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Point of Law

Buried facts doctrine in securities regulation

/ 02:05 AM January 08, 2015

What is the buried facts doctrine in securities regulation?

This basically states that a disclosure is insufficient if it is presented in a way that conceals or obscures the information sought to be disclosed.

The doctrine applies when the fact in question is buried in a voluminous document or disclosed in a piecemeal fashion, preventing a reasonable investor from realizing the correlation and impact of the various facts interspersed throughout the document (Werner v. Werner, 267 F.3d 288, 297 [3rd Cir. 2001]).


This theory was applied in several cases to determine whether the disclosure to the investors complied with the requirements of the securities laws.

For example, in one case, P&W Industries Inc. (PWI) solicited the support of the shareholders of publicly held Providence and Worcester Company (PWC) on a proposed tender of PWC shares in exchange for PWI shares. The prospectus stated that PWI shares received in the exchange would be subject to the scaled voting right similar to that applicable to the PWC shares. The prospectus did not mention that the scaled voting right for PWC shares was invalidated by a court order, although the order was on appeal.   It was not until the penultimate page of the prospectus, in a note to the consolidated financial statements of PWC, that the PWC stockholders were told that pursuant to the order, each share of their stock was entitled to one vote.

The court held that this information was important for the stockholders to decide whether to accept the tender offer. Since it was buried in the prospectus, the court found the manner of disclosure to be highly misleading. In the words of the court, “the difficulty is that a fair reading of the prospectus may have led stockholders to believe their shares had scale voting rights and that these would not be disturbed if they made the exchange offered them.”

The court made this ruling, notwithstanding that a letter was subsequently issued by the president of PWC to the shareholders to cure the defect. The court said “the letter failed to disavow the statement in the prospectus or tell the stockholders they should disregard it in determining whether to withdraw shares previously deposited.” Instead, the stockholders of PWC were left to determine which statements in the total mix were true and which as a result of the materially different disclosure in the Dec. 24 letter could no longer be considered accurate.

According to the court, the “letter, without a disavowal of the accuracy of the statements in the Prospectus, could not adequately cure the erroneous and misleading statements which it contained.” Blanchette v. Providence & Worcester Co., 428 F.Supp. 347, 353 (D.Del. 1977)

In another case, proxy materials were sent to the shareholders to solicit their vote on certain matters taken up in an annual stockholders’ meeting. It contained some information regarding a litigation (Dillon v. Berg) between the company and its former president (Power). The court found the proxy statement materially defective because, among others, of “the obscure manner in which the $936,000 tobacco inventory loss was disclosed.”

The fact that Power and others had been sued by the company (Scotten, Dillon) for this loss was “segmented into three different parts each presented in a different place in the documents provided shareholders” in connection with the proxy solicitation: (i) the fact that Power had been sued, on page 20 in the “Ralph R. Power” section; (ii) the fact that the suit was on account of the tobacco inventory loss, on page 10 under “Recent Developments,” and (iii) the fact that the loss was $936,000, not in the proxy statement at all, but buried in two pages of the forty page accompanying

“Financial statement” was referred to on page 10 of the proxy statement as “Annual Report For The Fiscal Year Ended Dec. 31, 1970” without specifying page numbers on which the amount of the loss could be found. According to the court, “there was a substantial likelihood that … a reasonable shareholder, in studying the 80 pages of the proxy statement and financial statement would fail to correlate the company’s suit with the fact and amount of the tobacco loss.” (National Home Products v. Gray, 416 F. Supp. 1293, 1215-16, D.Del. 1976).


In another case, an explanatory statement was sent to the shareholders with a view of securing their approval on a proposed merger between the company and another firm. The statement and its appendices contained about 200 pages of highly complex and technical financial and legal data. While the statement disclosed the conflict of interest on the part of the directors and investment advisers, the court found “their present location … not justified by their importance, in view of the length and complexity of the explanatory materials.”

According to the court, the law required not only disclosure but adequate disclosure. The information “should have in some way been highlighted to ensure that the shareholders were aware of them” and should not have been “’buried’ in the explanatory materials.” For this, the court found the statement materially misleading.   (Kohn v. American Metal Cimax, Inc., 322 F.Supp. 1331, 1362-63 E.D. Pa. 1971).

The question is whether the foregoing rulings apply in Philippine setting. Well, there are no Supreme Court decisions on the matter but noteworthy is that, under our Securities Regulation Code, there are provisions against misleading statements and acts, devices or schemes that would operate as a fraud upon the investing public.

(The author, former president of the Philippine Stock Exchange, is a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices (Accralaw) and president of the Shareholders’ Association of the Philippines. The views in this column are exclusively his, and should not be attributed in any way to the institutions with which he is currently affiliated. He can be reached through francis.ed.lim@gmail.com.)

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