All this tedium is because of a major legal issue: people can sue over a prospectus if it contains a misstatement or omission of material fact. Those minor details, if inaccurate, can lead to hundreds of millions of dollars in liability.Getty Images/iStockphoto
Law is the art of turning the metaphysical into the mundane. Aspiring lawyers around the country are discovering this right now as the articling term starts. The high-level analysis that took place in law school has been exchanged for the in-the-weeds labour of reviewing mountains of contracts for due diligence, or combing through pages of dispositions. Sometimes, the connection between legal concepts and the meticulous work involved in applying them can seem tenuous at best.
Take, for example, a public offering of securities. When a company issues shares to the public, that offering is accompanied by a document called a prospectus – a weighty tome of information securities regulators demand be disclosed to potential investors in advance of issuance of shares. If you ever work on one of these transactions, once the prospectus is released, you will receive a copy of the final document at your desk, presumably as a keepsake. I recently saw a lawyer pick up a freshly delivered prospectus and, Stephen Curry style, lob it with a satisfying thunk into the recycling bin.
Why? Because by the time the prospectus is released, every lawyer involved in its drafting has examined and wordsmithed every statement – every tiny, meticulous fact – into submission. It's painstaking. So by the time it ends up on your desk, it's like the "song of the summer": Even if you loved it in June, by mid-August, you change the radio station the second it comes on.
But all this tedium is because of a major legal issue: people can sue over a prospectus if it contains a misstatement or omission of material fact. Those minor details, if inaccurate, can lead to hundreds of millions of dollars in liability.
Which brings us to the U.S. Supreme Court's decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund et al., a case that asked the very weird and frankly philosophical question about securities liability: when can a public company be held liable for opinion statements?
If you want the grainy details, go to the decision or, better yet, read my colleague Marco Falco's case summary. Briefly, Omnicare released a registration statement (a prospectus-like disclosure document) while it was under investigation for allegedly receiving kickbacks from pharmaceutical manufacturers. The registration statement disclosed the investigation as well as the fact that the federal government had expressed concerns about Omnicare's rebate system and that these concerns could harm Omnicare in the future.
The registration statement also contained a statement that Omnicare believed that its contracts were "legally and economically valid" and "in compliance with applicable laws." When the federal government sued Omnicare, the stock plunged, and certain Omnicare stockholders sued the company on the theory that Omnicare's statement of opinion was "materially misleading."
From a practice perspective, you can see how the opinion language came about. Omnicare couldn't possibly state that it was in compliance with all laws; it knew about an investigation that threatened the company with serious liability and didn't want to further spook investors. Think of it as the legal version of "move along, nothing to see here." The opinion language was gloss, but necessary gloss.
Gloss or not, the Supreme Court held that yes, a company can be sued for opinion statements, even though opinions are simply beliefs and not facts, because opinions require "meaningful legal inquiry." While a company can't be sued because the opinion itself is inaccurate (well, unless the speaker knew the opinion to be false at the time of making it) it can be sued because it failed to disclose material facts about the inquiry that led the speaker to form the opinion. Opinions may not be facts, but they can imply facts. And liability will lie where a company fails to disclose facts that cannot be squared with the opinion statement.
One reading of this decision is that lawyers are better off drafting prospectuses by putting the words, "Hey man, it's only my opinion," before every statement, but I don't think this is right. Practically, Omnicare was sued because, well, it was sued (by the Feds). As a matter of course, major governmental lawsuits always result in securities fraud lawsuits, and securities litigators needed to hang liability on a disclosure misstatement. And, as hard as us corporate guys try to make every statement in a prospectus as accurate as possible, litigators will always come up with a theory of liability.
I'm being a bit unfair when I call the opinion language misdirection, it was also a solution to a legal problem. Omnicare had to disclose legal compliance by law. If it said it was in compliance, it would have been sued because that statement was potentially false (and it had just disclosed the investigation). If it said it wasn't in compliance, that statement would have been bad for the stock price and, more importantly, potentially also have been false (had the Feds not proceeded with the suit on Omnicare, the company's contracts would have been fine, though short sellers wouldn't have been able to sue Omnicare on the stock's ride back up). So it said what it could say: It thought that it was in compliance! This is not bad lawyering.
But note that whether Omnicare was sued for its opinion or sued because it had made a factual statement, it's the same set of facts that makes Omnicare liable – namely, that it had knowledge that its contracts were not legal. The opinion language, at best, offers Omnicare protection on the margin; it could say that it knew that it may not be in compliance, but it held the legitimate belief that it was. The crux of liability remains the failure to disclose a fact.
Wasn't that fun? So articling students, next time you're banging your head against the wall, fact-checking disclosure documents, remember that the forest is made of trees. We have created a legal system, through myriad levels of legal abstraction, that allows a group of people who formerly held ownership rights in a fictional legal entity to sue that fictional entity for its opinion, as if it's something that can have an opinion in a meaningful way, like Donald Trump or David Brooks. And that ability to sue a fictional entity for its opinion is why you are up late, in your office, grinding away. You are helping to protect a large company from that massive, potential, and borderline metaphysical liability. And hey, isn't that why you went to law school?
Adrian Myers is a lawyer at Torkin Manes LLP
Adrian Myers