On 21 June 2017, in Stadnick v. Vivint Solar, Inc., the federal appeals court based in New York affirmed a lower court's decision dismissing claims under Section 11 of the Securities Act. The plaintiff in this case argued that the defendants were obligated to disclose interim financial information in the offering materials for Vivint Solar, Inc.'s ("Vivint") initial public offering ("IPO") because, according to the plaintiff, those results constituted an "extreme departure" from past performance. The court here declined to follow the "extreme departure" standard set out by a federal appeals court from a different jurisdiction, and held instead that whether Vivint had an obligation to disclose the information is based on whether that disclosure would have "significantly altered the total mix of information made available."
Vivint installs and then leases solar energy systems to homeowners. A little over a month after Vivint's October 1, 2014 IPO, Vivint announced a net income loss of $40.8 million for the third quarter of 2014, which missed analyst projections by 143 percent. In the days after this announcement, Vivint's stock price dropped by approximately 20 percent and fell below the offering price of $16 per share. The plaintiff argued that Vivint had a duty under Section 11 of the Securities Act to disclose in the IPO offering materials the company's interim financial results for the third quarter, which ended the day before the IPO. Applying the standard adopted by the federal appeals court based in Boston, Massachusetts to address when a duty to disclose interim financial information arises, the district court granted the defendants' motion to dismiss because the third-quarter results did not amount to an "extreme departure" from previous performance.
On appeal, the court here affirmed the district court's dismissal of the plaintiff's claim, but expressly declined to adopt the "extreme departure" standard. The court explained that its prior case law established a different standard for assessing whether issuers have a duty to disclose interim financial results under the Securities Act. Under that standard, a duty to disclose arises when there is "a substantial likelihood that the disclosure of the omitted [information] would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available". The court approved that standard because (i) it "rests upon the classic materiality standard in the omission context", (ii) the "'extreme departure' test leaves too many open questions", such as the degree of change necessary to trigger the standard and which metrics should be considered, and (iii) the "extreme departure" test can be "analytically counterproductive" because it can fail to consider appropriately or sufficiently the context of the omitted information. Applying the "total mix of information" standard, the court determined that the alleged omissions were not actionable because the omitted information, when viewed in the proper context, was consistent with Vivint's disclosed results and investor expectations, and because the company, in its offering materials, adequately warned that financial results could fluctuate.
The standard that the court applied here places significant limits on the ability of plaintiffs to bring claims under Section 11 of the Securities Act based on the alleged omission of interim financial information. In particular, this decision requires that omitted information be considered in the context of all of the disclosures that a company makes. Although the federal appeals court in New York is influential, the decision nevertheless remains in tension with the decision of the federal appeals court in Boston, so the Supreme Court may eventually need to clarify the law.
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