March 29, 2017

SCOTUS: Forward-Looking Information Case Is a “Go”!

Here’s the news from this WSJ article by Andrew Ackerman about the US Supreme Court granting certiorari to a case that might impact liability for “known trends and uncertainties” disclosure:

The U.S. Supreme Court on Monday agreed to consider whether publicly traded companies can be sued for securities fraud by third parties for omitting “known trends or uncertainties” in filings to shareholders. The announcement is likely welcome news for corporate defendants that have lamented a 2016 ruling by a federal appellate court in New York, which found that companies can be sued for fraud by third parties for such alleged disclosure shortcomings.

At issue are Securities and Exchange Commission antifraud rules, which allow investors and other private entities to sue public companies for statements or omissions that are “material” and “misleading.” Historically that right wasn’t extended to a management’s discussion of known trends and uncertainties until a ruling last year by the 2nd U.S. Circuit Court of Appeals in New York. That appellate court’s decision conflicts with precedents set by at least two additional circuit courts, which have held companies aren’t liable to private litigants for the contents of such “forward-looking statements.”

The high court said it would consider the matter in the fall of 2017, giving the justices a platform to potentially end or limit private lawsuits in these cases. The appeal was brought by a company called Leidos Holdings Inc., a Reston, Va.-based national security and engineering company formerly known as SAIC, which was sued by the Indiana Public Retirement System and two other state public pension funds. The funds allege SAIC in 2011 omitted material information about a kickback and overbilling scheme involving the firm’s former employees and New York City.

The U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association, a Wall Street industry group, urged the high court to consider the case last year, saying the second circuit court’s ruling will extend “a state of confusion over how…companies disclose forward-looking information.” To avoid lawsuits, companies will err on the side of disclosing a flood of “essentially useless” information they might otherwise omit, the industry groups said in their filing, which sided with Leidos. A decision expected by the end of June 2018.

Here’s a blurb from Sullivan & Cromwell about the case:

Earlier today, the U.S. Supreme Court granted certiorari in Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. This appeal, which likely will not be decided until the first half of 2018, at the earliest, presents the question of whether non-disclosure of “known trends or uncertainties” under Item 303 of Regulation S-K may give rise to private liability for securities fraud under Section 10(b) of the Securities Exchange Act of 1934. The U.S. Supreme Court will address a split between the Second Circuit, which has held that, under some circumstances, non-disclosure under Item 303 of Regulation S-K could give rise to private securities fraud liability, and the Third and Ninth Circuits, which held that such non-disclosure does not create a private securities fraud claim. Although the Supreme Court’s decision will not affect the obligation of registrants to comply with Item 303, it may have a significant impact on their potential exposure to securities fraud claims.

Texas: Proposed Bill Would Burden Proxy Advisors & Activists

Here’s the intro from this memo by Olshan’s Steve Wolosky, Andrew Freedman & Ron Berenblat:

The Legislature of the State of Texas has proposed a new bill that would require certain investors in publicly traded companies headquartered in Texas and proxy advisory firms making recommendations with respect to publicly traded Texas-based companies to comply with a set of austere disclosure requirements. The proposed “Bring Business to Texas and Fairness in Disclosure Act” (the “Texas Act”) is purportedly intended to “foster and promote the immediate and full disclosure of the individual ownership of persons who are activist investors” and “prohibit discrimination by a proxy advisory firm.”

The unduly burdensome, excessive and inequitable scope of the proposed disclosure requirements is like nothing we have ever seen proposed by any state. If the Texas Act is adopted, it could have a chilling effect on shareholder activism and proxy advisory work with respect to public companies that have a specified presence in Texas, which, in turn, would help entrench management and the Boards of underperforming Texas-based companies.

Conflict Minerals: Comments So Far

A few months ago, SEC Acting Chair Piwowar requested comment on reconsidering the SEC’s 2014 guidance on conflict minerals. The comment deadline is now passed – and here’s the comments received so far. Note that the Wildlife Conservation Society has gotten over 10,000 folks to submit a form letter supporting the rule…

Here’s some analysis of these comment letters from Elm Sustainability Partners’ Lawrence Heim – and here’s some more analysis, including this excerpt:

Just over 12,000 comments were submitted to the SEC in response to Acting Chairman Piwowar’s request for comments. More than 11,700 of those comments were form letters and just over half of the remaining 300 were submitted by concerned citizens. Approximately 130 comments were submitted by company representatives, industry groups, Congolese society, NGOs and investors. In our view, opinion reflected in the 130 was split relatively evenly for and against the rule. We noted that several of the comments against the rule cited erroneous and outdated information, specifically concerning costs of rule implementation.

Broc Romanek