Today, the U.S. Supreme Court issued its anticipated Omnicare decision, which addresses the standard of liability applied to expressions of opinion in a registration statement for a public offering. While there will be clamoring about Omnicare (it is somewhat rare for the Supreme Court to issue securities law decisions), in my opinion the case does not involve a fundamental shift in how disclosure is drafted, although it does invite a few drafting and diligence strategies.
Section 11 of the Securities Act of 1933 permits purchasers of securities to sue for damages if a registration statement, at the time it became effective:
- contained an untrue statement of a material fact; or
- omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.
In contrast with other types of securities liability, neither the untrue statements prong nor the omissions prong of Section 11 requires showing that a defendant acted with any intent to deceive or defraud.
Omnicare, the nation’s largest provider of pharmacy services for residents of nursing homes, filed a registration statement for a public offering of its common stock. In discussing the effects of various laws on its business model, including its acceptance of rebates from pharmaceutical manufacturers, the registration statement contained the following statements of opinion:
- “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.”
Omnicare also noted that laws may be interpreted inconsistently with Omnicare’s interpretation, that governmental agencies had expressed concerns about manufacturer rebates to pharmacies, and that its business would suffer if these price concessions ceased. One of Omnicare’s attorneys had warned, but Omnicare did not disclose, that a particular contract carried “heightened risk” of anti-kickback liability. Subsequently, the federal government brought action against Omnicare regarding these rebate practices under anti-kickback laws.
Pension funds that invested in Omicare’s public offering brought suit against Omnicare, arguing that its statements of belief about legal compliance:
- were untrue statements of material fact, in light of the federal government actions demonstrating the practices were not in fact compliant with law; and
- omitted to state material facts necessary to make the statements not misleading, as there were no “reasonable grounds” for thinking that the opinions were truthful and complete and the heightened risk of anti-kickback liability had not been disclosed.
The Opinions Were Not Untrue
The Supreme Court first considered if the opinions were untrue statements of material fact. After distinguishing facts from opinions by the level of certainty they convey, the Court noted that:
- every statement of opinion “explicitly affirms” the fact that the speaker actually holds the opinion; and
- some statements of opinion contain “embedded statements of fact” (such as statements like, “I believe fact X because fact Y is true”).
The Court characterized both of the challenged opinion statements as solely in the first category. And because the investors made no allegations that Omnicare did not honestly believe that it was complying with law, Omnicare could not be liable under this test. That fact that Omnicare’s belief was in fact wrong does not allow investors to second-guess Omnicare’s “inherently subjective and uncertain assessment” that it was not violating law.
Unclear if the Opinions Omitted Necessary Facts
The Supreme Court then considered if the opinions omitted to state material facts necessary to make the statements not misleading. While the Court noted that a reasonable investor understands that a statement of belief conveys some lack of certainty and is not a guarantee the opinion is true, the Court observed that a reasonable investor may nevertheless understand some opinion statements to “convey facts about how the speaker has formed the opinion” or the “speaker’s basis for holding that view.” For example, an investor likely expects a statement of belief that conduct is lawful:
- to rest on some “meaningful legal inquiry,” and
- to “fairly align” with the information in the issuer’s possession at the time – which requires consideration of the “context” and the “broader frame” and does not necessarily require disclosure of all facts “cutting the other way.”
The Court remanded the case for consideration of the omission claims, which seem not to have been particularly developed in the courts below.
I Believe Some Omnicare Takeaways are…
Many securities lawyers have been assuming courts may test whether an opinion statement is honestly held and has a reasonable basis – in my estimation, not much changes for those following this approach. And it was nice that the Court unanimously reversed the Sixth Circuit’s judgment that an objectively false opinion was actionable (e.g., that despite Omnicare’s honest belief, its opinion was false since it was in fact not in compliance with law), which many found peculiar. While securities lawyers will certainly be offering various opinions on what Omnicare means, here are my initial thoughts about how this decision can impact registration statement drafting and related work flows:
- Continue using belief-qualified disclosure when the ultimate facts are uncertain (and the belief honestly held). While belief-qualifying its statements did not necessarily insulate Omnicare from all liability, it still seems incredibly helpful. Despite the Sixth Circuit holding the statement of belief did eliminate untrue statement liability, and the trial court may still conclude that there is no omissions liability.
- Continue ensuring issuers honestly hold the opinions expressed in disclosure. The Omnicare opinion does not appear to raise concerns that questions to management and other common forms of diligence suffice to show a belief is sincere.
- Diligence the facts that underlie expressed opinions. Opinions may be expected to rest on a meaningful inquiry and fairly align with the facts learned though that inquiry. Carefully consider facts that may be inconsistent with the issuer’s stated belief.
- Consider disclosing the factual or procedural basis for an opinion. The Court indicated that an issuer can “divulge an opinion’s basis” to avoid exposure for omissions under Section 11. Of course, the basis for the opinion may well be an “embedded” fact that gives rise to exposure for untrue statements under Section 11, so make sure the basis is true.
- Consider disclosing additional context for an opinion so that it adequately conveys uncertainty. The Court indicated that an issuer can avoid exposure for omissions under Section 11 by “mak[ing] clear the real tentativeness of its belief.” Simply saying “we believe X” (as Omnicare did) may not be adequate, but it may be possible in some circumstances to add disclosure to convey the level of uncertainty.