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The U.S. Supreme Court resolved a split among federal appellate courts by ruling that a company’s “pure omission” of information required to be disclosed under Item 303 of SEC Regulation S-K—that is, complete silence, as opposed to affirmative half-truths—cannot support a private plaintiff’s claim under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5(b) thereunder.1
The decision is notable because it definitively bars plaintiffs from pursuing claims based on a companies’ “pure omission”-based Rule 10b-5(b) claims, but leading defense-side and plaintiff-side securities litigation firms generally agree that Macquarie is unlikely to alter the legal landscape for issuers and their directors and officers (D&Os), underscoring the continued the importance of insureds maintaining robust D&O liability insurance programs.
Background and Decision
Item 303 requires companies to disclose in their periodic SEC filings any known trends or uncertainties that are reasonably likely to have a material impact on the company’s financial condition and results of operations. Rule 10b-5(b), in turn, prohibits, in the securities transaction context, making untrue statements of material fact (i.e., affirmative false statements) and omitting material facts necessary to render statements made not misleading (i.e., affirmative half-truths). Plaintiffs in Macquarie did not identify any affirmative false statement or half-truth. Instead, plaintiffs asserted that Item 303 required the defendant to disclose that a regulation capping the sulfur content of oil would dramatically impact the defendant’s fuel storage business, and that the defendant violated Rule 10b-5(b) by omitting this information. In rejecting this theory and reversing the U.S. Second Circuit Court of Appeals’ contrary conclusion, the Supreme Court held that Rule 10b-5(b) requires either an affirmative false statement or a misleading half-truth, and that Rule 10b-5(b) cannot be satisfied by a pure omission alone.
Anticipated Impact of the Decision
Leading litigation firms from both sides of the proverbial “v” agree that Macquarie likely will not fundamentally reform securities litigation. For one thing, the Supreme Court left open the question of whether pure omissions—a rare theory of liability to begin with—can support claims under provisions of Rule 10b-5 other than subsection (b). Moreover, as the Supreme Court acknowledged, notwithstanding the Macquarie decision, the SEC can still investigate and bring enforcement actions concerning Item 303 violations, and private plaintiffs can still bring pure omission-based claims under other securities laws—most notably, Section 11 of the Securities Act of 1933. Perhaps most fundamentally, plaintiffs still can satisfy Rule 10b-5(b) by identifying affirmative statements rendered misleading by a given omission, which plaintiffs had been required to do under decisions from multiple federal circuit courts of appeals (other than the Second Circuit), even before Macquarie was decided.
Because Macquarie is unlikely to dissuade plaintiffs from pursuing securities claims, insureds should continue maintaining and regularly auditing robust D&O programs to cover the company and its D&Os in the event of a securities lawsuit. An experienced broker can help optimize coverage terms and conditions. If you have any questions or are interested in obtaining coverage, please contact your Aon broker.
1 Macquarie Infrastructure Corp. v. Moab Partners, L. P., 601 U.S. ___ (2024)
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