John Jenkins reposted a thought-provoking article published last week by the American Bar Association Business Law Section. Glenn D. West, a retired Partner of Weil, Gotshal & Manges LLP, and a current Adjunct Professor of Law at SMU Dedman School of Law, wrote about legal (and practical) ambiguities of the word “material” in US contract and securities law. It is a short article with lots to think about and is good reading – especially for anyone not steeped in business law.
He summarizes his view of the seminal U.S. Supreme Court decision of TSC Industries, Inc. v. Northway, Inc that provides the legal basis for defining materiality, which states the standard for materiality “does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available”:
“So – important enough to have been significant in the ‘deliberations’ being made by the recipient of the information, but not important enough to have actually affected the decision that was made. Huh?”
Glenn’s conclusion runs counter to current approaches to materiality held by many sustainability professionals:
“If a matter will matter it may be best to recast a material liability, a material contract or a material litigation as a liability, contract or litigation involving (or that potentially could involve) [an impact of] more than a specified dollar amount [or specified percentage of equity value, net income, or assets] (below which dollar [or percentage] threshold any such liability, contract or litigation would be considered insignificant [or immaterial]). But, . . . [s]ometimes the vague, if not ambiguous, ‘material’ is all you can get and is perhaps good enough (but at least know that the term is fraught with uncertainty).”
Should sustainability professionals be more judicious in throwing around the word “material”? Or explicitly acknowledge “that the term is fraught with uncertainty”? Probably so – at the very least, you should be on a first name basis with your securities counsel and lean on them heavily before using the word in disclosures.
Our members can learn more about materiality in ESG/sustainability disclosures here. Those looking for more specific legal information about materiality (or other securities topics) should check out TheCorporateCounsel.net.
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