Public companies are continually pressured to give guidance about future events. Disclosure about everything from earnings forecasts and revenue projections to an announcement that the company is planning a significant acquisition or strategic initiative involves statements about what a company expects, intends, plans, anticipates, etc. Precisely because these statements are forward looking, there can be no guaranty that the predictions contained within them will actually come to pass. As a result, statements of this type are different from the typical statement that could be challenged as misleading under SEC Rule 10b-5, which makes it unlawful for any person to "make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading."
Both legislatures and courts have addressed the standard of liability when forwardlooking statements turn out to be wrong. The Private Securities Litigation Reform Act of 1995 (PSLRA), for example, contains certain safe-harbor provisions, as codified in Section 27A of the Securities Act of 1933 (Securities Act), that provide that forward-looking statements will not create liability in a private action arising under a Rule 10b-5 claim, if (i) the statement is identified as forward looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statement, (ii) the statement is immaterial, or (iii) the statement, if made by a business entity, was not made by or with the approval of an executive officer with actual knowledge that it was false or misleading. Similarly, the judicially crafted "bespeaks caution" doctrine, provides that forward-looking statements are not grounds for liability if they are accompanied by meaningful cautionary language that puts investors on notice of a particular risk at issue.
All of this should come as no surprise to anyone who has worked with corporate disclosures. Forward-looking statement disclaimers adorn quarterly reports and press releases, and no earnings call or annual meeting of stockholders would be complete without a disclaimer, including requisite cautionary language that acknowledges that forward-looking statements will, in fact, be made. All of this suggests that forwardlooking statement disclaimers and risk factors have become boilerplate, no longer requiring serious consideration.
Not so. In its recent decision in Illinois State Board of Investment v. Authentidate Holding Corp., 2010 U.S. App. LEXIS 5226, (2d Cir. March 12, 2010) the U.S. Court of Appeals for the Second Circuit vacated and remanded certain claims regarding forward-looking statements that the district court had initially dismissed. In doing so, it provided important reminders regarding how to – and how not to – avail oneself of the protections available regarding forward-looking statements. The lessons of Authentidate include the following:
1. Do not rely on generic, boilerplate disclaimers; make sure that any disclaimer addresses the potential risk. Defendants in Authentidate made substantially similar statements in both a press release and on a conference call with analysts regarding a potential significant agreement with the United States Postal Service. While the press release specifically stated that there could be "no guarantee" that an agreement would be reached, the conference call contained only boilerplate language that forward-looking statements "were subject to certain risks and uncertainties." The court held that the first disclaimer was sufficient cautionary language to cover the statements under the bespeaks caution doctrine; however, the second was not sufficiently tailored to alert investors of the specific risk and therefore was not covered by that doctrine.
2. These protections are only available for forward-looking statements. The plaintiff in Authentidate alleged that certain statements made by the defendant in conference calls regarding its compliance with certain metrics that were conditions to a final agreement with the USPS were untrue when made. Defendants sought the protection of the bespeaks caution doctrine for these statements as well, but the court found that both the bespeaks caution doctrine and the safe harbor available under the PSLRA apply only to forward-looking statements. Statements of then-present fact that were allegedly untrue when made are not protected.
3. Do not rely on materiality to resolve a matter on a motion to dismiss. As the court noted, citing long-standing precedent, the materiality of statements made in this context is established if "the statement or omission significantly altered the total mix of information made available as viewed by a reasonable investor." In practice, it can be very difficult for a court to find a fact immaterial as a matter of law on a motion to dismiss, as a court must construe all inferences in favor of the non-moving party. The court noted that to grant a motion to dismiss on materiality, it must find that the statements or omissions in question are "so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." Claims that statements are immaterial, while ultimately relevant, are not likely to be effective at the motion to dismiss stage. As a practical matter this means that the litigation will be protracted, prolonging uncertainty as to the resolution and increasing both cost and settlement value. Materiality should be viewed as a fall-back position, rather than a first line of defense.
4. Beware of creating expectations in the market. The duty to update can only arise once a forward-looking statement is made. In contrast, absent a duty to disclose, a party is not obligated to disclose a fact merely because a reasonable investor may want to know that fact. Based on this distinction, the court affirmed the district court's dismissal of several claims finding that, in general, Authentidate was not obligated to announce growing difficulties in meeting the metrics for the agreement, when it had not made any specific public statements that it would reach particular levels under those metrics. By limiting its forward-looking statements on these particulars, defendants effectively reduced the issues to which the duty to update applied.
In addition to the lessons above, companies should remember how important it can be to resolve litigation at the motion to dismiss stage. Due to the Authentidate defendants' imperfect use of the available protections, they were unable, at the appellate level, to have the case dismissed. Even if they ultimately avoid liability, they will be subject to protracted litigation, which is both costly and potentially distracting for senior management. Keeping in mind the points above regarding forward-looking statements can help other companies and managers avoid being subjected to protracted proceedings, and their potential distraction and expense.
Since the decision in Authentidate, the U.S. Court of Appeals for the Second Circuit has revisited the subject of forward-looking statements in Slayton v. American Express Co., 604 F.3d 758 (2d Cir. May 18, 2010). The decision in that case focused on the specific requirements of the PSLRA safe harbor, as opposed to the bespeaks caution doctrine discussed by the Authentidate court, and does not specifically address the duty to update. Nonetheless, Slayton is consistent with Authentidate on the points discussed above.
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