Key Concepts

• Author: Stephanie Tsacoumis
• Profession: Recognized securities law practitioner and professor at Georgetown Law Center
• Pages: 7-40

7

Chapter2

Key Concepts

Duty to Disclose

“[S]ilence, absent a duty to disclose, is not misleading.”

—Chiarella v. United States

The federal securities laws do not require public companies to dis-

close every item of information that a shareholder might like to know.

Nor are public company executive ofcers or directors required to

be clairvoyant or omniscient. In short, there is no overarching gen-

eral federal disclosure obligation.

A duty to disclose does arise, however, in dened circumstances,

which together act to impose signicant disclosure obligations on

public companies.

SEC Requirements

A duty to speak arises when there is a specic SEC disclosure require-

ment, such as the specic “line- item” disclosures required in peri-

odic reports led with the SEC. As described by a former chair of

the SEC, Mary Jo White, public companies are specically required

to disclose a whole host of different types of information, including:

➤ how they operate their business now and how they intend to

do so in the future, and, in some cases, how they did it before;

8 What Must Public Companies Disclose?

➤ how much money they made over the last few years, as well as

in the current year and how that might change in the future;

➤ specic details about large shareholders;

➤ the money they have borrowed, repaid, will borrow, and will

repay;

➤ a description of the background and experience of the of-

cers and directors of the company, how much they are paid

and why.

These “line- item” disclosure requirements largely are found in

Regulation S-K, which are referenced in the various forms required

to be led by public companies, such as the annual report on Form

10-K, the quarterly report on Form 10-Q, and the current report on

Form 8-K.

No Continuous Disclosure Requirement

“Companies have no ‘absolute duty to disclose all information material

to stock prices as soon as news comes into their possession.... We do

not have a system of continuous disclosure. Instead rms are entitled to

keep silent (about good news as well as bad news) unless positive law

creates a duty to disclose.’”

—Gallagher v. Abbott Labs

Other securities law requirements similarly impose disclosure

obligations under specied circumstances. If a public company solic-

its proxies from its shareholders, for example, the proxy statement

disclosure requirements of the 34 Act would apply. The occurrence

of specied events, such as entry into a material contract or resigna-

tion of a director, would trigger a Form 8-K ling and would man-

date appropriate related disclosures.

Company Is “in the Market”

A duty to speak also arises when a company is “in the market” buying

or selling its securities. An entity that is making a public offering of

securities is afrmatively required to make specied disclosures in a

Chapter2 ■ Key Concepts 9

registration statement required to be led with the SEC. Just as the

offering document that is part of the registration statement must

contain all “material” information relevant to a prospective purchas-

er’s investment decision in the public offering, an offering docu-

ment relating to an exempt offering (such as a private placement)

also must contain all “material” information relevant to investors in

the exempt offering.

A similar concept applies when a company engages in other mar-

ket transactions involving its own securities. Examples would include

repurchases of its own securities or acquisition transactions using

the company’s stock as consideration (which constitutes an offering

of its stock in connection with the transaction).

Correction of a Prior Statement

To the extent that a company’s prior statement is found to be inac-

curate and remains “live” in the reasonable investor’s mind, a duty

to correct exists. A duty to correct may arise where, for instance, a

company makes a historical statement that the company believed to

be true at the time that the statement was made, but actually was not

accurate as revealed by subsequently discovered information. The

duty to correct survives only as long as the initial statement remains

viable in the market.

The duty to correct is to be distinguished from the duty to

update, which concerns statements that were accurate when made

but that become misleading when viewed in the context of ensuing

events. A broad- based duty to update accurate disclosures could cre-

ate a burdensome, continuous disclosure obligation. Nonetheless,

case law on the point is mixed, and some courts have suggested the

existence of a duty to update in some circumstances.

Obligation Not to Mislead

Once a company discloses information related to material facts—

whether voluntarily or in response to a disclosure obligation— the

company has a duty to make complete disclosure. If a company con-

veys some information about a material matter, the company must

disclose all information necessary to prevent its communication

from being misleading.