There’s No Escaping the Vagueness in “Material”

The word material and the phrase material adverse change haven’t featured much on this blog in recent years. That’s mostly because MSCD chapter 9 covers the subject pretty comprehensively, and because there haven’t been any recent developments of particular interest.

But today I finally got around to reading, after a year, this 2015 article in the Wall Street Journal about alternative definitions of materiality. Here’s how it opens:

How much information is vital to investors depends a lot on who is defining what information is “material” and what is “immaterial.”

As CFO Journal reported on Tuesday, at least half a dozen standard setters, including the accounting rule makers, Securities and Exchange Commission and stock exchanges, have some guidelines on what information must be told to investors and when.

But I had a hard time staying awake while reading the definitions. Material is a vague word. Lawyers often think you can get around vagueness by adding more words, but that just swaddles the vagueness in blather.

Consider the granddaddy of definitions of materiality, that offered by Thurgood Marshall in 1976 in TSC Industries, Inc. v. Northway Inc.: “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” That definition of a vague word itself contains three vague words: substantial, reasonable, and important. Good luck with that.

In the next few days I’ll read through chapter 9 for the first time in a long time. If I think of anything interesting, you’ll be the first to hear it.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.