When might a wrong opinion give rise to prospectus misrepresentation? The U.S. Supreme Court recently addressed this question in its much-anticipated decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund.1 Its answer provides a useful point of comparison and discussion for Canadian securities lawyers.
The U.S. Supreme Court's Decision in Omnicare
Section 11 of the U.S. Securities Act of 1933 provides purchasers of securities in a public offering with a statutory right of action against the issuer or certain designated individuals where the registration statement either contained "an untrue statement of material fact" (also known as a "material misstatement") or "omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading" (also known as a "material omission"). As emphasized by the U.S. Supreme Court, there are two distinct avenues to liability here: the first focuses on what the statement says, the second on what it leaves out. In either case, the purchaser does not have to prove that the issuer acted with any intent to deceive or defraud.
Omnicare provides pharmacy services for nursing home residents. The case arose out of two statements of opinion in a registration statement the company filed in relation to a public offering of common stock. The statements expressed the company's view that it was in compliance with applicable state and federal laws, including with respect to its practice of accepting rebates from pharmaceutical manufacturers. Accompanying the opinions were several caveats and disclaimers. After the federal government filed suit against Omnicare for allegedly violating anti-kickback laws, pension funds (the "Funds") that had purchased stock in the public offering brought suit under section 11.
The U.S. Supreme Court separately analyzed an issuer's potential liability for opinion statements on the basis of both material misstatement and material omission.
Upholding the distinction between facts and opinions, the Supreme Court rejected the Funds' argument that a statement of opinion that ultimately proves incorrect constitutes an untrue statement of material fact. The law, the Court affirmed, is intended to protect investors against false statements of fact, which express certainty about a thing, rather than statements of opinion, which admit the opposite.
However, the Court reasoned that statements of opinion may still attract false-statement liability in one of two ways. First, as every statement of opinion "explicitly affirms one fact: that the speaker actually holds the stated belief" 2, they may be actionable if the opinion is not genuinely held. Second, they may be actionable if the opinion cites supporting facts that turn out to be false. The Court gave the following example: the statement "I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access"3 affirms not only the speaker's state of mind, but also a supportive fact—that the company uses a patented technology. If this supporting fact is false, the statement may attract liability.
As the Court found that the statements at issue were bare statements of opinion, and the Funds did not allege they were not genuinely held, the Court held they could not attract liability for material misstatement.
The most interesting aspect of the Court's decision is its analysis of how a statement of opinion might attract liability, not for what it says, but for what it leaves out.
The parties and the Court agreed that whether an omission renders a statement misleading is an objective inquiry, conducted from the perspective of the reasonable investor. However, they differed as to whether, and how, a statement of opinion could mislead through omission. Omnicare argued that so long as the statement of opinion is genuinely held it could never be misleading, irrespective of what related facts are left out, as a reasonable investor understands a statement of opinion to convey nothing more than the speaker's own mindset. One might suspect this approach would appeal to the Court given the Court's reasoning with respect to material misstatement summarized above. After all, the speaker's genuine belief in the stated opinion is the "one fact", according to the Court, that is expressly affirmed by every opinion statement.
But in an interesting turn, the Court rejected Omnicare's reasoning, finding that a statement of opinion may also, depending on the circumstances, imply facts about the issuer's basis for holding that opinion. These facts might relate to either "the inquiry the issuer did or did not conduct" or "the knowledge it did or did not have".4 If it is found that "the real facts are otherwise, but not provided, the opinion statement will mislead its audience."5
The Court gave the following examples. If an issuer expresses the opinion that its conduct is lawful without having consulted a lawyer, the statement could be "misleadingly incomplete".6 This is because, in a securities context, a reasonable investor likely expects such a statement to "rest on some meaningful legal inquiry".7 Equally, if the issuer expresses the opinion in the face of its lawyer's contrary advice, or with knowledge that an enforcement agency was taking the opposite view, the statement might attract omissions liability. This is because a reasonable investor "expects not just that the issuer believes the opinion (however irrationally), but that it fairly aligns with the information in the issuer's possession at the time."8
However, the Court clarified that not every countervailing fact must be disclosed, as reasonable investors understand that opinions are based on a weighing of competing facts. Suppose—to borrow another example given by the Court—a statement of opinion regarding legal compliance did not reveal that a single junior lawyer had expressed doubts about the legality of a practice when these were not shared by six more senior lawyers, the omission would not render the statement misleading, even if the junior lawyer's opinion ultimately proved correct. While the Court framed this as a question about what a reasonable investor would find misleading, it may in fact go to the materiality of the omission, which is an essential ingredient to a finding of omissions liability. Materiality is defined in the relevant U.S. case law to mean "there is a substantial likelihood that a reasonable [investor] would consider it important".9
Finally, the Court made clear that whether an opinion statement is misleading will depend on context, which includes whatever relevant facts the issuer did reveal in the registration statement, as well as "any other hedges, disclaimers, or qualifications".10
In the result, the Court remanded the case to the lower court to determine whether Omnicare had stated a viable omissions claim in light of this new standard.
