I/R on the Internet: A Securities Disclosure Perspective

By Boris Feldman

For Investor Relations professionals, the Internet offers an opportunity to reach the investing public directly, without filtration by the financial press and securities analysts. Want to explain a new market opportunity in detail, rather than in just a sound bite? Post it to your Web page. Similarly, inquiring investors enjoy greater access than ever before to raw corporate data, without spending a fortune on commercial databases.

Not surprisingly, the I/R section has become a prominent feature on many Web pages. Those surfing the Net will check the CEO's greeting only so often. But they will touch base with investment updates on every visit.

Of course, into every good thing intrude the lawyers & in this case, plaintiffs' securities lawyers. It is only a matter of time before they use something contained in a company's Web page as evidence in a lawsuit by disappointed shareholders. Before that happens, companies would be well-advised to consider certain protective measures to limit their risk.

Shareholder Class Actions and Analyst Contacts

Before turning to specific securities issues presented by the Net, it may be useful to place those issues in context. The shareholder class action phenomenon is well-known and needs little comment: a public company announces disappointing news (typically, lower than expected quarterly results); its stock plummets; and plaintiffs' lawyers scour computer databases to see whether the company's executives said anything that they can be sued over. As a result, many public companies have become loathe to predict publicly their future financial performance: absent such predictions, it is hard to sue them over a down quarter.

Plaintiffs' lawyers have therefore come to focus on predictions issued by securities analysts employed by brokerage firms. If the plaintiffs can establish a sufficient link between the company's guidance and the analysts' projections, then they have a viable lawsuit & or at least one that they can leverage into a sizable settlement. Thus, in the majority of shareholder suits, the principal battleground has become what the company told the analysts.

In recent months, courts have also begun to scrutinize what the company does with statements made by analysts. A few courts (in my view, erroneously) have held that a company can be held responsible for opinions or predictions made by a securities analyst if the company sends copies of analyst reports to investors; the theory is that such a company has ratified the reports. As a result, companies that used to provide copies of recent reports to investors who requested them are now abandoning that practice (or at least stamping disclaimers on the copies).

What the Plaintiffs Will Look For

As the plaintiffs' bar becomes more focussed on corporate Web sites, they are likely to scrutinize the following sections:

In each area, the plaintiffs will search for forward-looking, predictive statements that did not come true & especially with respect to financial results, product performance, market trends, and the like. Less tangibly, plaintiffs will also be looking for booster statements that may have seemed innocuous when the statement was posted, but that can be twisted into something more sinister when the company hits the skids a few months later. Above all, plaintiffs will be looking for anything that they can say entwined the company with the securities analysts, so that it might be held liable for their projections.

Although the dividing line between investor information and marketing information is ambiguous, you should try to limit the investor section of your Web page to matters that are truly geared towards the financial community. If some undue hype does sneak through into a posting, it will be marginally easier to defend if it is contained in a section that is clearly focussed on product marketing (as to which courts have granted companies somewhat greater leeway) than if it is pitched to investors.

Treat Web Postings Like Press Releases

In response to the class action threat, public companies have learned to subject their (and their officers') statements to meaningful scrutiny. Although one could credibly argue that Web postings do not influence the financial markets in the same way as do press releases or analyst conference calls, there can be no assurance (as the saying goes) that a judge will not hold that statements on a Web page trigger the panoply of securities obligations. Thus, the key take-away message of this commentary: SUBJECT YOUR WEB POSTINGS TO THE SAME SCRUTINY AS YOU WOULD A PRESS RELEASE OR SHAREHOLDER REPORT.

Obviously, this does not mean that you need to pore over every item posted to your page. Those that do not involve substantive business information need not concern you. You should, however, put in place procedures to ensure that substantive financial or product information placed on the page goes through meaningful internal review. Your legal department should sign-off on these postings just as they would on press releases. Someone within the communications organization should conduct fact-checking on the postings to make sure that factual representations are accurate. Whoever is responsible for stripping excessive hype from press releases or shareholder reports should also apply the editing pencil to Web information. You may not be under a securities-law duty to follow these practices; but they could well spare you from many hours with a lawyer down the road.

