Clarifying the Legal Standard for Risk Factor Disclosures

Clarifying the Legal Standard for Risk Factor Disclosures

According to an article by Bloomberg Law, the US Supreme Court’s dismissal of Facebook Inc. v. Amalgamated Bank left unresolved a critical issue in securities litigation: how courts should assess claims that risk factor disclosures are misleading. 

These disclosures, required under Item 105 of Regulation S-K, are meant to identify material risks that could affect a company’s performance, not to recount past events. However, an increasing number of securities lawsuits allege fraud when companies fail to disclose that a warned-of risk has already materialized. This evolving theory has created legal uncertainty, as courts are split on whether and when companies must disclose past adverse events in the context of forward-looking risk statements.

Michael Kahn of Gibson Dunn argues that this uncertainty can and should be addressed by treating risk factor disclosures as statements of opinion. Drawing on the Supreme Court’s precedent in Omnicare Inc. v. Laborers District Council, he contends that because risk disclosures inherently involve judgment about potential threats, they should be assessed under the legal framework for opinions. This would mean plaintiffs must show either that the company did not genuinely believe in the stated risk, that an embedded fact was false, or that the opinion was misleading due to undisclosed facts about how it was formed.

Adopting this standard would bring clarity and predictability for both companies and courts. For law firm managing partners advising public companies, Khan says risk factor disclosures should be drafted with the Omnicare framework in mind. Consider explicitly stating that these disclosures reflect the company’s current opinions about potential future risks, not assertions about past occurrences. Doing so may help mitigate litigation exposure and provide a stronger foundation for defending future securities claims.