'We Believe': Omnicare, Legal Risk Disclosure and Corporate Governance
24 Pages Posted: 22 Mar 2016
Date Written: March 10, 2016
The Supreme Court’s decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund is an exercise in corporate discourse theory. The question before the Court was whether and when a 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 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, and it remanded the case. Options on remand are limited. One is to declare the matter a contested fact question, reserved for the fact-finder at trial. The alternative is to dismiss the case for failure to state a claim or on a motion for summary judgment, a common occurrence in securities litigation, where judges often take on the role of assessing what reasonable investors think, employing a set of heuristics — often empirically questionable ones, as we have both written elsewhere — that have a big normative bite.
Our paper explores Omnicare through this discourse lens: how the judicial process extracts (or should extract) meaning from ambiguous, often strategically crafted words communicated to vastly complicated financial markets. We focus on compliance-related disclosures, though our analysis 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. Lurking here is a palpable epistemological question: what does it mean for an entity — a legal fiction, incapable of thought — to express a belief? Who is the “we” in “we believe” our practices are legally compliant, and what does it mean to believe? Using this prompt, we try to shed light on what, and how much, Omnicare says about liability for statements of opinion in a Rule 10b-5 lawsuit, where corporate scienter, rather than strict liability, is the norm.
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 under state corporate law occur under the same circumstances with complaints 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 courts have made them difficult for shareholders to win, 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. We also explore the growing perception from 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. 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.
Keywords: corporate governance, disclosure, securities fraud, federalism, securities litigation, Delaware, Caremark, Omnicare, fiduciary duty, directors, business judgment rule, oversight, risk management, psychology, publicness, securities law, corporate law
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