§ 4.1.9.4 Materiality
Only material misrepresentations and omissions are actionable.903 The standard for materiality is an objective one,904 as is the inquiry into whether a statement is misleading.905 Thus, a fact is material when there is (1) "a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder" or (2) "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."906
Because the standard is an objective one, measured by the conduct of reasonable investors, "it is not necessary to show that the statement or omission was material to [a] particular buyer."907 Nor must the statement be outcome determinative: investors are not required to show that with proper disclosure they would not have made the investment.908 Instead, materiality exists if the facts are important enough to assume actual significance in a reasonable investor's deliberations.909
Misstatements and omissions are not judged in isolation. The "total mix" of information must be considered.910 Each piece of information must be evaluated in its "full context"911 to see if the overall impression made by the defendant's statements is misleading.912 Under the buried-facts doctrine, a disclosure may be so obscurely presented that its disclosure is considered insufficient.913
Soft information like projections, estimates, opinions, motives, or intentions may or may not be material.914 "The materiality of soft information depends on the facts of each case, the dispositive factors being 'the nature of the undisclosed information and its importance, reliability, and investor impact.'"915
A 2011 decision by the U.S. Supreme Court under Rule 10b-5 illustrates the need to consider the context and total mix of information. In Matrixx Initiatives,916 the defendants argued that adverse-events reports regarding Matrixx's cold-remedy product were not statistically significant and therefore not material.917 The Court rejected a bright-line rule based on statistical significance.918 Instead, the Court reaffirmed the total-mix-of-information test and held that when viewed as a whole, the plaintiffs' complaint alleged omitted facts that reasonable investors would have found material.919
Administrative proceedings initiated by the Arizona Corporation Commission's Securities Division illustrate the range of facts that may be material. For instance, in its enforcement actions the Division has taken the position that the following facts are material:
Statements that investments would be secured by real estate when the security did not in fact exist;920
? Statements misrepresenting the use to be made of the investment proceeds;921
? Prior bankruptcies;922
? Misrepresentations or omissions regarding a promoter's education, employment, business background, adverse lawsuits, or past dishonesty;923
Criminal convictions and prior cease-and-desist orders by securities regulators;924
? Hidden fees or commissions;925
? Assurances that an investment is guaranteed;926 and
? Prior and ongoing securities offerings by the issuer that did not comply with the registration statutes.927
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Notes:
[903] See Caruthers v. Underhill, 230 Ariz. 513, 521 ¶ 27, 526 ¶ 53, 287 P.3d 807, 815 ¶ 27, 820 ¶ 53 (Ct. App. 2012); Aaron v. Fromkin, 196 Ariz. 224, 227 ¶ 14, 994 P.2d 1039, 1042 ¶ 14 (Ct. App. 2000). See generally Bainbridge & Gulati, supra note 26, at 119-26 (discussing case law concerning materiality-based heuristics for judicial decision-making); Allan Horwich, An Inquiry into the Perception of Materiality as an Element of Scienter Under SEC Rule 10b-5, 67 Bus. Law. 1 (2011) (providing a general discussion of the Rule 10b-5 case law on materiality and also discussing the relationship between scienter and materiality); Michael J. Kaufman & John M. Wunderlich, Messy Mental Markers: Inferring Scienter from Core Operations in Securities Fraud Litigation, 73 Ohio St. L.J. 507, 516-24 (2012) (arguing that misstatements about a company's core operations (for example, the company's core products or services) involve material matters that the company's directors and senior officers should be charged with knowledge of); Stefan J. Padfield, Is Puffery Material to Investors? Maybe We Should Ask Them, 10 U. Pa. J. Bus. & Emp. L. 339 (2008) (arguing that many cases are improperly dismissed at the pleading stage on the basis of materiality determinations and presenting survey evidence that contradicts judicial findings on puffery in four reported cases).
[904] Hirsch v. Ariz. Corp. Comm'n, 237 Ariz. 456, 463 ¶ 27, 352 P.3d 925, 932 ¶ 27 (Ct. App. 2015) ("Materiality is based upon an objective standard."); accord Trimble v. Am. Sav. Life Ins. Co., 152 Ariz. 548, 553, 733 P.2d 1131, 1136 (Ct. App. 1986).
[905] See Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1327 (2015) ("As all parties accept, whether a statement is 'misleading' depends on the perspective of a reasonable investor: The inquiry (like the one into materiality) is objective." (interpreting § 11 of the 1933 Act)).
[906] Caruthers, 230 Ariz. at 524 ¶ 43, 287 P.3d at 818 ¶ 43 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)); accord Rose v. Dobras, 128 Ariz. 209, 214, 624 P.2d 887, 892 (Ct. App. 1981) (adopting the TSC Industries standard).
[907] Aaron, 196 Ariz. at 227 ¶ 14, 994 P.2d at 1042 ¶ 14; accord Facciola III, 281 F.R.D. 363, 372 (D. Ariz. 2012) (quoting Aaron, 196 Ariz. at 227 ¶ 14, 994 P.2d at 1042 ¶ 14); Denver Energy Exploration, LLC v. Ariz. Corp. Comm'n, No. 1 CA-CV 15-0553, 2016 WL 4916776, at *3 ¶¶ 11-13 (Ariz. Ct. App. Sept. 15, 2016) (affirming ACC order applying an objective, reasonable investor standard); Hirsch, 237...
