On September 29, the Supreme Court granted cert in Macquarie Infrastructure Corp. v. Moab Partners, to decide:

whether the Second Circuit erred in holding—in conflict with the Third, Ninth, and Eleventh Circuits—that a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), even in the absence of an otherwise-misleading statement. 

(The question, I think, mischaracterizes the Third Circuit; you’ll get a sense of why below, the parties will argue the rest.  But leaving that point aside – )

I have no idea how the case will unfold, of course, but I tend to assume that despite the narrow framing, the real question is whether silence in the face of a regulatory duty to disclose constitutes a misleading omission.  I.e., it does not matter what the particular required disclosure is, or what the cause of action is; the question is whether, if you remain silent when a regulation requires you to speak, that is the equivalent of an affirmatively misleading statement.  The Second Circuit has repeatedly held yes, it is, usually in the context of 10b claims over Item 303 omissions.  Other circuits – well, to be honest, have been muddled.

This matters for any rule that prohibits false statements, or omissions that would render remaining statements misleading, but does not, by its terms, impose liability for omissions to state required information.

So, for example, compare Section 11 of the Securities Act of 1933:

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading … [purchasers can sue]

With Section 12 of the Securities Act, which prohibits the use of a prospectus that contains:

an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading

See?  Section 11 prohibits false statements, misleading statements, and straight omissions.  Section 12, by contrast, does not, by its terms, impose liability for failing to disclose required information (which is another reason why, by the way, that the Supreme Court got it wrong in Gustafson v. Alloyd Co., 513 U.S. 561 (1995), but that’s an argument for another time).  So, you could ask – if a prospectus fails to include required information, is there Section 12 liability?

Rule 10b-5 has similar wording to Section 12, as does Rule 14a-9 (proxy solicitations may not contain a “statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication”).  Nonetheless, in Jaroslawicz v. M&T Bank Corp., 962 F.3d 701 (3d Cir. 2020), the Third Circuit held that 14a-9 liability may be triggered by failing to disclose information required under Item 105 in the proxy statement.

So, to be very clear, the issue is whether under Section 12, or Rule 10b-5, or Rule 14a-9, failing to disclose required information is the equivalent of making a false statement.  If so, under this theory, the plaintiff would still have to separately prove the other elements of the relevant cause of action, such as materiality and, if relevant, scienter; silence, in the face of a regulatory obligation, would only satisfy the single element of falsity.  Or, as the Supreme Court put it in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), “Silence, absent a duty to disclose, is not misleading.”

The Supreme Court previously granted cert to decide this issue in Leidos Inc. v. Indiana Public Retirement System, but the parties settled, and the case was dismissed.  That time around, the United States actually weighed in on the plaintiffs’ side, which makes me wonder.

Could the SEC make all, or most, of this go away just by changing the signature block on the forms – the 10-Ks, the 10-Qs, the Schedule 14As, etc – to specifically say the forms are complete, as well as accurate?  You could do that for the SOX certifications, as well – which also don’t, currently, contain language representing that the form is complete.  At that point, there may be fights over whether the signatories must harbor scienter or whether someone else in the organization could, but it would at least narrow relevant scenarios.

And speaking of omissions liability –

One area where an amendment to the form would not be sufficient is where no form is filed at all, namely, where the plaintiffs allege the defendant should have filed a 13D or 13G disclosing a stake, and did not do so.  Again, the claim is that silence in the face of a regulatory duty to disclose – here, the duty to file a 13D to disclose a 5% stake – is the equivalent of a false statement for 10b-5 purposes. 

And this, of course, is playing out right now in a putative class action against Elon Musk, for failure to disclose his Twitter stake in a timely fashion (that case also involves affirmative false statements, in that Musk not only delayed disclosing his stake at all, but additionally filed a “passive” 13G form when he already knew he was not going to be passive).  I blogged about Musk’s potential liability here, before the complaint was filed, and this week, SDNY denied Musk’s motion to dismiss.  So it seems Musk has some interest in the outcome of Macquarie Infrastructure v. Moab Partners.

