Investor lawsuits challenging management’s public statements continue to reach record highs. Meanwhile, shareholder access to internal records and communications has grown. Public statements and internal documents should be prepared with these trends in mind, and records maintained in ways that minimize the burden on the company when confronted with legal action.
Here are some useful tips for boards to keep in mind for communicating with investors and colleagues, retaining necessary backup, and managing incoming shareholder requests.
Someone Is Listening
It is an unfortunate truth that plaintiffs’ lawyers monitor corporate statements for soundbites that they can use adversely. When a company experiences a significant decrease in share price, those lawyers pore through the issuer’s public statements for any evidence that new information caused the stock drop, and that such information contradicted what the company previously told the market. They then file class action lawsuits claiming the stock drop was the result of fraud and seek damages equal to the entire decline in market capitalization.
Court rulings in these cases have taken a broad view of what constitutes an actionable “statement” to investors. Recent decisions have found that plaintiffs can bring claims based not only on statements in SEC filings, in press releases, and at investor conferences, but also in trade publications, on third-party websites, and even on executives’ personal social media pages. These written and oral statements are often presented to the court out of context and scrutinized in hindsight. A little added nuance in the messaging can go a long way to avoiding a shareholder lawsuit, or to ultimately prevailing in the event such a case is filed.
Say It Like You Mean It
Before making or approving public statements, view them through the eyes of enterprising plaintiffs’ counsel. Avoid categorical statements, off-the-cuff commitments, overstatements, or mea culpas. It can be tempting, for example, to issue statements heralding the wonders of a new product without the appropriate caveats about its limitations. Consider the claim that a new security system is “able to identify and eliminate all threats.” One way to moderate the statement is to avoid being categorical. Just changing “eliminate all threats” to “eliminate threats” reduces the likelihood of liability. Another way is to accurately provide the basis for the assertion: “Independent third-party testing concluded that the Fraud Eliminator 5000 is able to identify and eliminate all threats from unsavory plaintiffs’ counsel.”
Mea culpas can be difficult to overcome when litigation ensues. When the company’s performance disappoints, earnest executives often want to assume responsibility and assure the market that the buck stops with them. But it is difficult to claim innocence after publicly admitting guilt. Rather than accept fault, provide reassurance. Instead of telling investors, “We should have updated you about this sooner, but are now committed to making it right,” consider, “We have learned that this has occurred and are taking the following steps to improve performance.”
Predictions and guidance should be treated with equal vigilance. It may be tempting to be bold when it comes to making forward-looking statements, taking comfort in the applicable safe harbors. But those protections are defensive mechanisms that should be used as a last resort, not as part of the initial calculus. This is true particularly because courts have begun eroding the safe harbors. Recent appellate decisions have taken a narrow view of what constitutes a forward-looking statement and required that the accompanying cautions be increasingly detailed and specific. For those reasons, among others, be sure to update risk factors regularly and tailor them to the statements they accompany.
Exercise control over internal communications. Noteworthy messages often find their way outside the company. A disgruntled employee may share them with counsel or leak them to the press. Likewise, if a shareholder lawsuit progresses past the pleadings stage, then emails, text messages, and other communications are often fair game. The key to managing the contents of internal communications is to set a tone from the top. If the C-suite uses profanity and hyperbolic language or describes the routine problems of running a business as catastrophic fire drills, expect that their subordinates will as well. Consider the documentary record such habits create. Even when the tone of these communications is friendly, cute phrases or colorful language often look different in hindsight. Think twice about the use of emojis or turns of phrase such as “I manipulated the accounting,” “destroy after reading,” “earth shattering,” and “top secret.” Litigators will often start their review of voluminous document productions searching for a common list of expletives and overstatements, hoping to find a trove of incendiary emails. It only takes a few to support a “where there’s smoke, there’s fire” narrative.
It is also unwise to assume that inflammatory information will be shielded by confidentiality or privileges. Confidentiality rarely protects information from disclosure in adversarial litigation. In shareholder actions, even material protected by the attorney-client privilege may be disclosed to plaintiffs purporting to assert claims on the company’s behalf. A good working assumption is that if it’s in writing (regardless of the medium), it will get out.