“We Believe”: Omnicare, Legal Risk Disclosure and Corporate Governance

by Hillary A. Sale & Donald C. Langevoort

Click here for a PDF file of this article

Abstract

The Supreme Court’s decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund presents new challenges for boards of directors. The opinion speaks to whether and when an issuer’s statement of belief can be false or misleading other than by proof that the issuer’s genuine opinion was different from what it stated. Statements of opinion imply something about how the belief was formed, and that process implicates the role of directors as fiduciaries.

This Article uses Omnicare as a starting point for exploring and developing the interplay between disclosure, discourse, and fiduciary duties. Using the lens of corporate-discourse theory, this Article explores how the judicial process extracts (or should extract) meaning from ambiguous, often strategically crafted words communicated to vastly complicated financial markets. Questions such as what it means for a corporate entity—a legal fiction incapable of thought—to express a belief, who the “we” is in “we believe our practices are legally compliant,” and what it means to believe, all help to frame the conversation about the role of directors in disciplining the corporate-disclosure process.

Federal securities law cases that raise questions about disclosure related to legal compliance and derivative lawsuits challenging board oversight are common after a big corporate penalty for violations of federal or state law. Regulators are also pushing boards of directors to participate more 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, this Article posits that boards need to exercise greater responsibility for disclosures, particularly with respect to legal compliance. In this manner, the securities laws perform in an information-forcing-substance manner, creating a disclosure regime that is backed by due diligence and fiduciary performance. Finally, this Article argues that the Omnicare litigation—and control over discourse about legal risk—belongs in the broader context of board fiduciary responsibility for enterprise risk management generally, and legal compliance in particular.

“We Believe”: Omnicare, Legal Risk Disclosure and Corporate Governance

by Hillary A. Sale & Donald C. Langevoort

Click here for a PDF file of this article

Abstract

The Supreme Court’s decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund presents new challenges for boards of directors. The opinion speaks to whether and when an issuer’s statement of belief can be false or misleading other than by proof that the issuer’s genuine opinion was different from what it stated. Statements of opinion imply something about how the belief was formed, and that process implicates the role of directors as fiduciaries.

This Article uses Omnicare as a starting point for exploring and developing the interplay between disclosure, discourse, and fiduciary duties. Using the lens of corporate-discourse theory, this Article explores how the judicial process extracts (or should extract) meaning from ambiguous, often strategically crafted words communicated to vastly complicated financial markets. Questions such as what it means for a corporate entity—a legal fiction incapable of thought—to express a belief, who the “we” is in “we believe our practices are legally compliant,” and what it means to believe, all help to frame the conversation about the role of directors in disciplining the corporate-disclosure process.

Federal securities law cases that raise questions about disclosure related to legal compliance and derivative lawsuits challenging board oversight are common after a big corporate penalty for violations of federal or state law. Regulators are also pushing boards of directors to participate more 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, this Article posits that boards need to exercise greater responsibility for disclosures, particularly with respect to legal compliance. In this manner, the securities laws perform in an information-forcing-substance manner, creating a disclosure regime that is backed by due diligence and fiduciary performance. Finally, this Article argues that the Omnicare litigation—and control over discourse about legal risk—belongs in the broader context of board fiduciary responsibility for enterprise risk management generally, and legal compliance in particular.