Transparency traps for the unwary
Businesses have been the subject of increasing public demands for more transparency. In the U.S., this demand for transparency can, at times, conflict with the competition laws. It is at this intersection where financial institutions can face risks.
The Benefits of Transparency
When a company seeks to further transparency, it may offer information through securities analyst calls, presentations or public statements. These widely accessible offerings often attract competitors, who find them to be a bountiful source of competitive intelligence. It is also the case that competition regulators in the United States also regularly scour these offerings, as do attorneys for plaintiffs seeking to bring class actions.
There are good reasons to voluntarily provide for transparency. Providing information about the company's performance generally and earnings in particular can build confidence in the company. For publicly held institutions, professional analysts will provide more reliable forecasts, and stock prices will have less volatility. To be truly valuable, this transparency will likely include not only reports on past results, but also projections on future performance.
In the United States, there are certain transparency requirements. The Securities Exchange Act of 1934 requires prompt disclosure of material information. Companies listed on major U.S. exchanges are separately required to make these disclosures. Companies that may trade in their own stock are particularly sensitive to transparency, as they could, at least in theory, face exposure for insider trading if they are accused of omitting material facts.
Many publicly traded institutions also hold earnings calls directed at securities analysis, among others. Company executives will take questions from analysts that may require responses relating to business strategies, pricing and other competitive issues. If such a call is held, attendees cannot be limited to professional analysts: the U.S. Securities and Exchange Commission prohibits selective disclosures to analysts.
The Antitrust Risks
While transparency and disclosure has value, too much information can also raise antitrust risk. In particular, sharing and disclosure in a public context can lead to allegations that the company is trying to "signal" competitors to reach an agreement on pricing or other areas of competition.
Public disclosures are becoming an increasing source of material for government enforcers and plaintiffs for (at least) two reasons.
First, the U.S. Supreme Court has made it more difficult for plaintiffs to bring an actionable complaint, increasing the pleading requirements for antitrust actions. Trial courts have generally embraced these higher standards, and have been empowered to dismiss cases without resort to pretrial discovery that do not make specific enough allegations. As a result, plaintiffs now scour public disclosures for statements that can be stripped of their context and made to seem like an offer to fix prices. Plaintiffs' lawyers believe that coupling these statements with parallel pricing action will be enough to get to discovery. Once in discovery, the settlement value of their claim increases dramatically.
Second, U.S. government enforcers have also increasingly reviewed public filings and have brought enforcement actions based on public statements, even in the absence of an agreement between competitors. Under the "invitation to collude" theory, the government may bring a case where there is a specific, directed offer from one competitor to another to agree on competitive terms, such as price, even where that offer is not accepted. A few recent Federal Trade Commission enforcement actions have involved cases where the primary source of communication was through public statements by senior executives in analyst calls. The FTC is continuing to search for cases that will extend and clarify the invitation to collude doctrine.
Balancing the Risks
There is a clear tension between the need for transparency and the desire to avoid competition risk. But there is a balance that can be struck. Companies can make many kinds of disclosures with minimal competition risk, by adhering to a few basic principles:
- Recognize the high risk areas. The most competitively sensitive information will generally be future pricing decisions or plans for growth or expansion ("high risk information").
- Be no more specific than necessary. The more general and aggregated the information, the safer the disclosure. By contrast, where a company appears to provide information gratuitously that is competitively sensitive but not necessary for investors or the public to know, the government will consider the statement to be unjustified and will presume it is an attempt to collude.
- Speak for yourself. Companies can get into trouble when executives try to speak for the industry or the market.
- Be definitive and factual. It can be dangerous to explain that the company's strategy requires its competitors to acquiesce. A future action conditioned upon the response of competitors or even "the market" can be taken out of context and argued to be a signal. Likewise, speculation about whether a price increase may "stick" or whether a competitor will be "rational" can be alleged to be a signal.
- When in doubt, keep quiet. A question that is not answered or deferred can always be the subject of a later response. A bad answer given will live forever on the internet. For that reason, executives should be empowered to respond to competitively sensitive questions on their own timetable.
- Beware the uncounseled competitor. While much of this note focuses upon ways that a company can avoid making risky statements, there are risks when a competitor makes an unwise statement or disclosure. Since reviewing competitor public statements is a legitimate form of competitive intelligence, the unfortunate competitor statement will often make its way into an innocent company's files and may be used as evidence that the competitor's "signal" was received. If competitor statements are going to be analyzed and circulated, it may be prudent to have counsel review the summary.
There are indeed tensions between the desire for transparency and the need for fulsome competition compliance. However, by following the principles described above, companies can limit the competition risks of transparency.