shareholders cannot sue company executives for forward projections that do not materialize, says Ninth Circuit | Proskauer – Corporate defense and litigation


It is illegal under the Securities Exchange Act to make false or misleading representations to the investing public about material facts. At the same time, companies and their managers must be able to make statements about the company’s future plans, projections and aspirations without fear of exposing themselves to securities law suits if The company’s achievements do not live up to its ambitions. The Private Securities Litigation Reform Act has therefore defined a “safe harbor” for certain forward-looking statements, including forward-looking statements accompanied by meaningful cautionary language, and forward-looking statements made by someone who is not familiar with the statement to be false or misleading.

But what about forward-looking statements that suggest current conditions are on track to meet those goals? The decision of the United States Court of Appeals for the Ninth Circuit of January 26, 2020 in Wochos v Tesla, Inc. provides useful advice. In Wochos vs. Tesla, a class of investors argued that 15 statements made in 2016 and 2017 by Tesla and two of its chief executives, Chairman and CEO Elon Musk and CFO Deepak Ahuja, regarding the production of the Model 3 were false and misleading in violation. of the Stock Exchange Act. Class claimants alleged that the statements, including those claiming that the production of the Model 3 was “on track” and “arriving as planned, that there were” no problems “and that 50” cars from production “had been manufactured, were not Safe Harbor because they” necessarily contain embedded assertions about current facts which are subject to prosecution. “

The group’s plaintiffs argued that the statements were false because two Tesla employees told Mr. Musk the production deadline was impossible to meet. The automated production line was delayed and the 3 few models that had been produced were handcrafted.

The Ninth Circuit ruled in Tesla’s favor, saying the case was dismissed. Statements made that the production is “on track” to meet a certain target are indeed forward-looking and safe harbor when worded in cautionary language. For such a statement to be actionable, the Ninth Circuit ruled, the statement must go beyond articulating plans or hypotheses, and “instead contain[] an express or implied “concrete” statement concerning a “present or past fact”. Username. at 7 O’clock. Any predictive statement will necessarily reflect the position that the stated objective is achievable based on the current state of affairs – the “legal safe harbor would cease to exist if it could be defeated simply by showing that a statement has the right to do so.” kind of characteristics that are inherent in any forward-looking statement. Username.

Because Tesla’s statements were forward-looking, the Safe Harbor would apply if they were accompanied by “meaningful caveats.” Username. at 8. Although the complainants did not directly dispute their suitability, the Ninth Circuit noted that Tesla’s warnings were detailed and specific. Username., not. 3. Tesla had listed many important risk factors that could lead to “different than expected” results, such as “the risk of delays[,]”including that the potential loss of suppliers” could lead to changes in product design and delays in product deliveries[,]”and acknowledged that it had experienced significant delays in the design, manufacture, launch and production ramp of new vehicles in the past, and therefore could experience similar delays with the Model 3. Username. However, the district court expressly assumed that, if the stated objective was impossible, then no warning could be sufficiently “significant” as required to fall within the Safe Harbor. The Ninth Circuit did not need to consider whether this assumption was correct, however, as it agreed with the district court that the class plaintiffs did not sufficiently allege that the defendants knew the production target was impossible. Username. While alleging that two Tesla employees told Mr. Musk, the complainants did not allege whether the company or Mr. Musk himself shared this view.

The Ninth Circuit also ruled that the class plaintiffs had not argued that the statements made were in fact false or misleading as to whether Tesla had started installing manufacturing equipment. Username. The use of the term “production car” was also not considered to be equivalent to representing that the vehicle was manufactured on a fully automated production assembly line. The Ninth Circuit held that, where “a claimant claims that words used in a statement have a special or nuanced meaning that differs from what the literal words suggest, the claimant must plead facts which will support this crucial premise in order to satisfy the requirements of the PSSRA. the requirement that a private securities applicant adequately plead the reason (s) for [a] statement is misleading. Username. (internal citation omitted). Class plaintiffs have not relied on sufficient facts to define the term “production cars” as exclusively those manufactured on a fully automated assembly line.

Since none of the contested statements was actionable, the complaint was dismissed with prejudice. Following Wochos, businesses and executives can continue to share predictions and projections about the business with the public, until the speaker knows the statement is false.

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