The U.S. Supreme Court’s decision in Macquarie v. Moab Partners draws a clear distinction between pure omissions and half-truths. Our Securities Litigation Group explains how the Court resolved a circuit split over public companies’ liability for disclosures required by Item 303 of Regulation S-K.

• Private plaintiffs may not bring pure omission cases under Section 10(b) of the Exchange Act
• Instead, private plaintiffs must specifically identify an affirmative statement that the alleged omission renders misleading – a “half-truth”
• The Securities and Exchange Commission retains its authority to bring enforcement actions for violations of its own regulations, including alleged omissions in Item 303 of Regulation S-K

On April 12, 2024, the U.S. Supreme Court issued its unanimous decision in Macquarie Infrastructure Corp. v. Moab Partners L.P. The unanimous decision, written by Justice Sotomayor, provides limited and clear direction that plaintiffs may not bring pure omission cases under Section 10(b) of the Exchange Act and Rule 10b-5 but must identify the specific statements that were made misleading by the alleged omission.

This decision resolves a circuit split over public companies’ liability for disclosures required by Item 303 of Regulation S-K. The underlying appeal in this case came after the Second Circuit held that the petitioners’ failure to disclose the potential impact of industry regulations on their business, as required by Item 303, could support a private claim under Section 10(b) of the Securities Exchange Act. Item 303 is intended to “enhance” a stockholder’s understanding of a public company’s financial condition, cash flows, and operations from management’s perspective. Item 303 requires issuers to “describe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” in the Management’s Discussion and Analysis (MD&A) section of Forms 10-K and 10-Q.[1] The requirements are intentionally general, even vague, reflecting the Securities and Exchange Commission’s view that the flexibility afforded by Item 303 leads to more meaningful disclosures and avoids boilerplate.[2]

Under the Macquarie decision, an issuer’s failure to disclose information required by Item 303 of Regulation S-K can support a Section 10(b) claim only if an omission renders an affirmative statement misleading. Plaintiffs must specifically identify an affirmative statement that the omission renders misleading. In practice, this means that plaintiffs cannot plead a fraud case by pointing to the entire MD&A section of a filing and arguing, with the benefit of hindsight, that some risk or trend was missing from the MD&A section. This decision makes sense in the wider context of the federal securities laws: Section 10(b) is intended to address securities fraud rather than disclosure obligations. Section 10(b) is not intended to cover claims by shareholders who say the company should have disclosed more about a risk or trend, but rather claims by shareholders who say a company intentionally or recklessly misled investors by including misleading information in the MD&A.

Justice Sotomayor also notes in the decision that contrary to the respondents’ claims, issuers do not have immunity for omitting information from the MD&A. Private plaintiffs may still bring claims related to Item 303 disclosures under Section 10(b) if they identify misleading half-truths in the MD&A. This implies that future plaintiffs will need to be more specific in their pleadings about exactly which statements were made misleading by the alleged omission. The SEC also retains its authority to police Regulation S-K and bring enforcement actions for omitting information required to be disclosed by Item 303.

The opinion reflects the discussion and focus by the parties from the January oral arguments. While at times the discussion during oral argument strayed from the narrow question the Court granted certiorari on, the endnote of the opinion reflects the Court’s desire to give clear and focused guidance rather than wading into other issues the parties raised.

Given the narrow scope of the opinion, the analysis by the Court may change the way private plaintiffs plead their cases, but it will have no real impact on how companies draft their MD&A filings.