Wednesday, May 25, 2011

The Infield Fly Rule and Disclosure

With the advent of Memorial Day and warm weather (down here in Houston we define warm weather by temperatures being above 90 degrees, where they will stay until late September), my thoughts have turned to baseball and what we in the investor relations profession can learn from it. After all, baseball is a deceptively simple game consisting of throwing a ball, hitting it with a stick and then catching the ball. This compares to investor relations, which on the surface is also deceptively simple, as it’s really just about talking to people about your company and how it’s doing.

In both instances however, what starts out to be simple, rapidly get complex as the result of rules. For example, in baseball, consider the infield fly rule. The infield fly rule is designed to eliminate a situation where a base runner might be damned if he does and damned if he doesn’t. That is, the purpose of the infield fly rule is to prevent the defensive team from turning a double play by intentionally dropping or not catching a fly ball hit to the infield. The rules of baseball define an infield fly as the following:

An INFIELD FLY is a fair fly ball (not including a line drive nor an attempted bunt) which can be caught by an infielder with ordinary effort, when first and second, or first, second and third bases are occupied, before two are out. The pitcher, catcher and any outfielder who stations himself in the infield on the play shall be considered infielders for the purpose of this rule. 
When it seems apparent that a batted ball will be an Infield Fly, the umpire shall immediately declare ”Infield Fly for the benefit of the runners. If the ball is near the baselines, the umpire shall declare Infield Fly, if Fair.” The ball is alive and runners may advance at the risk of the ball being caught, or retouch and advance after the ball is touched, the same as on any fly ball.

There are several interesting aspects to the rule, such as it requires the judgment of the umpire that the ball can be caught with ordinary effort, an outfielder can be an infielder for purposes of the rule, and it has exceptions for line drives and attempted bunts. And, in true regulatory fashion, this is just the definition. You have to go to another rule to discover the effect of the rule, which is that the batter is out. This is a rule that only a lawyer can love.

Next consider the rules and regulations surrounding disclosure of material non-public information. The rule here appears to be a little less complex than the infield fly rule (although technically speaking, it’s not a rule at all as it came out of court decisions), and goes as follows:

“Information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision.” And “There must be a substantial likelihood that the disclosure of an omitted fact would have been viewed by the reasonable investor as having significantly altered the “total” mix of information made available.” (TSC Industries, Inc. v. Northway and Basic v. Levinson.)

There are several striking similarities between the disclosure of material information and the infield fly rule. First, the judgment of the umpire, or in this case the arbiter of fact such as a judge, jury or your securities law lawyer, is called for to figure out what is important and what a reasonable shareholder would think. Next, if you think about the cases handed down about people who have been caught using insider tips, you know that outsiders can be considered insiders. Also, just as with the infield fly rule, there are clear exceptions to the application of the rule. Just as base runners cannot be forced to leave their base in the case of an infield fly, companies can’t be forced to disclose if the disclosure would interfere with sensitive negotiations (for example, in the event of merger negotiations) or if the issue isn’t ripe (due to facts still being discovered). Finally, just as with the infield fly rule, you have to go to a different rule, in this case Rule 10 b-5, to learn that failure to disclose a material fact is unlawful. Coincidence? You decide. It’s enough to make me think that Casey Stengel would have made a great securities law lawyer.

So the next time you’re confronted with a disclosure issue, think of the infield fly rule and take comfort in the fact that very few people truly understand the way these things work, and even fewer can make the right calls under the pressure of the moment.


jeffzilka said...

Dynamite post, John. Well played.

Douglas K. Chia said...

I am sure you are familiar with "The Common Law Origins of the Infield Fly Rule," 123 Univ. Penn. Law Review 1474 (1975). For those who are not, here is a link to the piece: