Reactions to the Supreme Court in Omnicare Inc. v. Laborers District Council Construction Industry Pensions Fund, No. 13-435, have been predictably varied. Most note that there are pluses and minuses for both plaintiffs and defendants in federal securities cases under section 11 of the Securities Act of 1933. Dealmakers express relief that they can devise disclosures to protect against liability for opinions stated in registration statements that are part of public company mergers. Plaintiffs’ lawyers say they now have a Supreme Court imprimatur for causes of action challenging undisclosed feeble support for company or management opinions in public offering materials. More developments are inevitable as commentators and the courts focus on the scope and application of Justice Kagan’s concept of what I call “incomplete opinions.” Our post on the Omnicare opinion is available here: Omnicare: Supreme Court Shoots Down 6th Circuit, but Adopts Amorphous Standard for Section 11 Opinion Liability.
Some amusing reactions discuss Justice Kagan’s unusual chatty style of writing: Minor Wordfoolery in Today’s Supreme Court Opinion (Lowering the Bar) (commenting on pronoun sniping between Kagan and Scalia); “Way overstates,” in a Supreme Court opinion (Washington Post) (commenting on a lapse into Valley girl speak by Kagan); and “Yeah, Well, That’s Just, Like, Your Opinion”: Supreme Court Limits Securities Liability for Opinions in Omnicare (JDSupra) (in which the only stylistic comment is in the title, but it makes the point).
See for yourself. We provide below links to commentary about the Omnicare decision. These links will be updated in the future to include thoughts published after today (March 25, 2015):
We include at the bottom the descriptions and analyses published by various law firms. For your convenience, if you prefer not to go through the many primary sources provided, we provide at the outset of that section a sampling of quotes from these materials with “takeaways” laid out by several firms.
Omnicare: Supreme Court Shoots Down 6th Circuit, but Adopts Amorphous Standard for Section 11 Opinion Liability (Straight Arrow Mar. 24, 2015 Blog Post)
In Omnicare the Supreme Court Provides Evidence for Opinions in Registration Statements (Wolf Haldenstein)
IMHO Omnicare Doesn’t Materially Change Opinion Disclosure (The Venture Alley)
Omnicare: Section 11 Liability and Opinions (SEC Actions)
“Yeah, Well, That’s Just, Like, Your Opinion”: Supreme Court Limits Securities Liability for Opinions in Omnicare (JDSupra)
Supreme Court’s “Omnicare” Decision Follows Middle Path (Washington Legal Foundation)
A company’s opinion isn’t always a lie (Bloomberg)
High Court gives Omnicare another shot at stopping investor suit (Wall Street Journal)
Law Firm Advisories
Summary of “takeaways”:
The Omnicare decision will affect whether and how opinions are communicated in registration statements. It may also shape, to some extent, how courts approach liability even for statements alleged to be misleading where a material fact is omitted from other investor communications. That is because the statutory language at issue in Omnicare is similar to more than a dozen other federal securities laws provisions. One key difference, however, is that civil liability under other statutes like Section 10(b) of the Securities Exchange Act of 1934—the federal securities statute most frequently invoked by private plaintiffs—requires proof of scienter, unlike Section 11. That means that, with respect to opinion statements made outside of registration statements, plaintiffs must show not only a material misstatement or omission, but also that a defendant did not believe his or her opinion and intended to deceive investors, a high hurdle for plaintiffs to overcome.
Going forward, public companies, their speakers, and the gatekeepers who advise them (including in -house and external counsel) should give special consideration to expressions of opinion that are communicated to the investing public. A prudent approach would be to accompany statements of opinion with the actual basis for the belief, the reasons for that belief, and qualifications of the opinion, including caveats or statements of tentativeness. In addition, documents supporting the basis for every statement of opinion should be verified, preserved, and readily accessible if litigation is filed. Indeed, doing so can significantly help bolster the defense of claims relating to all types of public statements, not just statements of opinion.