In determining when a statement of opinion might amount to an actionable misrepresentation, one of the most difficult questions to answer is where reasonableness fits in. It is less contentious that an issuer must actually hold an opinion it communicates to the public, but what if that genuinely held opinion is nonetheless objectively unreasonable?
It is debatable whether the U.S. Supreme Court's omissions analysis imposes an objective standard of reasonableness on every opinion statement included in a registration statement, as suggested by Justice Scalia in his dissenting opinion.11 On the one hand, asking whether an omission renders a statement "misleading" seems but a roundabout way of asking whether the excluded information reveals it to be unreasonable. Take the Court's suggestion that a legal opinion may be "misleadingly incomplete" for failing to disclose that it is not shared by the company's lawyers. There is something slippery about this analysis. It seems more straightforward to say that what is really objectionable about the company's statement is, not that it is incomplete, but that it is unreasonable.
On the other hand, there may be instances where the Court's omissions analysis does not yield the same results as a reasonableness one. This may occur, for example, where an issuer proactively discloses material facts that might later be found, on an objective standard, to render its opinion unreasonable. Accordingly, one would expect to see the volume of disclosure, hedges, disclaimers, and qualifications accompanying statements of opinions to expand rapidly as a result of the Court's decision.
But the two standards may also potentially yield different results in the situation where disclosure of an underlying fact is not made. Consider the situation where reasonable investors disagree about the likely impact of a particular fact on an issuer's opinion. Even if the issuer's opinion is found to fall within a range of reasonable opinions, its failure to disclose that fact might nevertheless render the statement of opinion "misleadingly incomplete" in the eyes of a reasonable investor. If Omnicare is applied in this manner, it could in fact result in a lower threshold for liability than would applying a reasonableness standard in such cases.
Implications for Canadian securities law
The Supreme Court of Canada has not addressed an issuer's liability for opinion statements as fully or directly as the U.S. Supreme Court did in Omnicare. Its most relevant decision to date is Kerr v. Danier Leather Inc., 2007 SCC 44.12
One of the subsidiary issues in Danier was whether a forecast in a prospectus, being an opinion about future events, could constitute a misrepresentation under Ontario's Securities Act, which is defined as either "(a) an untrue statement of material fact, or (b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made".13
While acknowledging that a forecast "is not a fact in the sense that actual results are facts",14 the trial judge, Justice Lederman, held that a forecast nevertheless contained the following implied assertions of fact:
- the forecast was not prepared using reasonable care and skill; or
- management does not generally believe the forecast; or
- management's belief in the forecast is not reasonable; or
- management is aware of facts that would seriously undermine the forecast.15
In this view, unreasonable forecasts (or opinions) would attract not only omissions liability but also false-statement liability: if the implied representation of reasonableness proves untrue, it would constitute "an untrue statement of material fact".16
This holding was significantly narrowed on appeal. The Ontario Court of Appeal would have rejected it completely, finding that the forecast did not contain an implied representation of objective reasonableness, either as a matter of law or of fact. However, the Supreme Court of Canada found that the forecast did contain an implied representation of reasonableness as a matter of fact, based on the language of the prospectus. Still, it did not address the broader issue of whether reasonableness should also be implied as a matter of law.
With this question left undecided, Omnicare provides a useful point of comparison and discussion: while Omnicare does not extend false-statement liability to genuinely held but unreasonable opinions, it accomplishes much the same thing through a robust, if unintuitive, omissions analysis. To what extent Canadian courts will find this analysis relevant and persuasive remains to be seen.17
Date of Decision: March 24, 2015
 575 U.S.___(2015) [Omnicare]
 Ibid. at 7
 Ibid. at 8
 Ibid. at 18
 Ibid. at 11
 Ibid. at 12
 Ibid. at 20, citing TSC Industries, 426 U.S., at 449
 Ibid. at 20
 See especially ibid. at 3, 6-7
 Kerr v. Danier Leather Inc., 2007 SCC 44 [Danier SCC]
 Securities Act, RSO 1990, c. S.5, s.1
 Kerr v. Danier Leather Inc., 2004 CanLII 8186 (ON SC) at para. 65 [Danier Trial]
 Ibid. at para. 77
 Ibid. at paras 77-78
 In considering Omnicare's impact, if any, on the development of Canadian case law in this area, differences in the statutory regimes and relevant jurisprudence must also be borne in mind, including for example differences in how they define materiality
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