Shareholders can’t sue a company for remaining silent on risks or trends that might have a material impact on its business, the U.S. Supreme Court has ruled. What impact will this have on GRC professionals?
The (Fake) Case of ABC Corp:
Imagine a scenario where a company, ABC Corp., faces significant risks related to its supply chain due to geopolitical tensions. The company’s management knows about these risks but decides not to disclose them in its periodic filings with the SEC.
Unaware of the potential impact on the company’s financial performance, shareholders continue to invest in ABC Corp. When the risks materialize and the company’s stock price plummets, shareholders seek to sue ABC Corp. for failing to disclose the known risks. But can they succeed in their claim?
The Supreme Court’s Decision:
In the recent case of Macquarie Infrastructure Corporation v. Moab Partners, L.P., the Supreme Court addressed the scope of liability for omissions under SEC Rule 10b-5(b). The Court unanimously held that pure omissions—where a company says nothing about a particular issue—are not actionable under Rule 10b-5(b). According to the Court, the Rule covers only half-truths, which occur when a company makes affirmative statements rendered misleading by the omission of material facts.
Applying this decision to our hypothetical scenario, ABC Corp. shareholders would likely face an uphill battle in their lawsuit. If ABC Corp. made no statements about its supply chain risks, the failure to disclose the risks would be considered a pure omission. Under the Supreme Court’s ruling, such an omission would not be actionable under Rule 10b-5(b).
However, suppose ABC Corp. had made any affirmative statements about its supply chain or risk management practices that were rendered misleading by omitting the known risks. In that case, the shareholders may have a stronger case. The Court clarified that Rule 10b-5(b) prohibits omitting material facts necessary to make “statements made” not misleading.
Key Takeaways for GRC Professionals:
- Review public statements: GRC professionals should carefully review their company’s public statements, including periodic filings with the SEC, to ensure they are not rendered misleading by omitting material information. While pure omissions may not be actionable under Rule 10b-5(b), half-truths can still expose the company to liability.
- Assess materiality of risks: When deciding whether to disclose certain risks, GRC professionals should assess their materiality. The Supreme Court’s decision does not change the standard for materiality, which depends on whether there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision.
- Comply with disclosure obligations: While the Supreme Court’s decision may limit private parties’ ability to bring claims for pure omissions under Rule 10b-5(b), companies must still comply with their disclosure obligations under SEC regulations, such as Item 303 of Regulation S-K. Failure to do so may result in SEC enforcement actions.
- Foster a culture of transparency: GRC professionals should encourage a culture of openness within their organizations. By promoting open communication and timely disclosure of material risks, companies can build trust with investors and reduce the likelihood of legal disputes.
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