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Using Generic Cautionary Language in MD&A May Not Be Sufficient Disclosure

Merrill Disclosure Solutions | September 03, 2013

Quality outranks quantity in Panther Partners. Under the 2012 decision by the Second Circuit in Panther Partners v. Ikanos Communications Inc., issuers may find it harder to comply with the SEC's MD&A rules. Regulation S-K Item 303, dictates the content for the Management's Discussion and Analysis section of SEC filings. The issuer must describe the “known trends or uncertainties” it reasonably expects to produce a material, negative impact on its revenues or income from continuing operations, focusing on what would cause its future operating results or financial condition to differ materially from reported information. Finding that the “generic cautionary language” used by the defendant/issuer was inadequate to comply with Item 303, the Panther Partners court imposed a reasonable-foreseeability standard, which stresses qualitative over quantitative factors. Attorneys Jonathan Dickey, Michael Li-Ming Wong, and Nicola McMillan advise issuers to proceed cautiously.

The standard could get an issuer's goat. The requirement to look at qualitative factors is not new. Nevertheless, Panther Partners and subsequent district-court cases in the Second Circuit are a concern for issuers that prefer a brightline quantitative test. This is particularly true, the authors assert, as more and more plaintiffs' firms cite Item 303 in suits under Section 10(b) of the 1934 Act. The Second Circuit cases arguably force issuers to revamp their disclosures to reflect intensified monitoring of problems in core businesses, such as risks to relationships with important customers or vendors and dangerous trends in receiving or filling orders. The cases also present a dilemma: Should issuers disclose less than is required about uncertain future occurrences and risk violating strict-liability laws? Or disclose more than is required and risk making uncertainties into certainties?

The Second Circuit: a leader or a lone wolf? Some district courts in other circuits have declined to follow Panther Partners. For example, a court in the Southern District of California followed cases that approved of using quantitative factors in MD&A compliance. It is not yet clear, the authors note, whether the decisions outside the Second Circuit are atypical or indicate a split among the circuits. A court in the Northern District of Illinois held that the plaintiffs could not show that the defendant/issuer should have reasonably foreseen the effects of the worldwide financial crisis. This decision might prove, as the crisis recedes, to be atypical; or other courts might follow it in dealing with external uncertainties, viewing them differently from how the Second Circuit dealt with internal uncertainty.

Ask questions, lest plaintiffs' firms smell a rat. To comply with Panther Partners, the authors suggest that issuers ask five questions: Does the uncertainty to be disclosed in the MD&A section concern a core product, service, or business? Could it affect important customers? Did it result from internal events? Did the issuer know about those internal events when making an SEC filing? Did external financial trends bring it about to a greater degree than disclosed or reasonably anticipated? An issuer that answers “yes” at least once ought to contemplate warding off suits by using more than the “generic cautionary language” of which the Second Circuit disapproved.


The referenced working paper, The Devil's In The Disclosures: Compliance After Panther Partners by: Jonathan Dickey, Michael Li-Ming Wong, and Nicola McMillan Gibson Dunn & Crutcher, New York, NY (JD) and San Francisco, CA (MLW and NM) from Insights: Corporate & Securities Law Advisor, published by Aspen Publishers, 76 Ninth Avenue, 7th Floor, New York, NY 10011. To subscribe, call (800) 638-8437; or visit

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