The U.S. Supreme Court has unanimously ruled that pure silence in MD&A statements are not actionable in shareholder securities fraud cases. The case is important for issuers and shareholders alike for several reasons:
- Pure omissions in MD&A statements are not actionable, but half-truths remain actionable.
- Item 303 duty to disclose requirements do not automatically render omissions thereunder as independent support of Section 10(b) private liability.
- The opinion does not impact the SEC’s authority to prosecute issuers that fail to disclose all the information required in Item 303 of SEC Regulation S-K.
- The case leaves open for future litigation what constitutes actionable misleading half-truths and whether Rules 10b–5(a) and 10b–5(c) can support liability for pure omissions.
On Friday, April 12, the U.S. Supreme Court unanimously ruled that a company’s failure to disclose information about its business risks, as required under Item 303 of Regulation S-K, cannot, on its own, form the basis of a private securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder, absent some affirmative statement that would make its silence misleading. Rule 10b-5(b) in pertinent part makes it unlawful for issuers “to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).
The case, Macquarie Infrastructure Corp. v. Moab Partners, L.P., has been closely watched by securities litigation practitioners and, at least on first blush, may serve to limit future shareholder suits based on purported omissions and a duty to disclose.
More specifically, the opinion – which considered whether a company’s “pure omission” in Item 303 disclosures could be actionable under Rule 10b–5(b) – should offer companies some helpful clarity on possible private liability exposure in connection with their MD&A statements. As the Court explained, issuers are required to file periodic reports to the Securities and Exchange Commission (SEC), which includes Item 303 of Reg. S-K that, among other things, “requires companies to ‘[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a materially favorable or unfavorable impact’” on the company. (quoting 17 C.F.R. § 229.303(b)(2)(ii)).
While the ruling was a victory for the defense, the Court made a point of highlighting the limited scope of its opinion. In ruling pure omissions in such reports are not actionable under Rule 10b-5(b), the Court held that it “does not opine on issues that are either tangential to the question presented or were not passed upon below, including what constitutes ‘statements made,’ when a statement is misleading as a half-truth, or whether Rules 10b–5(a) and 10b–5(c) support liability for pure omissions.” (emphasis added). Thus, the plaintiffs’ bar still has a door open to allege “half-truths” with Item 303 disclosures and test liability under Rules 10b–5(a) and 10b–5(c) for pure omissions in connection with Item 303. Additionally, Justice Sonia Sotomayor’s opinion for the Court points out that the decision does not impact the SEC’s “authority to prosecute violations of its own regulations.”
We expect the impact of the Macquarie decision to be played out in lower courts in the coming months, with cases likely focusing on whether and to what extent Macquarie extends beyond Item 303 and, as previously mentioned, the extent to which alleged omissions contain “half-truths” or fall under or are outside the protection of Macquarie. We also expect it will affect how plaintiffs plead future cases involving omissions.