A related concern involves the duty to update previously disseminated information. The duty to update is not mentioned anywhere in the Federal securities laws, but seems to have been assumed into existence by some courts. To the extent that a duty to update exists, one can readily imagine plaintiffs' lawyers applying it to attack Web information that was accurate when posted but is superseded by subsequent events.

In some respects, Web pages present a greater risk than press releases with respect to the duty to update. Unlike press releases, which are issued once and rarely recirculated, Web postings just keep going and going. While a press release may arguably no longer be alive in the market months after it was disseminated, the argument is a tougher one to make with respect to an ongoing statement on the Web page.

Just as a prudent company will adopt fact-checking procedures to clear material before it is placed on the Web page initially, so too should that company adopt procedures to review Web information periodically to ensure that it has not become inaccurate with the passage of time. Of course, if you are correcting or updating something on your Web page, you need to consider whether some other corrective disclosure is needed (such as to a previously issued announcement).

Avoid Entanglement With Analysts

From a securities litigation standpoint, what a company says others are saying about it is almost as important as what the company says about itself. Companies have adopted a variety of practices for dealing with analyst information on the Net. Some provide no information about analysts. Others provide a list of analysts who follow the company, sometimes with links to their homepages. Some list the analysts' recommendations or earnings estimates. No doubt some enterprising Web page designer will reprint favorable reports online or link directly to them.

This is an area in which the conflict between helping investors and reducing securities exposure is especially great. As a practical matter, the greater the links to information provided by analysts, the more useful is the site to investors. Unfortunately, the greater the links to analysts, the more likely are plaintiffs to argue that the company is liable for the analysts' projections.

Where to draw the line is a matter of your company's risk aversion. At one extreme, merely identifying which brokerage firms provide research coverage poses a minimal risk of creating entanglement. At the other extreme, reprinting analysts' earnings estimates, or even their recommendations, is an invitation to plaintiffs' lawyers to make you a test case. A good rule of thumb is that, if you're going to incorporate any analyst information, it should be done in an even-handed way: for example, listing only buy recommendations, while omitting sell recommendations, would probably be grist for the legal mill. Of course, many companies will avoid including analyst information entirely, rather than include negative assessments.

Include Risk Factors

In the early 1980's, when the high-tech IPO boom first started, many underwriters refused to include risk factors in a prospectus: their view was that, if the deal required such disclosures, it was a deal better not done. Gradually, underwriters learned that risk factors were the key to winning securities suits based on offerings.

In the early 90's, corporate counsel began to advise clients to include risk factor-type disclosures in annual and quarterly reports. Once again, initial disdain gave way to widespread acceptance, as numerous courts cited cautionary MD& discussions as the basis for tossing shareholder suits out of court. The courts even gave the approach a title: "the bespeaks caution doctrine."

The time has come to apply this medieval-sounding doctrine to the digital world. The cautious company should consider including on its Web page a section that reprints the risk factors contained in the company's most recent shareholder filing (10-K or 10-Q). In my view, this is preferable to drafting a separate statement for the Web page, because plaintiffs would try to capitalize on any differences between that statement and the SEC filing. A company could simply add a link to the financial or company profile section of the Web page entitled "Risk Factors" or "Investment Considerations," and then reprint the most recent section. It makes sense to list the date on which the statement was originally filed with the SEC and to state explicitly that the information will not be updated until the company's next SEC filing.

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The plaintiffs' securities bar has proven creative in getting companies into trouble for practices that they thought were quite innocuous. Typically, companies have responded to the plaintiffs' new thrusts by altering their disclosure practices (often with the effect of reducing the information flow to investors). The Web offers an opportunity for I/R professionals to leapfrog the plaintiffs' bar by implementing preventive measures for their Web pages before a court holds that the absence of such measures is a potential basis for liability to disappointed shareholders.

Boris Feldman is a partner in the litigation department of Wilson, Sonsini, Goodrich & Rosati.