Supreme Court to Hear Case Involving Item 303 Disclosures

Court calendars across the country—and in Washington—are filled with cases business leaders need to keep an eye on. But certain recent securities litigation cases demand special attention from directors, at least according to Jared Gerber, a partner with Cleary Gottlieb Steen & Hamilton, whose practice focuses on securities litigation and other actions filed by shareholders. Corporate Board Member recently spoke with Gerber about the impact of these cases. This is part 2 of a 3 part series. Click here for parts 1 and 3.

In March, the Supreme Court agreed to hear Leidos Inc. v. Indiana Public Retirement System to resolve a circuit split on whether the failure to make a disclosure required by Item 303 of SEC Regulation S-K can give rise to claims under Section 10(b) and Rule 10b-5 of the Exchange Act. Among other things, Item 303 of Reg S-K requires companies to “describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material or unfavorable impact.”

“If the Second Circuit’s decision stands, its primary effect will be to increase the liability of public companies for omissions and to encourage THEM to make more or premature disclosures about potential trends that may mitigate litigation exposure but are not necessarily informative for investors.”

In the decision under appeal, the Second Circuit relied on its previous holding that failure to make a disclosure required by Item 303 is an omission that can give rise to a Section 10(b) claim, as long as the plaintiff has established the other requirements of such a claim. The Second Circuit’s decision conflicts with the Ninth Circuit’s NVIDIA Corporation Securities Litigation decision, which held that failure to make disclosures required by Item 303 cannot serve as the basis of a Section 10(b) claim because the text of Section 10(b) does not permit liability based on a failure to make required disclosures.

Gerber says this is a corporate governance issue directors should be aware of in terms of corporate liability over company disclosures. “If the Second Circuit’s decision stands,” Gerber explains, “its primary effect will be to increase the liability of public companies for omissions and to encourage public companies to make more or premature disclosures about potential trends that may mitigate litigation exposure but are not necessarily informative for investors.”

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Kimberly Crowe
Kimberly Crowe is managing editor with Corporate Board Member magazine, a publication of Chief Executive Group.