Opinions in registration statements continue to be one of the most commonly litigated items under Section 11 of the Securities Act of 1933 (“Section 11”). On March 24, 2015, the U.S. Supreme Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund clarified a lower court split in the application of Section 11 to opinions in registration statements. The court held, in pertinent part:
1. A statement of opinion does not constitute an “untrue statement of … fact” simply because the stated opinion ultimately proves incorrect. Rather, for an opinion to constitute an “untrue statement of … fact” under Section 11, the opinion expressed must not have been sincerely held by the registrant
2. Section 11 liability only attaches to an omission of material fact in a registration statement if both (i) the registration statement omits material facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion, and (ii) those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.
Omnicare involved opinion statements made by Omnicare in the risk factors of its 2005 registration statement to the effect that Omnicare believed it was in compliance in all material respects with applicable federal and state laws. These compliance with law opinions were accompanied by disclosure in the risk factors indicating that Omnicare was subject to certain state law enforcement actions and that the federal government had expressed “significant concerns” about certain rebates provided by manufacturers to pharmacies (Omnicare runs pharmacies). Omnicare stated that its business might suffer if the rebates were no longer provided to it.
Subsequent to the 2005 stock offering, the federal government brought claims against Omnicare for violations of federal laws. Plaintiffs, who were purchasers of the stock of Omnicare issued pursuant to the 2005 registration statement, brought suit under Section 11 alleging an “untrue statement of … fact” and an omission of material fact with respect to the compliance with law opinions.
Clarification of whether opinions constitute statements of fact under Section 11
The court concluded that a statement of opinion that is ultimately found incorrect — if believed at the time made — would not count as an “untrue statement of a material fact” under Section 11 because a “pure opinion” is not a “fact.”
The court determined that the Sixth Circuit had wrongly conflated fact and opinion in concluding that Omnicare’s compliance with law opinion statement was an “untrue statement of … fact.” The court noted that a “fact” was a “thing done or existing,” whereas an opinion was a “belief [or] a view.” Further, the court noted that a fact expresses certainty about a thing, whereas an opinion does not.
However, the court stated that every statement of opinion explicitly affirms at least one fact: that the speaker actually holds the stated belief. Therefore, the court determined that Section 11 liability would attach to a statement of opinion ultimately found incorrect if the speaker did not actually hold the belief expressed in the statement of opinion.
Additionally, the court noted that some statements of opinion may contain “embedded facts,” which may be read not only to affirm the speakers state of mind, but also a statement of fact.1 The court concluded that Omnicare’s statement that it believed that it was in compliance in all material respects with applicable laws was a “pure opinion” that did not contain any embedded facts. Accordingly, Omnicare could only be liable for that statement of opinion under Section 11 if it did not actually believe it was in material compliance with applicable laws.
Opinions rendered misleading by omissions of material facts
Next, the court discussed whether Omnicare “omitted to state facts necessary” to make its opinion on legal compliance “not misleading” such that Section 11 liability would attach.
For purposes of the omissions clause in Section 11, the court noted that whether a statement is “misleading” is an objective inquiry that depends on a reasonable investor’s perspective. The court then recognized that a reasonably person can, depending on the circumstances, understand an opinion to convey facts about the speaker’s basis for holding the stated opinion. Specifically, the court recognized that an issuer’s statement of opinion may fairly imply facts about the inquiry the issuer conducted or the knowledge it had in making the opinion statement. And if the real facts are otherwise (i.e., the opinion is not based on any inquiry, or there are other material facts that would question the correctness of the opinion), but not provided, the opinion statement will mislead by omission.
The court stated that an opinion statement, however, is not misleading simply because the issuer knows, but fails to disclose, some fact cutting the other way. The court noted that a reasonable investor does not expect that every fact known to an issuer supports its opinion statement. Moreover, the court stated that whether an omission makes an expression of opinion misleading always depends on context. The court reasoned that reasonable investors understand opinion statements in light of the surrounding text, and Section 11 creates liability only for the omission of material facts that cannot be squared with a fair reading of the registration statement as a whole.2
The court noted 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.”
The court ultimately remanded the case back to the lower courts to consider the plaintiffs omissions theory of liability with the right standard (described above) in mind.
1. Registrants should be careful to use language such as “we believe” or “it is our opinion” to clearly indicate to investors that a statement of opinion, rather than fact, is being made.
2. Though this should go without saying, registrants should ensure that any statements of opinion made in its SEC filings are made in good faith following due inquiry.
3. Registrants should review the statements of opinion made in their SEC filings to determine if there are any material facts contrary to the registrant’s statement of opinion that warrant disclosure in order to make the opinion not misleading.
4. Registrants should consider adding hedging language or factors mitigating their statements of opinions in their SEC filings.
1 To illustrate this concept, the court provided the following example “Suppose the CEO in our running hypothetical said: ‘I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access.’ That statement may be read to affirm not only the speaker’s state of mind, … but also an underlying fact: that the company uses a patented technology.”
2 To illustrate this concept, the court used an example similar to the Omnicare compliance with law opinion. The court reasoned “Consider an unadorned statement of opinion about legal compliance: ‘We believe our conduct is lawful.’ If the issuer makes that statement without having consulted a lawyer, it could be misleadingly incomplete. In the context of the securities market, an investor, though recognizing that legal opinions can prove wrong in the end, still likely expects such an assertion to rest on some meaningful legal inquiry — rather than, say, on mere intuition, however sincere. Similarly, if the issuer made the statement in the face of its lawyers’ contrary advice, or with knowledge that the Federal Government was taking the opposite view, the investor again has cause to complain: He expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer’s possession at the time.”