June 29, 2017

Disclosure in Offerings: 2nd Cir. Addresses Interim Financials

This Skadden memo discusses Stadnick v. Vivint Solar , a recent 2nd Circuit decision addressing when financial information about an incomplete quarter needs to be disclosed in a prospectus.

Most courts that have confronted this issue have followed the 1st Circuit’s 1996 decision in Shaw v. Digital Equipment, and require disclosure when the information suggests that the quarter will be an “extreme departure” from prior results. But as this excerpt notes, the 2nd Circuit took a different approach:

The Second Circuit declined to adopt Shaw’s “extreme departure” standard, adhering instead to the materiality test it articulated in DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003). Under DeMaria, a duty to disclose interim financial information arises “if a reasonable investor would view the omission as ‘significantly alter[ing] the ‘total mix’ of information made available.’”

Instead, the Second Circuit analyzed the omissions holistically in light of the total mix of available information. The Second Circuit concluded that when viewed in the context of the registration statement’s extensive disclosures on Vivint’s six prior quarters and unique business, Vivint’s third quarter results were consistent with past performance and “the successful implementation of its business model.”

The 2nd Circuit also rejected plaintiff’s argument that the company’s failure to address certain regulatory risks in its MD&A violated Item 303’s “known trends” disclosure requirement.  In doing so, it pointed to the company’s risk factor disclosure, which in the Court’s view provided investors with ample warning of the regulatory issues in question.

Securities Act Claims: Do States Still Have Jurisdiction?

I recently blogged about the growth in Section 11 lawsuits in state courts – with California, in particular, emerging as a favorite venue for these actions. Now this Shearman & Sterling blog reports that the Acting Solicitor General is asking the US Supreme Court to review whether state courts still have jurisdiction over these suits:

On May 23, 2017, the Acting Solicitor General filed a brief on behalf of the United States as amicus curiae urging the Supreme Court to grant the petition for a writ of certiorari in Cyan v. Beaver County Employees Retirement Fund, No. 15-1439, to resolve confusion in lower courts as to whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) divests state courts of jurisdiction over cases that allege only claims under the Securities Act of 1933.

The issue has been a significant one. California state courts in particular have become a forum of choice for plaintiffs asserting claims under the Securities Act, and procedural bars on interlocutory review of decisions denying motions to dismiss or remand have precluded significant appellate review.

The Supreme Court had invited the government to weigh-in last fall. The Acting Solicitor General’s brief urged the Supreme Court to hold that SLUSA doesn’t divests state courts of jurisdiction – but renders Securities Act cases removable to federal court.

The Supreme Court granted cert earlier this week.  Check out this ‘D&O Diary’ blog for more details on the case.

Securities Class Actions: Is Reform on the Way?

This recent blog by Woodruff Sawyer’s Priya Huskins summarizes the key provisions of the “Fairness in Class Action Litigation Act of 2017” (H.R. 985), which passed the House in March and is currently under review by the Senate Judiciary Committee.

The blog points out that there are some pretty interesting provisions in the legislation, including a section forbidding a federal court from certifiying a class action in which the named plaintiff is “a present or former client” of class counsel.  As this excerpt notes, that’s pretty radical stuff:

As skeptical as we may be about some of the securities class action lawsuits brought against public companies, it’s very unusual to take the position that plaintiffs cannot choose counsel they’ve worked with in the past to represent them.

It’s particularly unusual given that institutional investors and others are not naïve entities unable to protect their own interests. Many of the plaintiffs being represented in securities class action litigation are large, sophisticated institutional investors.

This McGuire Woods blog says that this statute faces fairly long odds – it has a long list of opponents & PredictGov gives it only a 21% chance of passing.  But the last time Republicans controlled the White House & both branches of Congress saw the most recent round of reforms enacted – so the time may be ripe for this kind of legislation.

John Jenkins