As a microcap leader, you should generally avoid sharing forward-looking statements, as it almost always increases scrutiny and your risk of getting sued. If you don’t live up to the hype, liability follows. From an insurance perspective, less is more. Underwriters prefer working with companies that do not give forward-looking statements.
That said, if you must share a forward-looking statement, below are the do’s and don’ts. By following corporate governance best practices, you can help shield your company from headaches and liability.
DO Include Necessary Disclaimers
The Private Securities Litigation Reform Act (PSLRA) of 1995 provides some protection against frivolous shareholder lawsuits. Specifically, plaintiffs must present specific fraudulent statements made by the defendant and argue that those statements were reckless or intentional and resulted in financial loss.
PSLRA also provides safe harbor for forward-looking statements as long as certain criteria are met. Notably, the statement must be identified as a forward-looking statement and “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” Additionally, the statement must not be based on untrue statements of material fact or misleading omissions of material facts.
PSLRA protections are important, but they do not give corporate leaders carte blanche to say whatever they want without repercussions. When giving forward-looking statements, it’s important to exercise caution and include necessary disclaimers.
DON’T Be Careless About What You Say (Or Post) in Passing
When companies issue official corporate guidance statements, they tend to be careful in their wording and include key disclaimers. However, corporate leaders are not always so careful with what they say in passing at a conference or what they post online – and this can land them in hot water.
Even two words in a tweet could cause problems.
On August 7, 2018, Elon Musk posed on Twitter (now X) “Am considering taking Tesla private at $420. Funding secured.”
According to The Los Angeles Times, Tesla investors claimed they lost $12 billion over a 10-day period because of those last two words – funding secured. A class action shareholder lawsuit followed. Reuters says a jury found Musk and his company not to be liable for misleading investors. However, CNN says Musk had to give up his position as the executive chairman of Tesla and pay millions of dollars in fines and legal fees.
Statements do not have to be part of official reports to become the basis for shareholder litigation. Any public statement, written or verbal, could trigger a lawsuit, so the same level of caution must be exercised.
DO Share Your Genuine Optimism
With so many warnings about what not to say, it’s possible to overcorrect. However, there is nothing wrong with genuine corporate optimism.
According to The Fashion Law, a judge has dismissed a securities fraud lawsuit against Farfetch and some of its executives. The lawsuit alleged that the company’s executives misled investors and obscured the state of its operations. However, the judge confirmed that forward-looking statements and opinions are generally protected, and the statements made amounted to “inactionable puffery,” and there was no evidence that the executives did not believe what they said. The takeaway is that corporate optimism does not equate to fraud, even when things do not turn out how the corporate leaders expected.
Of course, the caveat here is that even though the lawsuit was ultimately dismissed, it was filed in the first place. In general, corporations would prefer to avoid litigation entirely. Although this is not always possible, proper disclaimers and cautious wording can help reduce the risk of claims.
DON’T Take Risks with Inadequate D&O Insurance
The future is never certain. Regulations can change, wars and pandemics can break out, and economies can collapse. No matter how rosy the future looks, there is a chance that a promising company will underperform. When shareholders lose money, they may be eager to recoup their losses through securities litigation, and they may look for any statements that could form the basis of a claim. Even if the lawsuit is ultimately dismissed, the defense can be expensive.
Make sure you have adequate D&O insurance.
Many smaller public companies overlook key aspects of D&O insurance – until they have a claim. For example, they may neglect to secure pre-IPO coverage that protects them against claims based on statements made during this critical time. Other issues may involve inadequate tail coverage or insufficient excess Side A coverage.
Are you adequately protected against shareholder lawsuits? Contact us for a complimentary review of your D&O coverage.