But there’s more!  The SEC is the one who usually enforces the 13D/13G filing requirements, and we all assumed the SEC’s interest in this was dead, but  – wrong!  Apparently, Musk agreed to sit for a depo, didn’t show, and now is refusing any depo – which caused the SEC to file a motion to compel in the Northern District of California.  So … stay tuned!

You may be interested in an event taking place on October 11 at the Center for American Progress in Washington, DC, which will focus on the regulation of private markets and feature SEC Commissioner Caroline Crenshaw, as well as business law professors Renee Jones (BC) and George Georgiev (Emory).

The registration link (in-person or virtual) is as follows: https://www.americanprogress.org/events/accessing-public-capital-without-public-disclosure/

Event description:

Accessing Public Capital Without Public Disclosure

Oct. 11, 2023

12:30 PM – 12:35 PM

Introductory remarks provided by CAP Senior Vice President for Inclusive Growth Emily Gee.

12:35 PM – 1:05 PM

Keynote remarks provided by Caroline A. Crenshaw, Commissioner of the U.S. Securities and Exchange Commission.

1:05 PM – 1:45 PM

A panel discussion with experts on the topic moderated by CAP Senior Director for Financial Regulation Alexandra Thornton, featuring Renee Jones (Boston College Law School) and George Georgiev (Emory University School of Law)

Today, more capital is raised annually in private markets than in the public markets. Hundreds of multibillion-dollar companies can raise all the capital they need from an unlimited number of unaffiliated investors, while selling products and services to tens of thousands of customers and employing thousands of people. Many are unicorns—companies that started in private markets and never left.

But companies that offer their shares for sale in private markets generally are not required to provide investors and the public with the type of information that public companies must provide when offering their shares for sale, such as reliable information about their operations, financials, business prospects, or governance, much less the financial risks they may face from climate disasters, workforce lawsuits, human rights violations, and more.

The astounding growth of private markets affects us all. Large opaque companies create risks not just for their investors and customers, but also for their workers and for the economy overall. Addressing these risks will help protect retirement savings from fraud and waste and ensure that our economy works for everyone.

Please join the Center for American Progress to discuss the origin and potential risks of opaque private markets and what can be done to avoid a future crisis.

Dear BLPB Readers:

“Minnesota State University Mankato is hiring a full-time tenure track Assistant Professor of Business Law position starting Fall 2024. Here is a link to the job posting –https://minnesotastate.peopleadmin.com/postings/2485.

The Business Law program offers a stand-alone certificate and teaches a robust curriculum to undergraduate and MBA students. Classes regularly offered include Legal Environment of Business; Contracts, Sales and Professional Responsibility; Employment and Labor Law; Technology and Intellectual Property Law; Negotiation and Conflict Resolution, International Legal Environment of Business; and Environmental Law.

Applications will start to be reviewed after December 1 and continue until the position is filled. MSU-Mankato is an equal opportunity employer and is a member of the Minnesota State System. Contact Wade Davis if you have any questions: wade.davis@mnsu.edu.”

I was incredibly honored to be selected by Marquette Law School to deliver this year’s Boden Lecture.  The title of my talk was Of Chameleons and ESG, and it is now available for your viewing pleasure on YouTube:

Last week, we hosted the Fourth Annual Corporate Governance Summit at the Wynn in Las Vegas.  You can see the program here.  Stephen Bainbridge came in to give our keynote address in a talk focused on his new book, The Profit Motive.  We ended up drawing about 130 participants.  I’m incredibly grateful to Mike Bonner at Greenberg Traurig and the rest of the Greenberg team that helped put the event together.  We were also fortunate to have some great sponsors for the event: Joele Frank, Connor Group, Deloitte, J.P. Morgan Chase & Co., and Whittier Trust.