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On March 24, 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 [lexis.com subscribers may access Supreme Court briefs and an enhanced opinion for this case]. 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.
Statutory Backdrop
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:
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’s Opinions
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:
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:
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:
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:
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:
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