for the statement because investors have been warned that no information outside the offering document has been authorized. Second, in the event that a court does attribute the information to the issuer or underwriters, many of the relevant causes of action require the plaintiff to prove “reliance” on the misrepresentation or allow the defendant to rebut a presumption of reliance. If the investors have been specifically instructed not to rely on outside information, it may be harder for them to prove they actually did.

Judge Rakoff turned this logic on its head by ruling that the language issuers thought would impede plaintiffs’ ability to prove reliance instead allowed them to exclude outside materials from the materiality analysis. In the wake of Judge Rakoff’s decision, some issuers began revising their disclosure documents to remove the “reliance” language, and now limit the disclaimer to an alternative along the lines of the following:

We have not, and the underwriters have not, authorized anyone to give you any information other than in this prospectus and the information incorporated by reference herein. We take no responsibility for, and can provide no assurances as to the reliability of, any other information that others may give you.

This alternative language addresses the concern in Judge Rakoff’s decision that issuers should not be able to tell investors at the time of the offering not to look at outside information and then later claim that outside information was relevant to materiality. An issuer that used the revised language could presumably argue that outside news reports were part of the “mix” of information relevant to materiality. At the same time, the warning still seeks to mitigate litigation risk for statements outside of the prospectus by disclaiming responsibility for them and warning about their potential unreliability.

Despite Judge Rakoff’s 2010 decision, other issuers—such as Facebook—have continued to take the traditional approach of a full warning against reliance.

A Way Forward

In light of the Facebook case following Judge Rakoff’s reasoning, is it ever prudent for issuers to include the full disclaimer? Arguably, the traditional approach may still be better to weaken the reliance element of a fraud case because it explicitly warns against reliance. In the alternative approach, if a plaintiff argues that it relied on information outside of the prospectus, the issuer would be able to respond only that it had warned that it did not take responsibility for any outside information and that the information may not be reliable. The alternative warning potentially undercuts both the issuer’s responsibility for the information and the reasonableness of an investor’s reliance on it. Nevertheless, if other evidence suggests that the issuer indeed authorized the information—such as emails demonstrating that senior management approved the distribution—the alternative warning might provide less protection than the traditional one.

So which approach is better? In most circumstances—especially if the issuer receives heavy (or negative) media coverage, as in the Bank of America and Facebook cases—it is preferable to use the alternative approach. Under Judge Rakoff’s reasoning, outside information could be included in the “mix” of information relevant to whether a particular misstatement or omission is immaterial. However, if the issuer receives little media coverage or expects difficulties controlling its agents’ statements, the traditional language might be better. For these issuers, the risk of outside information being relevant to a materiality analysis is slight and it might be more important to hamper a prospective plaintiff’s ability to prove reliance.

Of course, under either approach, the best defense is to avoid a lawsuit in the first place. Issuers, underwriters and their law firms must vigilantly monitor the professionals who might disseminate information outside of the traditional offering materials to decrease the chance of spreading misinformation. Furthermore, offering participants should draft comprehensive prospectus disclosure that highlights significant business issues and risks, including those mentioned in media reports.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Akin Gump Strauss Hauer & Feld LLP | Attorney Advertising

Written by:

Akin Gump Strauss Hauer & Feld LLP
Contact
more
less

Akin Gump Strauss Hauer & Feld LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.