Materiality. Forward Looking Information. X. X. Oran v. Stafford. A merican H ome P roducts Corporation. annual report press releases. Forward Looking Information. Oran v. Stafford. MATERIALITY - failure to disclose Mayo Clinic data? failure to disclose European data?
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American Home Products
EFFICIENT MARKET CAPITAL HYPOTHESIS
Current prices incorporate all historical information and all current public information.
All information concerning historical prices is fully reflected in the current price.
Prices incorporate all information, whether publicly available or not.
1. Do you agree that data that fail to rise to the level of “statistical significance” do not alter the total mix of information?
2. Should the lack of market movement inresponse to a disclosure establish the non-materiality of that disclosure?
– Abnormal return, or was entire market moving?
– Confounding disclosures?
– Litigation costs?
– Efficient market?
– Information leakage?
3. Why would the SEC mandate disclosure under Item 303 of information that is notlikely to influence reasonable investors?
4. If a company has made a misstatement, why excuse it from liability if the misstatement was not material?
5. What business reasons did AHP have for withholding the information?
Are these business reasons relevant in determining materiality?
10-15% growth in revenues for the foreseeable future.
Cremations form 20% of Six Feet’s total business.
Six Feet Inc. (Hypothetical 2)
HUNGARIANTELEPHONE & CABLE
Auditors and their clientsdefine materiality asevents that might affectearnings by 3% to 10%
HUNGARIANTELEPHONE & CABLE
Court cannot dismiss unless the information is “so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance”
1. Why did Citizens emphasize that it had reported 50 years of increased revenue?
Is a 5 year upward trend by a small company better than a 50 year upward trend by a larger company?
What motives would Citizens have for not reporting earnings until 1996?
3. Why did the court reject the district court’s holding that a 1.7% discrepancy in total revenues was immaterial as a matter of law?
4. Why did the court reverse the district court’s finding of immateriality based on the lack of stock price reaction at the time of Citizens’ Form 10-Q filing?
- interest rate above prime rate
- substantial default rate
“LOAN LOSS” RESERVE
- loan loss reserve is made public
- reserve includes 10-15% of outstanding loans
- loans 35-40% of Six Feet’s profits
- “smoothing” earnings by ~2% per year
- based on inside information and expertise
- required to be in shareholders’ best interest
- directors’ are acting for the reasons given
- verifiable through objective evidence
- no risk of open-ended liability or litigation
1. Examples of “conclusory or qualitative” statements expressing “opinion”?
The company made “revenues last year equal to $100 million”.
The company is going “great”.
“My life is a peach.”
2. What is the risk of “open-ended liability or uncontrollable litigation”?
3. Why didn’t the directors’ conflict ofinterest and FABI’s domination of theBank render the directors’ opinions immaterial?
cash sale = 50% premium
stock merger is “great deal”