Due to the absence of instructive case law and interpretative guidance from the U.S. Securities and Exchange Commission (SEC), companies are often left in the dark with regard to whether and/or when they should publicly disclose that they are under investigation. The Southern District of New York recently provided much-needed guidance on the issue.
On January 22, 2016, the Southern District of New York dismissed the complaint filed in In re Lions Gate Entertainment Corp. Securities Litigation, which was a consolidated securities action brought on behalf of a proposed class of shareholders of common stock of Lions Gate Entertainment Corporation. The complaint alleged that Lions Gate was aware of an active SEC investigation into certain corporate transactions allegedly structured to prevent a minority investor from gaining control of the company. Eventually, the company settled with the SEC and agreed to pay a civil penalty of $7.5 million in March 2014. The plaintiffs alleged, among other things, that the failure to disclose the SEC investigation and possible settlement was a violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder. While dismissing the complaint, the court held that “a government investigation, without more, does not trigger a generalized duty to disclose” and the defendants “did not have a duty to disclose … because the securities laws do not impose an obligation on a company to predict the outcome of investigations. There is no duty to disclose litigation that is not ‘substantially certain to occur.’”
Although In re Lions Gate provides some guidance, a company’s duty to disclose requires careful examination of the relevant factual circumstances. Such considerations should include, among other things, whether the company is subject to an existing duty of disclosure under the securities law, whether the company has made express prior disclosures related to the investigation which are rendered materially misleading by omitting further information about the investigation, and whether the investigation itself is material. Companies evaluating whether there is a duty to disclose should seek the assistance of experienced counsel in order to avoid the potential pitfalls of failing to disclose investigations to the public or prematurely disclosing such investigations to the public.