Yesterday’s decision provides important guidance on how Section 11 applies to statements of opinions. The Court’s guidance is significant in light of the critical role of pleading standards and motions to dismiss in securities litigation. The Court’s decision confirms that Section 11 does not authorize lawsuits based on honestly held opinions in registration statements that subsequently turn out to be wrong…. [W]hen opinion statements contain embedded factual assertions—i.e., when an issuer says that it holds a particular opinion because of some fact—issuers should be careful that they have taken measures to verify the factual assertions underlying those opinions.The decision may encourage plaintiffs’ lawyers to bring litigation over whether issuers have adequately accompanied their opinions with statements about how they formed those opinions—i.e., “facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have.” But the Supreme Court made clear that, “to avoid exposure for omissions under [Section] 11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief.”
…. To guard against the possibility of omissions liability, issuers should consider setting forth the bases for opinion statements in disclosure documents where necessary to prevent any potential confusion. Issuers also should consider whether there are any material assumptions underlying their opinion statements that would not be apparent from the context of the opinion and may be material to a reasonable investor…. [I]ssuers should consider accompanying their opinion statements with language making clear the opinions’ uncertainty or limited nature or scope. Although the Supreme Court’s decision rested on the language of Section 11, plaintiffs’ lawyers may seek to extend the Court’s rationale to claims under other provisions of the securities laws, such as Section 12 of the Securities Act and Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, including with respect to oral or written statements of opinion not crafted with the care and forethought applied to registration statements. The Supreme Court was clear, however, that plaintiffs have substantially less room to claim to have been misled by opinions outside the context of carefully drafted registration statements and similar documents…. Defendants may wish to resist any attempt to extend yesterday’s decision beyond litigation under Section 11 in the context of registration statements.
Notably, Section 11 cases are typically subject to a stay of discovery during the pendency of a motion to dismiss under the Private Securities Litigation Reform Act of 1995 (PSLRA), and thus plaintiffs will likely have to plead such facts without the benefit of any discovery.
It bears noting, however, that plaintiffs are increasingly filing their Section 11 cases in state court—as there is a split among district courts as to whether Section 11 cases are removable to federal court—and in so doing are arguing that the PSLRA stay of discovery does not apply. The Omnicare decision may create further incentive for plaintiffs to file in state court to attempt to obtain discovery in order to properly plead a Section 11 claim under the Omnicare standard.
…. The opinion  strongly suggests that the presence of words like “I believe” may indicate a statement of opinion, rather than one of fact…. As a result, issuers may be more likely — and well advised to use such “opinion” language in their registration statements and other disclosures going forward. The Court’s ruling, however, also leaves considerable room for lower courts to develop more precise rules about what types of statements do and do not constitute opinions….
[T]he Supreme Court’s ruling that a statement of opinion may be actionable under Section 11 under an omissions theory is likely open to a new avenue of litigation. Plaintiffs who cannot allege that an opinion was not honestly held may instead allege that it was based on inadequate inquiry or that there was contrary information available to the speaker. The extent to which such allegations are sufficient to avoid a motion to dismiss will require further judicial development…. [I]t will be up to lower courts to develop case law distinguishing actionable amissions from non-actionable ones, and those distinctions may depend on industry practice and other factors that the Supreme Court’s opinion references but does not conclusively determine.
…. [T]he Supreme Court’s opinion does not address the application of the standards it sets forth to claims based on statements of opinion that are asserted under provisions of the federal securities laws other than Section 11. The Second Circuit Court of Appeals, for example, has held that the same standards for pleading an actionable misstatement of opinion that apply under Section 11—including subjective falsity—also apply to claims asserted under Section 10(b)…. The Supreme Court’s opinion in Omnicare appears to leave such lower court decisions intact —at least insofar as they concern alleged misstatements. But, to the extent that lower courts have not drawn the same distinction as the Supreme Court did between affirmative misstatements of opinion and statements of opinion that omit material facts, the decision also raises certain unanswered questions. These include, for example, whether plaintiffs alleging that a statement of opinion is materially misleading under Section 10(b) because the defendant omits that he failed to conduct an investigation supporting his opinion would be entitled to a presumption of reliance under Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972), or whether such plaintiffs would be required to demonstrate reliance through one of the means applicable to a claim of alleged misrepresentation.
