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In re Oracle Corp. Derivative Litigation11/24/2004
ences between Shaw's teaching and Delaware law are slight. The reason why this is so is that I am skeptical that there will be many cases when a materially significant alteration in company projections is made without any connection to a change in certain "hard" facts. Usually, a downward or upward move in projections will directly result from the processing of "hard information" about the business. This could include an actual diminution or increase in the sales opportunities available to the company as measured by some objective internal standard (e.g., in this case, the size of Oracle's Pipeline). Therefore, it is not apparent to me that the line drawn by Shaw between hard and soft information will be outcome-determinative in many cases.
Whether that is so or not, what is more important is that Delaware law does not require this court to make a binary decision about materiality based on a characterization of information as soft or hard. The relative firmness of the information is simply one factor in the overall determination of materiality, albeit an important one.
By contrast, however, Shaw's requirement that the plaintiff must demonstrate that intraquarter information is material in the sense that its existence creates a "substantial likelihood" of an "extreme departure" from projected results is a sensible one that reflects concerns that Delaware law shares. If a company makes good faith estimates of its performance and is subject to the expected variations in results of an operating business in a market economy, one would expect that its intraquarter results and projections will often involve some deviation from the original quarterly projections. To find information material simply because it might cast some doubt on the company's ability to meet its projections more or less exactly would unduly chill trading by issuers and insiders (not to mention issuers' willingness to provide guidance at all), for reasons I noted earlier in deciding that scienter is a critical element under Brophy. Such a finding is also unnecessary in view of the inherent imprecision of forward-looking estimates and the correspondingly greater caution that rational investors should use in relying upon such estimates to make investment decisions. Too low a bar under state law would also tend to disrupt the federal quarterly reporting regime and to generate an incentive for prolix disclosures that are more fulsome in their cautionary language, but no more informative or reliable. Indeed, the estimates might become even more unreliable as companies submit lower estimates that they are certain to make instead of more reasonable, but less certain, estimates.
Therefore, it is only when the intraquarter information makes it likely that the company will either outperform or underperform its projections in some markedly unexpected manner that the materiality threshold is satisfied. In so concluding, I reject the plaintiffs' argument that there should be a more plaintiff-friendly standard of materiality in the Brophy-insider trading context than in a situation when this court is weighing the sufficiency of a corporate disclosure document. Like Shaw and other courts, I do not believe that the definition of materiality changes based on that distinction. As Shaw points out, the disclose or abstain doctrine applies to issuers as well as to corporate insiders who wish to trade.
In determining whether corporate insiders are liable under Brophy because they allegedly possessed material, inside information, the court is engaged in an analytical exercise identical to that required to determine whether an issuer that sold or bought stock should be liable because it failed to disclose material information or to
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