Saul Levmore on Probabilistic Disclosures for Corporate and other Law

Probabilistic Disclosures for Corporate and other Law

law is a striking area where probabilistic information ought to be made widely available. This information often has elements of continuity and discontinuity, but it is at present withheld because disclosure is accompanied by the risk of liability when it is later discovered to have provided an inaccurate particle of information. It is not simply that corporate and securities law make use of continuous as well as discontinuous rules. For example, continuously defined controlling shareholders are subject to a strict fiduciary obligation, while discontinuously defined acquirers must make the government and the world aware of their holdings of more than 5% (depending on the jurisdiction, but almost all countries have such categories) of the stock of a corporation. Many areas of law are peppered with such contrasts. But corporate law, like the law governing products liability, medical malpractice, and other areas where disclosure is law’s centerpiece, is also home to rules that encourage vague information of limited usefulness. Ironically, disclosure rules discourage better disclosure. Much as a surgeon is encouraged to disclose that there is “some chance” that an operation will lead to death, corporations are encouraged to say things like “a lawsuit that has been brought against us presents some risk that our profits will decline.” In both cases, the better-informed insider could more usefully offer a series of probabilities, but current law discourages such disclosures. 

When law requires disclosures, the product is often categorical. Investors might prefer probabilistic information, but it is often easier to make disclosures in binary form, though this is of little use to the audience. The key point here is that more useful disclosure opens the disclosing party to claims of misrepresentation because it is easier to err when revealing a great deal of probabilistic information than it is when making vague categorical information.

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