…. [T]he Court’s decision places some important restrictions on investors’ ability to challenge statements of opinion under § 11. First, an issuer need not disclose all facts supporting or undercutting its expressed opinion. Normal principles of materiality still apply…. Second, and relatedly, an issuer can reduce the risk of § 11 liability by “including hedges, disclaimers, and apparently conflicting information.” For example, an issuer wishing to express its belief in its compliance with law can note the existence of any private or governmental litigation – and any conflicting legal decisions – on the matter at issue and can include cautionary language warning that courts or regulators could view the factual and legal issues differently than does the issuer…. Third, issuers can take some comfort from the Court’s unwillingness to countenance generalized, conclusory assertions about alleged omissions and lack of reasonable basis for opinions expressed. While the Court cited the general notice-pleading standard articulated in Ashcroft v. Iqbal, the Omnicare decision applies specifically in the § 11 context, so issuers will undoubtedly focus on this language if they believe that plaintiffs have not pled “particular (and material) facts going to the basis for the issuer’s opinion.”
Subsequent cases will explore whether and to what extent Omnicare applies to claims under § 10(b) of the Securities Exchange Act, which – unlike § 11 – requires plaintiffs to prove the defendants’ knowledge (or at least recklessness) as to falsity. If Omnicare allows § 11 liability where an issuer omits material information about the basis for its opinions, must a § 10(b) plaintiff prove that the issuer acted with the requisite scienter in omitting that information?
Moreover, if Omnicare applies to § 10(b) cases involving opinions, investors will presumably need to satisfy the heightened pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) in specifying the “facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have – whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.” The pleading standard that Omnicare cited should not suffice in a PSLRA case.
…. As with most such decisions, the proof is in the pudding: Omnicare’s impact on Section 11 litigation will be borne out in the coming months and years as lower courts grapple with the decision. And while Omnicare’s relevance beyond Section 11 will no doubt be debated, the opinion’s reach, particularly to federal securities law claims that require scienter, is questionable. A more subjective standard, such as that set forth in Justice Scalia’s concurrence, likely remains more fitting for scienter-based claims…. But regardless of how the omission standard is applied to federal securities law claims requiring scienter, plaintiffs still face a high pleading burden in such cases.
…. [T]he Court did not directly address important issues regarding how the Omnicare analysis will be applied.
The Court’s opinion provides relatively little guidance as to when an omission may give rise to Section 11 liability. The Court stated that “to avoid exposure for omissions under [Section] 11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief” – but left it to the lower courts to determine the extent to which the basis of an opinion should be disclosed to accord with a reasonable investor’s expectations, and what more an issuer should say about the “tentativeness” of the belief beyond the inherent uncertainty conveyed by stating the view in the form of an opinion.
The Court also did not address whether and how its analysis applies outside of Sechtion 11. Much of the Omnicare decision has the potential to be equally applicable to other statutes requiring false or misleading misrepresentations or omissions.
As for omissions and opinions under Section 11, because Omnicare’s inquiry focuses on the speaker’s “basis for offering the opinion,” the “foundation” a reasonable investor “would expect an issuer to have,” and “reading the statement fairly and in context,” there will be considerable room for future disagreement between the defense and shareholder plaintiffs’ bars. Nevertheless, the confirmation that these alleged omissions must be pled with specificity and must be material to a reasonable investor is helpful to issuers.
