Paters Paul Hastings: Clétaux to remember for public companies faced with Shortesseller reports

The impact, however, extends far beyond the volatility of the short-term market. In the landscape of disputes today, the companies of shareholders’ applicants regularly grab short-Pont reports as “the emergence of the truth” necessary to allege the causality of losses under article 10 (b) of the SECURITIES EXCHANGE ACT of 1934 and Rule 10B-5. The interaction between the exposed sellers of activists, the lawyers of the complainants and the courts presents challenges, legal issues and commercial decisions that business leaders must anticipate.

A brief history of short selection reports in disputes in securities securities

The open sellers have long been part of American capital markets, but the practice of publishing aggressive investigation style reports designed to move markets with questionable accusations is a relatively recent phenomenon. The courts generally see these relations with skepticism, but will allow the allegations based on the reports to pass beyond the plaid phase in certain circumstances. Consequently, the use of these reports for complaints of securities does not seem to dissipate. Recent decisions highlight the evolution of legal treatment:

• In Re Bofi Holding, SECS INC.. Argue., 977 F.3D 781 (9th Cir. 2020): The ninth circuit held that blog articles to short-seller did not constitute corrective disclosure because the short seller had a financial interest to convince others to sell and decline representations at accuracy or exhaustiveness, but qualified his analysis by indicating that short reports can be qualified as corrective disclosure if they reveal new credible information, independently of the editor.
• In Re Ideanomics, Inc., dry. Argue., 2022 WL 784812 (SDNY March 15, 2022): The South New York district found that two short reports were not corrective disclosure because neither of them revealed before not disclosed in the alleged deceived declarations.
• Saskatchewan Healthcare Emp. Pension plan c. Ke Holdings Inc., 718 F. Supp. 3D 344 (SDNY 2024): The court explained that if the short-scale reports were to be consulted with caution, the report on short-term sellers had “sufficient reliability clues” to survive the argument and the “truth” of the report was a factual issue not appropriate on a rejection request. This decision highlights the precise reasons for the titles that the applicants will continue to rely on these reports to allege corrective disclosure and the causality of losses.
• In Re Genius Brands Int’l, Inc. dry. Litig.763 F. Supp. 3D 1027 (CD Cal. 2025): The California central district found that a short-seller report did not support allegations of corrective disclosure and losses causal because the information has simply reconditioned market information easily available and digestible.
• Defeo c. Ionq, inc., 134 F.4TH 153 (4th CIR. 2025): After the reasoning of the ninth circuit in BifiThe fourth circuit recently confirmed a request for rejection by declaring that the shareholder had not “erased the high bar to show that the (short-seller report) revealed the truth” because the report relied on anonymous sources for its non-public information and included in-depth responsibility clauses on the accuracy of opinions.

Together, these cases confirm that the courts focus on the substance: has really new and credible information has been revealed? Or the report simply compiled the existing information and dissuades the precision of his opinions?

Seven things that each company should consider

For companies, short -term doubts represent a multidimensional threat:

• Walk: The equity prices can fall following the report, eroding the value of shareholders and destabilizing relationships with investors.
• Dispute: The applicants’ societies rely on these reports to allege the causality of losses and the “evidence” of the emergence of the truth of fraud.
• Reputation: The account of misconduct can persist, whatever the merit.

Not strategically assessing the appropriate response (if applicable) can worsen these risks. The implementation of the following steps is essential to successfully navigate short -speed.

1 and 1 Annotate the short report under privilege

The first step is to dissect the line report by line. Each allegation must be annotated to:

• Identify what is factually incorrect or misleading.
• Crite previous public disclosure of the company.
• Flag statements that may require clarification in future deposits.

This process should be carried out under the direction of the lawyer to preserve the avocado-client privilege and the protection of work products. A disciplined and annotated version of the report becomes an essential tool to guide the internal response, to take into account offensive litigation strategies and prepare potential titles in terms of securities.

2 Evaluate the response of the public and the offensive options

Reflexive denials can turn against him. The responses must be verified through teams of legal relations and investors. Offensive actions may include:

• press release Refuting allegations in the short report.
• Prepare letters to stop and abstain to the publisher or platforms hosting the report.
• Defamation complaints assessment where the report clearly contains false factual affirmations.
• Engage with regulators (For example, dry, finra, scholarships) when the report seems to manipulate the market through misleading declarations.

Some companies have strategically deployed offensive tactics and obtained immediate results, including uncovered sellers removing a report and / or issues a retraction. However, offensive action is not always recommended. Press releases concerning the short report and the dispute against the open sellers often amplifies their platform. Each situation requires a judgment.

3 and 3 Monitor the course of action and negotiation activity

The impact on the course of action is not only a problem of relations with investors – it directly shapes exposure to litigation. The courts often consider market reactions as proof of loss causality. Companies must: (i) follow intraday stock movements in the hours and days following the publication; (ii) monitor trading volumes and identify abnormal models; (iii) Evaluate new or recent events to assess whether alternative market factors may have had an impact on stock movement rather than the short report itself; and (iv) evaluate if there are recent shareholders who acquire important actions which may have interests to further disrupt corporate governance.

A careful recording of the market reaction can help defeat swollen causal theories.

4 Monitor the short interest and the activity of derivatives

Suns often operate through opaque structures, including exchanges and options. Companies should follow the short -term levels of interest and derivative exchanges at the time of the short report. A short high activity can report coordinated campaigns.

Some companies are engaging specialized analysis companies to monitor unusual models. This intelligence can support defensive strategies, investor communications and, if necessary, references to regulators.

5 Make specialized advice with defense expertise with short selection

Defending against short selection campaigns is not a standard dispute of securities. It requires advice with:

• Activism Defense Experience To anticipate market -based tactics.
• Expertise in dispute in securities securities To supervise causal and materiality arguments.
• Crisis management judgment To balance the disclosure obligations with reputation risks.

Hiring Counsel Early allows the company to coordinate the market response, the disclosure strategy and the posture of disputes in real time.

6. Quickly engage the board of directors

Short selection reports are important governance events. The advice must be informed quickly and the directors should exercise surveillance, which must be reflected in the minutes. These practical processes are essential to protect the interests of the company and its shareholders. It is not unusual, in fact, it is expected that any dispute in securities will include derivative disputes provided by various shareholders. The administrators of the company must be informed and exercise their surveillance function.

7 Consider getting involved with long -term strategic investors and sales analysts

It is generally prudent to proactively inform strategic or major long -term investors. Direct communication of the company – rather than the media spin – can help preserve confidence and reduce reputation damage. A company should also take advantage of relations with sales analysts in order to refute the short seller’s thesis.

Conclusion

The proliferation of short selection reports will continue. The business leaders who implement these practical actions in response will have the upper hand in the fight to restore order and maintain the trajectory of the company.

The opinions expressed in the Fortune.com comments are only the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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