While today’s U.S. Supreme Court decision in the closely watched Halliburton Co. v. Erica P. John Fund case didn’t go as far as some corporate advocates had hoped, it does provide corporations that are defending themselves against shareholder class-action suits with a new way to foil the certification of such suits before they even start, lawyers representing corporations contend.
To be sure, the nation’s highest court turned back Halliburton’s attempt to overturn the “fraud on the market presumption,” a prime theory that plaintiffs’ lawyers rely on to amass classes of plaintiffs for federal securities suits against companies whose representatives have allegedly made materially false, market-moving statements to shareholders.
A relative of the “efficient markets hypothesis,” the theory enables plaintiffs to form a class without having to prove that each investor suffered financial loss resulting from a company’s misleading statements. Instead, the Supreme Court ruled 25 years ago in Basic Inc. v. Levinson, courts can presume that the share price set by the stock market as a whole takes into account the effects of such information.
Today, the Court threw out Halliburton’s attempt to have the whole theory overturned, a decision which would have enabled corporate defendants to insist that each class of plaintiffs prove that they were harmed financially by the company’s specific misrepresentations. At the same time however, it enabled attorneys representing companies to demand proof that their clients’ share price was affected by the company’s misdeed. Now, if such proof isn’t forthcoming, the plaintiffs won’t be able to form a class and seek a big judgment or settlement against the company.
“In our view [the ruling] actually captured what the theory was about from the beginning. Of course, Halliburton challenged the entire presumption of reliance, and we asked that it be overruled. And the court decided not to accept that argument,” Aaron Streett, head of the Supreme Court and constitutional law practice at Baker Botts, who argued the case for Halliburton before the Court, told CFO.
The Court did rule in favor of Halliburton’s “fallback argument” that the fraud on the court presumption depended on “whether the misrepresentations affected the market price, and we were very pleased that the Court did make that clear,” he said.
The takeaway for CFOs? “There’s less overall exposure for liability for securities class actions after today’s decision,” Streett says. And litigation costs will be moved back earlier in the process, as companies try to defeat classes from even being assembled.