Nick Even Warns Public Companies of Disclosure Risks

04/11/2011

Attorneys Say Matrixx Stresses Importance Of Considering Disclosure’s Effects on Market
Corporate Accountability Report

As a result of the U.S. Supreme Court ruling in Matrixx Initiatives Inc. v. Siracusano, all public companies need to assess, among other factors, the gravity and market effects of adverse event reports to determine whether such events are material for public disclosure, securities and corporate law attorneys told BNA in recent interviews.

In Matrixx, a unanimous court concluded that shareholders may proceed with their claims that drug manufacturer Matrixx Initiatives Inc. failed to disclose material information by making rosy statements about Zicam, a key product, without also disclosing that the cold remedy may have caused a small number of users to lose their sense of smell (Matrixx Initiatives Inc. v. Siracusano, U.S., No. 09-1156, 3/22/11) (9 CARE 344, 3/25/11).

‘‘One statement from the Matrixx case that should provide some guidance to all public companies is the court’s finding of a compelling inference that Matrixx withheld disclosure of the adverse event reports not because they were meaningless, but because of their likely effect on the company’s stock,’’ Nicholas Even, a national securities and shareholder litigation partner at Haynes and Boone LLP in Dallas, told BNA March 30.

Disclosure Impact on Share Price Is Key. In light of the Matrixx case, companies and their advisors should be especially alert to internal concerns that undisclosed adverse reports regarding a product may affect the company’s share price, Even, author of a March 24 Haynes and Boone client alert on Matrixx, said.

‘‘These concerns are potentially more critical to materiality and disclosure determinations than whether or not the adverse events are statistically significant from a scientific standpoint,’’ Even said. ‘‘Thus, if a company gleans information from investors or its own investigations suggesting that an adverse event—even without being ‘statistically significant’—will likely affect the market, it may want to consider making a disclosure,’’ he said.

Public companies should avoid interpreting the Matrixx decision as requiring the disclosure of all adverse event reports, Even said. ‘‘In fact, Justice Sotomayor expressly pointed out that the ‘total mix’ standard for determining materiality does not mean that all reports of adverse events must be disclosed,’’ he said. ‘‘The difficulty lies in how to actually determine this,’’ he said.

Newer public companies will develop more confidence in deciding the materiality of an adverse event report over time with more experience, Even said. ‘‘The company’s investor relations team may gain a stronger comprehension of whether or not certain information will affect price movement,’’ he said.

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Reproduced with permission from Corporate Accountability Report, 9 CARE 367, 04/01/2011. Copyright © 2011 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.

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