After Omnicare, it seems likely that future Section 11 complaints involving opinions will be pled strategically under an omissions theory, not as direct misstatements (absent a “smoking gun”). Companies preparing for an offering should pay close attention to any statement that may qualify as an opinion and carefully review the “hedges, disclaimers or qualifications” directly tied to that opinion in the registration statement. The Supreme Court instructed that this “context” is critical to determining whether an omission is material and misleading.
Moreover, in instances where an issuer is faced with an internal diversity of views about an opinion, the crafting of the disclosure language is not the only critical step for the company and its counsel. How those diverse views are resolved and memorialized may be critical, should a Section 11 suit concerning that opinion reach the discovery phase.
Arnold & Porter:
While Omnicare involved filings made under the Securities Act of 1933 (registration statements),its reasoning may be instructive for other types of filings – whether statements are materially misleading or omit material facts is a common element of many other claims under the federal securities laws, including those that govern periodic filings. As the Court wrote, “These principles are not unique to § 11: They inhere, too, in much common law respecting the tort of misrepresentation.
”An issuer’s statement of opinion will not result in liability solely on the basis that the opinion turned out to be incorrect. Nor, however, are issuers immunized from potential liability because statements are couched as opinions rather than facts. As the Court indicated, there are no “magic words” such as “we believe” or “we think” that will foreclose liability in all circumstances.
The Court emphasized that the evaluation of particular disclosures “always depends on context.” Accordingly, predicting how lower courts will apply the Court’s standard to particular disclosures may be difficult. This may be especially true with respect to statements of opinion of the type at issue in Omnicare – i.e., opinions regarding legal compliance – made by companies that could face allegations under anti-kickback laws (such as pharmaceutical or medical device companies) or other laws that are ambiguous as to the lines between lawful and unlawful conduct (such as the Foreign Corrupt Practices Act). It remains to be seen how lower courts will apply Omnicare, especially in the context of statements of opinion about compliance with complex regulatory statutory schemes where the lines are blurred.
Shearman & Sterling:
From the defense perspective, while the Court’s repudiation of the Sixth Circuit’s “objective falsity” standard for Section 11 material misstatement claims is an important victory, the Court’s omissions analysis could invite more Securities Act claims attacking statements of opinion. Issuers frequently offer statements of opinion concerning “inherently subjective and uncertain assessments,” including, for example, with respect to matters required by GAAP (such as goodwill calculations, reserves or loss contingencies). In the wake of Omnicare, an issuer cannot be confident that Section 11 challenges to such opinions will be subject to dismissal simply because the plaintiff is unable to adequately allege subjective falsity. Accordingly, issuers may need to consider, among other things, whether or the extent to which statements of opinion can or should be coupled with appropriate caveats (beyond those that inhere in the very nature of an opinion) or with an elucidation of the rationale or basis underlying the opinion. And with relatively little guidance from the Supreme Court on how to apply a context-specific standard, the outcomes in Section 11 cases challenging statements of opinion on an omission theory can be expected to vary depending upon the judge. Having said that, the Supreme Court’s admonition that going the omissions route will be “no small task for investors, ”and its seeming requirement of a tight and specifically pleaded nexus between the opinion and a truly important omitted fact regarding its basis, bear emphasis. Properly construed, we believe the Court’s decision should allow potential opinion liability based on omissions in a relatively narrow set of cases rather than open the floodgates to opinion-focused claims.
This week the United States Supreme Court issued a landmark opinion under the federal securities laws in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, ruling that investors can in some cases recover damages for losses even for statements couched as “opinions.” The Court found that an issuer’s opinions in a registration statement filed in connection with a public offering can be rendered misleading by the issuer’s failure to disclose certain material facts. The Supreme Court’s opinion effectively overrules the more narrow existing standard established by federal courts in New York, which have held that an issuer’s opinions in a registration statement are actionable only if the investor can prove that those opinions were both objectively false and the issuer did not believe them at the time they were expressed.
