The U.S. Supreme Court’s recent decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund resolved a clear split in the federal courts of appeal regarding when statements of opinion may give rise to liability under the securities laws. In a victory for public companies and their officers and directors, the Court held, among other things, that a statement of opinion that later turns out to be incorrect creates a cause of action under Section 11 of the Securities Act only if the speaker did not honestly believe that opinion when it was expressed.
While this is certainly good news, companies must be careful going forward to be sure the language of their SEC filings stays within the scope of the Court’s ruling.
The Omnicare decision…
A registration statement under which Omnicare sold shares of its common stock contained statements expressing the company’s belief that certain of its contracts with pharmaceutical companies complied with applicable federal and state laws. Omnicare was later sued, however, by the federal government for allegedly receiving illegal kickbacks from pharmaceutical companies, which called into question whether Omnicare was, in fact, legally compliant when the offering occurred.
The plaintiffs’ suit alleged that the registration statement disclosures violated Section 11 since Omnicare’s officers and directors lacked “reasonable grounds” to give the opinions in the registration statement. Eventually, the Sixth Circuit Court of Appeals held that Omnicare’s expressions of opinions were actionable under Section 11 (which imposes liability for material misstatements and omissions in Securities Act registration statements) regardless of its officers’ subjective belief at the time the opinions were made, thereby splitting with the Eleventh Circuit on this issue.
The Supreme Court disagreed with the Sixth Circuit and unanimously vacated its decision. The Court distinguished statements of fact from statements of opinion, noting that Omnicare stated merely that it “believed” it was in compliance with applicable law. Because the plaintiffs did not contest that the stated opinions were “honestly held,” their claims under Section 11 failed.
Although the decision applied specifically to claims under Section 11 of the Securities Act, we can expect the same rationale to apply to all SEC filings and public disclosures.
Omnicare highlights the importance of clearly distinguishing between statements of fact and statements of opinion in SEC filings. Certainly words like “we believe,” “we think,” “it is our view that,” and “in our opinion” should go a long way toward protecting against hindsight claims of material misstatement, although such language, of course, provides no guarantee. For most companies, this type of qualification should be a familiar concept, given the now-widespread compliance with the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act.
Nevertheless, such qualifications are sometimes overlooked in the urgency of drafting and filing deadlines, and it is easy to dismiss them as needless formality. (See this Doug’s Note.) Omnicare is an excellent reminder that a well-place word or phrase can mean the difference between a favorable dismissal versus a debilitating trial (or settlement).
Be sure, therefore, to carefully evaluate such statements in all public communications and filings and appropriately qualify anything that might be problematic.