Anyone who attends presentations by US business executives has chuckled obligingly through the routine.
After the introduction, the executive steps to the podium. On a screen nearby glitters an exquisite PowerPoint title slide. The speaker thanks whoever made the introduction, attests to the pleasure of being there, presses the hopefully correct button on somebody else’s laptop, and glances nervously at the screen to check the result.
There, the beautiful title slide gives way to monochromatic rows of minuscule type. Lumbering sentences herald “forward-looking statements” and warn of “risks and uncertainties.”
Nobody reads the disclaimer. There’s no time.
Quickly changing slides, the speaker quips, “All that means is you shouldn’t believe anything I say.”
Everybody laughs. Everybody’s heard that one before. But everybody knows it’s better to laugh and move on than waste time with legal boilerplate.
It’s everywhere
Yet the boilerplate appears everywhere. It turns up not only in executive presentations but also in company brochures and news releases.
“This [report, news release, presentation] contains information that may be considered ‘forward-looking’ statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the intent, belief, or current expectations of the company and its management.”
That’s a typical start. It makes you want to dive right into the statutes and check those definitions, doesn’t it?
“Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results such as, but not limited to...” nearly everything some lawyer imagined might go wrong.
Without the warning, there’s no telling what prospective investors might believe, gulls that they are. Yet prospective investors never pay attention to the warnings. Nobody does. The disclaimers don’t exist for anybody’s reading pleasure or enlightenment. They exist to envelop company communications with legal protection.
This genre of legal boilerplate began with the Private Securities Litigation Reform Act of 1995 (PSLRA), which a Republican Congress enacted over a veto by former President Bill Clinton. PSLRA responded to a surge of class-action lawsuits by investors alleging fraud after the share prices of companies in which they held stock failed to meet rosy projections.
The lawsuits tended to hit any company whose stock price plunged, of which there were many after the dot-com frenzy ended. Lawyers would file class-action suits on behalf of investors against companies and their accountants and auditors. Then, during pretrial discovery, they’d force defendants to turn over huge volumes of company records, through which they’d sift in search of anything that could be made to look like fraud.
Many companies chose to settle rather than pay for all the pretrial disclosures plaintiffs demanded and trial costs. Atop those pressures to settle was the potential for triple damages from a securities-fraud civil claim under the Racketeer Influenced and Corrupt Organization Act of 1970 (RICO).
PSLRA supporters-not to mention many companies, accountants, and auditors-considered most of these lawsuits unfounded and the tactics that went with them unfair. The 1995 law made a number of technical changes aimed at discouraging frivolous litigation and restraining class action lawyers. For example, it required plaintiffs to convince judges they had promising cases before discovery. And it removed securities fraud as a basis for RICO civil racketeering claims.
PSLRA also created what it called a “safe harbor” for “forward-looking statements” in many types of company communications. With some exceptions, it said statements that turn out not to be true aren’t fraudulent if the person who made them didn’t know they were untrue at the time. To enjoy this protection, the statement had to be “immaterial” or be “identified as a forward-looking statement and [be] accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”
Hence the windy boilerplate stamped onto press releases and PowerPoint presentations since 1995.
Improves communications?
PSLRA remains controversial. Its opponents have tried to repeal it. Its supporters say it achieves its goals. Legal experts will decide who’s right.
What most interests this editor is the plausible claim by PSLRA fans that the safe harbor provision improves company communications. For the origin of piles of words nobody ever reads, that seems like quite a feat. ✦
