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Materiality

Materiality. Opinions. Opinions. F irst A merican B ankshares. A merican B ank of V irginia. freeze-out merger. sub. Virginia Bankshares. Minority Shares = $42/sh. 85% shareholder. C. Board approval. Virginia Bankshares Inc. v. Sandberg. “high” value. “fair” price. Opinions.

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Materiality

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  1. Materiality

  2. Opinions

  3. Opinions FirstAmericanBankshares AmericanBank ofVirginia freeze-out merger sub VirginiaBankshares Minority Shares = $42/sh 85% shareholder C Board approval • Virginia Bankshares Inc. v. Sandberg “high” value “fair” price

  4. Opinions • Virginia Bankshares Inc. v. Sandberg • BOARD OPINIONS • Why are they important? • - based on inside information and expertise • required to be in shareholders’ best interest • Is there a material fact at issue? • - directors’ are acting for the reasons given • - verifiable through objective evidence • Must go beyond “unclean heart”

  5. Opinions • Virginia Bankshares Inc. v. Sandberg 1. Examples of “conclusory or qualitative” statements expressing “opinion”? The company made “revenues last year equal to $100 million”. The company is going “great”. “My life is a peach.” How do we deal with these?

  6. Opinions • Virginia Bankshares Inc. v. Sandberg 2. What is the risk of “open-ended liability or uncontrollable litigation”?

  7. Opinions • Virginia Bankshares Inc. v. Sandberg 3. Why didn’t the directors’ conflict ofinterest and FABI’s domination of theBank render the directors’ opinions immaterial?

  8. Opinions Stock-for-StockMerger DearlyDepartedInc. SIX FEET inc. ??? MATERIAL • Six Feet Inc. (Hypothetical 4) cash sale = 50% premium stock merger is “great deal”

  9. Opinions • Summary • Opinions actionable if: • a. Not honestly held and • Not accurate • Identity of speaker matters • 3. Specificity of opinion matters

  10. The “Total Mix”

  11. The “Total Mix” • What is the “total mix”? • Separate Press • Release • Going concern value of $60/SH • Separate Analyst • Opinion • Going concern value of $60/SH • Proxy Statement • Interior Page • Going concern value of $60/SH • Proxy Statement • Cover Sheet • “High” Value at $42/SH • Going concern value of $60/SH • Proxy Statement • Cover Sheet • “High” Value at $42/SH Scenario 1: All on Same Page Scenario 4: Separate Analyst Research Document Released Scenario 3: Separate Documents Scenario 2: Same Document but Different Pages

  12. The “Total Mix” sophisticatedinstitutional investors unsophisticatedindividual investors • What is the “total mix”? Which group of investorsneeds protection?

  13. The “Total Mix” The Market The Broker The Investor • What is the “total mix”?

  14. The “Total Mix” FOOD LION • Longman v. Food Lion Inc. Documentary aired on Food Lion’s unsanitary practices and labor law violations. Food Lion’s stock prices dropped. - Class A fell 11%; Class B fell 14% Food Lion settles with Dept. of Labor for $16.2m. - 1.67 cents/share/year 1000stores

  15. The “Total Mix” FOOD LION • Longman v. Food Lion Inc. “Special” rejuvenating procedure

  16. The “Total Mix” FOOD LION • Longman v. Food Lion Inc. FOOD LION’S DISCLOSURES 1989 Annual Report and 1990 press release - competitive wages, excellent benefits - close attention to service and cleanliness 1991 Press Releases - clear policy against “off-the-clock” work - nothing proven, nothing decided - launched investigation of allegations - Union was harassing Food Lion to unionize

  17. The “Total Mix” FOOD LION • Longman v. Food Lion Inc. FOOD LION’S DISCLOSURES 1991 Annual Report - competitive wages - stores are “clean and conveniently located” 1992 Quarterly Report - ultimate liability “not presently determinable” - management believes Food Lion’s defenses are “meritorious”

  18. The “Total Mix” • Longman v. Food Lion Inc. • 1. Why did the court hold that the disclosure of the Department of Labor settlement was not material? • - Union had disclosed practices • -Settlement small relative to revenues • - No stock market reaction

  19. The “Total Mix” • The market incorporated information despite false information • Investors were relying on market price • Investors couldn’t have been harmed if market price was unaffected by misstatements • Should investors rely on the Union? • Truth on the Market Defense

  20. The “Total Mix” • Longman v. Food Lion Inc. 1993 1990 8/3/93 9/11/91 11/5/92

  21. The “Total Mix” • Longman v. Food Lion Inc. 2. Why did the court hold that the unsanitary practices were not material? - “puffery and generalizations” - documentary only covered 3 stores - no policy supporting unsanitary practices - federal, state, and internal inspections

  22. The “Total Mix” • Longman v. Food Lion Inc. • 3. What is “puffery”? • this company is a “winner” • “everyone loves us” • the investment will return “100% per year for the next twenty years”

  23. The “Total Mix” • Evidence of materiality • Presence or absence of the information already in the investing public’s hands • Dollar magnitude of the misstatement or omissions as a percentage of earnings, revenues, or assets • Stock price change around the date of disclosure of the truth

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