The Omnicare decision, while on its face a victory for the issuer and protective of opinion statements, will nonetheless open up new avenues for future litigation concerning the contours of omissions liability arising from statements of opinion. In the event that, in hindsight, an opinion turns out to have been untrue, plaintiffs’ lawyers will likely challenge whether the basis of the opinion was adequately disclosed. Although Omnicare rests on the language of Section 11, plaintiffs may seek to apply Omnicare to claims arising under other provisions of the securities laws, including statements of opinion expressed in places other than registration statements.
Kink & Spaulding:
Omnicare leaves the door open to litigation about the omissions clause of Section 11, much of which will take place at the motion-to-dismiss stage. The Court stressed that satisfying the applicable pleading burden will be “no small task” for plaintiffs, who cannot skate by with “conclusory assertions” or allegations “that the issuer failed to reveal [the] basis” for its opinion. Instead, “[t]he investor must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”
Lower courts can expect to spend long hours applying this new standard to the prolix complaints that are regularly filed when stock prices drop in the wake of bad news. Public companies hoping to avoid getting caught up in that process might heed Omnicare’s advice that, “to avoid exposure for omissions under § 11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief.” Alternatively, they might “control what they have to disclose . . . by controlling what they say to the market,” in recognition of the fact that “[s]ilence, absent a duty to disclose, is not misleading.” Such reluctance to opine could contribute to a deepened circuit split over whether a violation of Item 303 can form the basis of a claim under the federal securities laws.
Claims premised on an asserted untrue statement of fact. The Omnicare decision likely will have little impact on the volume of Section 11 claims premised on an opinion that allegedly was not honestly believed. Although not an issue addressed by the Supreme Court, circuit courts consistently have held that, because such claims sound in fraud, the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure apply to the claims. Accordingly, the trend in the plaintiffs’ bar, as illustrated by the pleading in the Omnicare case itself, is to disclaim any suggestion that the Section 11 claim is premised on a knowingly false statement. Because the Omnicare decision explicitly requires, for pleading a false statement of opinion, that the plaintiff allege a knowingly disbelieved opinion, which would have to meet the stringent pleading requirements for a fraud claim, we expect the plaintiffs’ bar to avoid making such claims absent exceptional circumstances.
Claims premised on an allegedly misleading opinion. The Omnicare decision is likely to result in more Section 11 claims premised on supposedly misleading opinion statements, and potentially in a greater number of Section 11 claims that survive at least an initial motion to dismiss.
The Omnicare decision dramatically alters the standards for reviewing Section 11 claims premised on opinions in those federal circuits, such as the Second Circuit and the Ninth Circuit, that had required plaintiffs to allege both that a statement of opinion was not only “objectively” false but also “subjectively” false in that it was disbelieved by the speaker. In those circuits, plaintiffs had to allege facts raising an inference of dishonesty, which often proved an insurmountable hurdle. That bulwark against Section 11 claims directed at opinions is now no longer available. Moreover, the question of what facts a “reasonable” investor might infer from an opinion – like the issue of what facts a “reasonable” investor might consider material – may prove notoriously fact-specific and not amenable to ready resolution on a motion to dismiss or for summary judgment. The Supreme Court suggested that its ruling would not likely open the floodgates to litigation because a plaintiff must still satisfy the “facial plausibility” pleading standard of Rule 8(a) of the Federal Rules of Civil Procedure and thus “identify particular (and material) facts going to the basis for the issuer’s opinion – facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have – whose omission makes the opinion statement” misleading to a reasonable investor “reading the statement fairly and in context.”
We anticipate that, in many cases, distilling those factual inferences that a reasonable investor might draw from an opinion and assessing whether such inferences are negated or otherwise limited by the “broader frame” of other disclosures will lead to an extended exchange of motions before disposition of a claim. In addition, we expect that courts, assessing plaintiffs’ claims only for facial plausibility (the pleading standard under Rule 8(a)), will find the factual issues too intractable to resolve at an early stage.
