Publications

Congress recently enacted into law the Private Securities Litigation Reform Act (the “Act”). These provisions can be found in subsection 27A of section 102 of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. The Act’s main purpose is to reduce what many in Congress felt was the large number of frivolous lawsuits against corporations regarding securities issues. Among other provisions, the Act establishes a safe-harbor for certain “forward-looking” statements. Many companies have avoided such statements given the potential for litigation. Forward-looking statements are typically financial data projections, plans and objectives of management, or future economic performance information.

In order to fall within the safe-harbor, a forward-looking statement must be made by or on behalf of an issuer that is subject to the reporting requirements of sections 13(a) or 15(d) of the Exchange Act and

• must be identified as a forward-looking statement and be accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those in the forward-looking statement, or
• must be immaterial, or
• the plaintiff fails to prove that the statement was made or approved by a person with knowledge that the statement was false or misleading.

Any oral forward-looking statement must be accompanied by or refer to written material containing additional factors that could cause the results to differ materially from the statement. If the forward-looking statement falls within the safe-harbor the person or entity making the statement is insulated from any private action based on the forward looking statement containing an untrue statement of material fact or the omission of a material fact necessary to make the statement not misleading. Persons or entities making such statements do not have a continuing duty to update the information.

Certain forward-looking statements, however, are excluded from the safe-harbor provision. These statements are ones:

• included in financial statements prepared in accordance with GAAP;
• contained in an investment company registration statement;
• made in a disclosure of beneficial ownership pursuant to section 13(D) of the Exchange Act;
• made by a person who, in the preceding three years, has been convicted of certain felonies or misdemeanors or is the subject of a judicial or administrative decree; or
• made in connection with a blank check company offering, the issuance of penny stocks, roll-up transactions, going private transactions, tender offers, initial public offerings, partnership offerings, limited liability company offerings, or direct participation investment programs.

Because of the tests that must be met in order to fall within the ambit of the safe-harbor and the numerous categorical exclusions, counsel should be consulted prior to the public dissemination of any forward-looking information.

Practice Pointer
It is still too early to determine if the new safe harbor will encourage the increased use of forward-looking statements by public companies. Despite the apparently broad scope of the safe harbor, we are suggesting proceeding cautiously in using forward-looking statements. Also, be careful that all oral as well as written forward-looking statements satisfy the safe harbor.