Steve Davidoff discusses materiality issues in the GS Abacus transaction, Gupta/Galleon, Apple and Jobs’ health and Sokol. He questions “quirky” American securities laws that don’t require continuous disclosure of material information, and a materiality standard which “allows lawyers and others to argue that something is not material because they didn’t think it was certain or important enough to affect the stock price of the company significantly.”
Davidoff also says that “efforts to find distinctions between material and nonmaterial can seem baffling” to non-lawyers, and that “the current disclosure scheme and its definition of materiality* * * is increasingly disconnected from the desires of investors and the marketplace.” He adds that “a failure to act here may lead to increasing distrust of the markets by an already wary public.”
Davidoff may be right that investors want more information, but fails to identify a key reason why the legal standard can’t and shouldn’t be tighter: litigation. A looser materiality standard could expose every statement or non-statement to judicial second-guessing.
This also answers Davidoff’s question of why companies don’t just disclose on their own “what investors will find important,” and why companies don’t seem to “understand that information disclosure is not just a legal game.”: Every disclosure is a potential securities fraud claim.
More disclosure may be a good idea. But the way to get it is to fix securities litigation.
