Optimism is an indispensable element of effective salesmanship. It is therefore quite natural for the directors of public companies to want to optimistically tout the potential long-term benefits of investing in their companies. After all, directors of public companies must be empowered to attract the attention and money of American investors. But what happens if these long-term projections fail to come true? Who is to blame for long-term projections that are simply unrealistic? A doctrine called the “bespeaks caution” doctrine has emerged in order to govern these inquiries, and holds that these optimistic forward-looking statements are legally immunized provided that they are sufficiently tempered with “meaningful” cautionary language in accompanying stock offering documentation. Such cautionary language must operate to put investors on notice that their investment is merely speculative, and that returns on investment are not guaranteed. Through this doctrine, public companies are protected against lawsuits brought by disappointed investors scrounging for settlement handouts when their investments fail to yield return.
The structure of this doctrine, of course, begs the question: what constitutes “meaningful” cautionary language? In recent years, circuit courts have been split on this issue, and remain divided about whether stock-issuing companies are required to truly believe their optimistic forward-looking statement before they may be protected from shareholder lawsuits in the event that such statements fail to materialize. In other words, it is currently unclear under the law whether these forward-looking statements must be made in good faith in order to merit legal protection. This Note argues that the bespeaks caution doctrine should and must require that optimistic forward-looking statements be made in good faith in order to merit protection under the law. This Note proceeds by analyzing the current state of the bespeaks caution doctrine across various circuit courts, and continues by critiquing certain judicial decisions which applied the doctrine. It then proposes amendments to the doctrine, which aim to preserve the transparency and integrity of U.S. capital markets.
Andrew W. Fine,
A Cautionary Look at a Cautionary Doctrine,
10 Brook. J. Corp. Fin. & Com. L.
Available at: https://brooklynworks.brooklaw.edu/bjcfcl/vol10/iss2/8