October 19, 2023
MD&A: SCOTUS to Address Private Right of Action for Item 303 Omissions
We’ve previously blogged about the split between the circuits over whether deficiencies in MD&A disclosures, standing alone, are sufficient to give rise to a private Rule 10b-5 claim & efforts to persuade the SCOTUS to address the issue. Late last month, the Court granted cert in Macquarie Infrastructure Corp. v. Moab Partners, L.P., a case from the 2nd Cir. where the ability to rely on non-compliance with Item 303’s requirements to state a securities fraud claim is front and center. This excerpt from Debevoise’s recent memo on the Court’s decision to review the case discusses what’s potentially at stake:
The Supreme Court’s decision could have a significant impact on private securities fraud litigation, should Item 303 omissions be allowed to serve as a basis for Section 10(b) liability. This change would enable plaintiffs to establish a duty to disclose when they otherwise may not be able to plead an omission case, potentially expanding Rule 10b-5 liability to more closely resemble Section 11 and 12(a)(2) liability for omissions of “a material fact required to be stated.”
Although expanding the private cause of action under Section 10(b) and Rule 10b-5 in this way could incentivize issuers to over-disclose in an effort to prevent costly shareholder suits, issuers are already subject to SEC review and enforcement action regarding omissions in MD&A, so the practical impact of the Supreme Court’s decision on issuer activity may be negligible.
However, if the Court determines that Item 303 violations can serve as a basis for Rule 10b-5 liability, the ruling may raise questions about whether other disclosure obligations under Regulation S-K should be afforded similar treatment. In light of the upcoming changes to Regulation S-K, including significant new requirements related to cybersecurity risk management and climate change disclosures, the Court’s decision in Macquarie could have broader implications for issuer liability.
The memo also provides background on the Macquarie litigation and reviews the divergent positions that the 9th Cir. and 2nd Cir. have taken on whether there is a private right of action for MD&A disclosure shortcomings, so it’s a great way to get up to speed on the issues before the SCOTUS.
– John Jenkins