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E-MailDonald Langevoort is a Professor of Law at the Georgetown University Law Center and Hillary A. Sale is the Walter D. Coles Professor of Law at Washington University School of Law. This post is based on an article authored by Professor Langevoort and Professor Sale.
The Supreme Court’s 2015 decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund is an extended exercise in corporate discourse theory. Omnicare’s registration statement for a public offering under the Securities Act of 1933 stated the company’s belief that its marketing practices to certain kinds of pharmacies were lawful. Later the government decided that they were not, and took legal action against the company, imposing sizable sanctions.
The question before the Court was whether and when that statement of belief could be found false or misleading other than by proof that the issuer’s genuine opinion at the time was different from what it stated. The Court said it might, because words in context can generate inferences for the reasonable investor that go beyond narrow linguistic confines. The statement of opinion could imply something about how the belief was formed that might be untrue, or that certain facts do not exist when in fact they do. Thus the case was remanded for further proceedings, in particular to consider evidence that a lawyer had described one of Omnicare’s contracts as high-risk. Did that or anything similar uncovered by plaintiffs render the unqualified compliance opinion misleading even if genuinely believed?
On remand, the lower court has limited options. One is simply to declare the matter a contested fact question and hence reserved for the fact-finder at trial. But securities law trials rarely occur; the probability of settlement is overwhelming in the aftermath of any such declaration, and perceptions about risk meritless (or low-merit) settlements makes many judges uneasy. The alternative is to dismiss the case for failure to state a cause of action or on a motion for summary judgment, which happens more frequently in securities litigation than civil procedure doctrine would suggest. Judges often take on the role of assessing what reasonable investors think, employing a set of heuristics—often empirically questionable ones—that have a big normative bite.
Our paper first explores Omnicare through this discourse lens: how the judicial process extracts (or should extract) meaning from ambiguous, often strategically crafted words and actions communicated to vastly complicated financial markets. Our focus is on compliance-related disclosures, though what we say applies to other disclosure issues as well. One need not be an obsessive post-modernist to doubt that a single preferred meaning can ever confidently be extracted from text. Meanings vary based, among other things, on prior beliefs and expectations brought to the task of interpretation by a diverse audience of investors; privileging one meaning as the “reasonable” one in hindsight invites arbitrariness at best, bias at worst. We suggest a variety of ways to navigate the contextual approach Omnicare invites.
Lurking in all of this is a palpable epistemological question: what does it mean for an entity—a legal fiction, incapable of thought—to express a belief? Who is “we” when the company says “we believe” our practices are legally compliant, and what does it mean to believe? This is important when the authors of the disclosure lack personal knowledge of whatever was amiss, but someone else in the company knew troubling facts. Using this prompt, we try to shed light on what (and if so how much) Omnicare has to say about liability for statements of opinion in a Rule 10b-5 lawsuit, where corporate scienter is the norm rather than strict liability for issuers. Indeed, a companion case involving Omnicare’s opinion about compliance raises exactly this issue, and offers a novel solution.
That is a natural bridge to our second main goal, exploring Omnicare through the lens of corporate governance and fiduciary responsibility. Arguably, Omnicare made a poor legal decision in its contracting practices. Federal securities law cases challenging disclosure about legal compliance are common in the aftermath of a big corporate penalty for a violation of federal or state law. Derivative lawsuits are brought under state corporate law under the same circumstances, complaining that the board of directors failed to prevent the wrongdoing by inadequate monitoring. In Delaware, these so-called “Caremark cases” have dwindled in importance because the Delaware courts have made them extremely difficult for shareholders to win on the merits, insisting on proof that the directors acted in bad faith. There are many interesting connections between these two lines of cases notwithstanding—or maybe because of—their different trajectories. There is also a growing perception from a variety of other authorities—the Justice Department, the SEC and other financial regulatory agencies—that boards of directors must become more deeply involved in legal and disclosure quality control in any event. To the extent that Omnicare was favorable to plaintiffs in allowing some suits to proceed notwithstanding belief or opinion qualifiers, boards and executives have more to worry about in terms of corporate and (perhaps) personal liability risk when the company has a compliance failure. We therefore situate the Omnicare litigation—and control over discourse about legal risk—in the broader context of board fiduciary responsibility for enterprise risk management generally, and legal compliance in particular.
The full paper is available for download here.