Implications for preparing disclosure. The Supreme Court emphasized the importance of evaluating factual inferences that reasonable investors may draw from an opinion statement in the “broader frame.” This emphasis illustrates the importance of drafting registration statements to include, in the words of the Securities Act safe harbor for forward-looking statements, “meaningful cautionary statements identifying important facts that could cause actual results to differ materially from those” in an opinion. Disclosures that meaningfully “bespeak caution” to investors are likely to substantially thwart claims that an opinion was rendered materially misleading by the omission of facts concerning the basis for the issuer’s statement. Some issuers may choose to respond to Omnicare by adding disclosures about the bases for opinions. Doing so may create a new set of risks, so issuers should exercise care and use cautionary language to limit the chances that those disclosures themselves will become grounds for an omissions claim. Because many issuers incorporate by reference their periodic reports and other Exchange Act filings into their registration statements, we advise similar care in drafting those filings. We also recommend alerting disclosure committees and other persons who are involved in preparing SEC disclosures on the need for enhanced care in disclosing expressions of opinion in light of the standard of liability articulated by the Supreme Court in Omnicare.
Here are links to those and other law firm advisories or memos on the Omnicare decision:
Litigation Alert: The Supreme Court’s Omnicare Decision Clarifies When an Opinion Stated in a Registration Statement Can Give Rise to Section 11 Liability (Fenwick)
The Supreme Court rules on securities issuers’ liability for misleading statements of opinion (Robins Geller)
Supreme Court Limits, But Does Not Reject, Securities Liability for Statements of Opinion in Registration Statements (Linklaters)
Context, Reasons, Hedges, and Disclaimers: The Supreme Court’s Ruling in Omnicare May Shape Whether and How Companies Express Opinions (Morrison Foerster)
Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund: Liability for Opinions in Registration Statements (Sullivan Cromwell)
Supreme Court Decides Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (Faegre Baker Daniels)
Omnicare: Supreme Court Sets Liability Tests for Issuers’ Statements of Opinion in Public Offerings (Haynes Boone)
Legal Alert: Omnicare Opinion Expands Liability for Expressions of Opinion Under Section 11 (Sutherland Asbill)
U.S. Supreme Court Clarifies When Opinions Can Be Actionable Under Federal Securities Laws (Clifford Chance)
Supreme Court Clarifies Liability for Statements of Opinion Under Section 11 of the Securities Act (Arnold & Porter)
Supreme Court Opines on Opinions v. Facts in the Sale of Securities (Michael Best & Friedrich)
We’ll hold you to that: U.S. Supreme Court in Omnicare rules that even pure opinions can create strict Securities Act liability for some omissions (Nixon Peabody)
Supreme Court Sets Standard for Section 11 Opinion Statement Liability in Omnicare Ruling (Shearman & Sterling)
High Court Opens Courthouse Doors to New York Investors Harmed by False Statements Couched as Opinions in Registration Statements (Lowenstein Sandler)
Everyone Has An Opinion: Supreme Court Clarifies When Opinions Create Securities Law Liability (Fried Frank)
U.S. Supreme Court’s Omnicare Decision Leaves Open Narrowed Theory Of Liability For Statements Of Opinion Under Federal Securities Laws (King & Spaulding)
Omnicare: Statements of Opinion, Omissions, and Implication (Sidley Austin)
Supreme Court Limits — But Does Not Foreclose — Section 11 Liability for Statements of Opinion, Leaving Investors With a Steep Climb (Chadbourne)
Supreme Court clarifies liability standard under Securities Act Section 11 for statements of opinion in registration statements (Hogan Lovells)
In Omnicare, Supreme Court Clarifies the Scope of Liability for Statements of Opinion Under Section 11 of the Securities Act of 1933 (Cleary Gottlieb)
March 25, 2015
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