Legal Definitions - buried-facts doctrine

The buried-facts doctrine is a legal principle, primarily applied in securities law, which states that a company's disclosure document can be considered inadequate and misleading if critical information, especially concerning potential risks, is presented in a way that makes it difficult for a reasonable investor to find or understand its true significance. This doctrine applies when important facts are scattered throughout a lengthy document, hidden in dense footnotes, appendices, or other obscure sections, thereby obscuring the overall meaning or potential dangers.

The purpose of this doctrine is to prevent companies from technically disclosing information while practically concealing it from investors. Even if all facts are technically present, if their arrangement makes it nearly impossible for a reasonable person to grasp their importance, the disclosure may be deemed insufficient.

• Example 1: Company Merger Proxy Statement

  Imagine a large corporation proposes to merge with a smaller company. The proxy statement, a document sent to shareholders asking for their vote on the merger, prominently highlights the projected synergies and financial benefits of the deal in its executive summary and main body. However, a critical detail about a significant, ongoing environmental lawsuit against the smaller company, which could result in substantial financial penalties and liabilities for the combined entity, is mentioned only in a single, complex paragraph within a 70-page appendix detailing various minor legal proceedings. A reasonable shareholder, reviewing the main sections to make an informed decision, could easily overlook this crucial risk. In this scenario, the buried-facts doctrine could be invoked, arguing that despite being technically disclosed, the material risk was effectively hidden, making the overall proxy statement misleading.

• Example 2: Investment Fund Prospectus

  Consider a new investment fund launching with a prospectus that details its innovative strategy and potential for high returns. The main sections and marketing materials emphasize the fund's growth potential. However, the prospectus also contains a clause allowing the fund manager to significantly increase management fees under certain market conditions, potentially eroding investor returns. This crucial fee increase mechanism is not in the prominent "Fees and Expenses" section but is instead embedded within a lengthy, jargon-filled section on "Operational Flexibility" deep within the document, written in small print. An investor reading the prospectus might reasonably miss this significant detail about future costs. Here, the buried-facts doctrine would suggest that the fund's disclosure is inadequate because a material financial risk (increased fees) was obscured rather than clearly presented.

• Example 3: Annual Financial Report

  A publicly traded technology company releases its annual report, showcasing impressive year-over-year revenue growth. The report's main financial statements and management discussion focus on this positive trend. However, a critical piece of information—that a major patent held by the company, which underpins a significant portion of its product line and revenue, is set to expire in the next 18 months without a clear renewal strategy—is only mentioned in a single sentence within a lengthy "Risks and Uncertainties" section, buried among dozens of other, less immediate or impactful risks. A reasonable investor trying to assess the company's future prospects might easily overlook this impending patent expiration and its potential impact on future revenue. The buried-facts doctrine would apply, asserting that the overall significance of the patent expiration was obscured by its placement, making the report potentially misleading about the company's long-term stability.