On March 24, 2015, the U.S. Supreme Court issued its decision in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund, et al., addressing when an issuer may be held liable for material misstatements or omissions under Section 11 of the Securities Act of 1933 for statements of opinion in a registration statement.
Among other things, the Supreme Court held that an issuer may be held liable under Section 11 for a statement of opinion, even one that is sincerely held, if its registration statement omits facts about the issuer's inquiry into, or knowledge concerning, a statement of opinion and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.
In some respects, the Supreme Court's decision is reminiscent of case law that preceded the adoption of the Private Securities Litigation Reform Act (PSLRA) in 1995 and introduces uncertainty regarding the appropriate scope of disclosure regarding, and inquiry as to the basis of, opinion statements to avoid liability under Section 11.
Given this uncertainty, and the likelihood that plaintiffs will try to expand the application of the Omnicare decision beyond Section 11 to other provisions of the Securities Act, including Section 12, Section 10 and Rule 10b-5, we caution that persons that may be subject to liability under the Securities Act should be disciplined in the use of true statements of opinion in offering documents, periodic reports, and other disclosure documents.
The case arose from a 2005 stock offering by Omnicare, Inc., a U.S.-based provider of pharmacy services. The registration statement for the offering contained opinion statements regarding compliance with laws related to Omnicare's practice of accepting rebates from pharmaceutical manufacturers; in particular:
"We believe our contract arrangements with other 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 registration statement included caveats regarding these opinions, including statements:
cautioning that laws relating to such practice might be interpreted in the future in a manner inconsistent with Omnicare's interpretation and application; and
noting that the federal government had expressed significant concerns about some manufacturers' rebates to pharmacies.
Subsequent to the completion of the offering, the federal government filed suit against Omnicare for alleged violations of anti-kickback laws. Citing these lawsuits, the plaintiffs alleged that the two statements of opinion set forth above gave rise to Section 11 liability.
The district court granted Omnicare's motion to dismiss, holding that statements by Omnicare regarding its belief of its legal compliance were "soft" information and not actionable unless Omnicare knew that the statements were untrue when made, essentially applying the "actual knowledge" of falsity standard under the PSLRA. The Sixth Circuit reversed the district court, holding that it was sufficient for the plaintiffs to allege that Omnicare's belief was objectively false, regardless of whether Omnicare subjectively believed the stated opinion.
The Supreme Court stated that both lower courts failed to consider the plaintiffs' omissions theory with the proper standard and thus remanded the case to the district court to determine whether the plaintiffs stated a viable claim that Omnicare omitted some specific fact that would have been material to a reasonable investor or, if not, whether the plaintiffs should be given an opportunity to replead.
Takeaways from Omnicare
While the Omnicare opinion confirms longstanding tenets of public disclosure (e.g., an issuer is not automatically liable if an opinion later proves to be incorrect), it also introduces uncertainty regarding the scope of disclosure necessary to allow a reasonable investor to understand the basis of an opinion statement and the scope of inquiry one must undertake to establish the bases of the opinion statement. In many respects, the Supreme Court's decision is reminiscent of the 1989 In re Apple Computer Sec. Litigation decision, in which the Ninth Circuit held that "[a] projection or statement of belief contains at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. A projection or statement of belief may be actionable to the extent that one of these implied factual assertions is inaccurate." In any event, the standard imposed by the Supreme Court will be easier for plaintiffs to meet than the "actual knowledge" of falsity standard under the PSLRA.
However, the Supreme Court's decision is limited to statements of opinion, not projections and other forward-looking statements. As a result, we believe that issuers should carefully scrutinize non-factual statements contained in SEC-filed documents to determine whether they are truly opinions or forward-looking statements falling within the safe harbor afforded by the PSLRA. Issuers should identify forward looking statements as such and provide meaningful cautionary disclosure identifying important facts that could cause actual results to differ materially from those in the forward-looking statement. If a statement is eligible for the safe harbor, a plaintiff would be required to prove that the maker of the statement had "actual knowledge" that the statement was false or misleading, a higher burden than that imposed by the Supreme Court in the Omnicare decision with respect to opinion statements. In instances where the safe harbor is unavailable (e.g., initial public offerings and tender offers), issuers should still consider identifying forward-looking statements in the same manner as safe harbor eligible statements, as the judicial "bespeaks caution" doctrine may provide some measure of protection.
For statements that truly are opinions, issuers should consider disclosing:
the basis for the stated opinion;
any material assumptions underlying the opinion;
caveats regarding any uncertainty or the limited scope of the opinion; and
any material countervailing factors that might lead to a different conclusion, including cross-references to relevant risk factor disclosures.
In addition, we would recommend that steps be taken by persons that may be subject to disclosure-based securities law claims, particularly those such as underwriters and directors that have a due diligence defense, to mitigate the risks they face, including:
confirming that statements of opinion included in publicly filed documents are actually held by management;
understanding and documenting the basis for management's subjective belief of a statement of opinion;
verifying embedded factual assertions within statements of opinion; and
for highly specific statements of opinion, confirming that the inquiries serving as the bases for the opinion are appropriately specific.