On January 4, 2019, the Supreme Court granted a petition for a writ of certiorari filed by the defendants in Varjabedian v. Emulex Corp. seeking review of a decision by the Court of the Appeals for the Ninth Circuit1 finding that the requisite intent under Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (Exchange Act) was mere negligence, rather than an intent to mislead. The petition challenged the Ninth Circuit's state of mind requirement and also argued that an implied private right of action does not exist under Section 14(e), which addresses fraud in connection with tender offers. Petitioners claimed that the issue of the requisite intent under Section 14(e) is ripe for Supreme Court review because a circuit split exists. With its grant of certiorari, the Court has ostensibly agreed, and a decision—which is expected to be issued towards the end of the Court's current term—will likely have significant implications for federal tender offer litigation.
The District Court's Decision
In February 2015, Emulex Corporation (Emulex) and Avago Technologies Wireless Manufacturing, Inc. (Avago) announced that they had entered into a merger agreement, with Avago offering to pay $8.00 per share for all shares of outstanding Emulex stock. A subsidiary of Avago, Emerald Merger Sub, Inc. (Merger Sub), thereafter initiated a tender offer for Emulex's outstanding stock. Emulex filed a recommendation statement with the Securities and Exchange Commission (SEC) in which it elected not to include a summary of a one-page premium analysis that had been performed by an outside bank showing that the transaction premium fell within the normal range, but was below average.
In April 2015, a class of plaintiffs brought a putative securities class action against Petitioners alleging that they violated various federal securities laws, including Section 14(e) of the Exchange Act,2 by failing to summarize the premium analysis in the recommendation statement. The District Court dismissed the complaint with prejudice for failure to plead a strong inference of scienter in connection with the alleged violations of Section 14(e) after finding that "the similarities between Rule 10b-5 and § 14(e) require a plaintiff bringing a cause of action under § 14(e) to allege scienter."3
The Ninth Circuit's Decision
On appeal, a panel of the Ninth Circuit reversed the District Court's dismissal of the complaint and remanded the case for reconsideration under a negligence standard splitting from five other circuit courts that found that Section 14(e) requires a showing of scienter.4
In reaching its decision that Section 14(e) requires only a showing of negligence, the Ninth Circuit relied on two decades-old Supreme Court decisions. Focusing on a 1976 decision where the Supreme Court concluded that Rule 10b-5 required scienter "because it is a regulation promulgated under Section 10(b) of the Exchange Act, which allows the SEC to regulate only 'manipulative or deceptive device[s],'"5 the Ninth Circuit held that, "[t]his rationale regarding Rule 10b-5 does not apply to Section 14(e), which is a statute, not an SEC Rule."6 The Ninth Circuit also reasoned that the SEC is authorized under Section 14(e) to regulate a broader array of conduct than under Section 10(b) stating, "[i]f the SEC can prohibit 'acts themselves not fraudulent' under Section 14(e), then it would be somewhat inconsistent to conclude that Section 14(e) itself reaches only fraudulent conduct requiring scienter."7
In addition, the Ninth Circuit cited the Supreme Court's decision in Aaron v. SEC,8 which addressed a provision in Section 17(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77a–77aa (the Securities Act), that is nearly identical to Section 14(e). Both statutes contain provisions prohibiting "any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statement made . . . not misleading."9 The Ninth Circuit concluded that because the Supreme Court in Aaron held that Section 17(a)(2) does not require a showing of scienter, Section 14(e) also does not require scienter.10
Certiorari Briefing
Petitioners subsequently filed a petition for a writ of certiorari with the Supreme Court on October 11, 2018, arguing that the Court has never previously recognized a private right of action under Section 14(e) and expressly declined to do so in its 1977 decision, Piper v. Chris-Craft Industries, Inc.11 Such a right of action has only been inferred by lower courts, and until the Ninth Circuit's decision in Varjabedian, the lower courts had declined to create private rights of action for negligent conduct.12 Petitioners relied on the Court's decision in Alexander v. Sandoval, which provides that "restraint is always warranted when it comes to the disfavored practice of inferring a private right of action."13 Petitioners noted that although the Court previously inferred rights of action relatively freely, "under the current rigorous standard that this Court applies today, there is no basis for inferring any private right of action under Section 14(e)."14
On November 13, 2018, the Securities Industry and Financial Markets Association (SIFMA) and the U.S. Chamber of Commerce (the Chamber) filed separate amicus briefs arguing that the Ninth Circuit incorrectly deviated from five other circuit courts in determining Section 14(e) merely requires negligence. The SIFMA brief focused on concerns related to the import of the Ninth Circuit's decision, namely that the number of frivolous merger objection cases in federal courts will expand, forum-shopping among plaintiffs will increase, uncertainty with respect to tender offer disclosure requirements will fester, and additional risks for financial institutions in participating in merger transactions will exist.15 The Chamber's amicus brief, meanwhile, was significant for its insistence—like Petitioners'—that Section 14(e) does not provide a private right of action and that the circuit courts that have inferred a private right of action under Section 14(e) have improperly ignored the Supreme Court's jurisprudence since the mid-1970s regarding private rights of action.16
Respondents filed their brief in opposition to the petition for a writ of certiorari on November 30, 2018. In their brief, Respondents argued that the Ninth Circuit's decision did not in fact create a direct circuit split because prior rulings from the other circuit courts merely involved Section 14(e)'s second clause—which makes it "unlawful for any person . . . to engage in any fraudulent, deceptive, or manipulative acts or practices."17 Meanwhile, argued Respondents, the Ninth Circuit's ruling concerned only Section 14(e)'s first clause—which makes it "unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading".18 Respondents argued that, as a result, no circuit split exists because no appellate decision squarely conflicts with the Ninth Circuit's decision in the relevant context, i.e., construing Section 14(e)'s first clause, not its second.19 Further, Respondents contended that the Ninth Circuit's decision establishing a negligence standard was proper because Section 14(e)'s first clause—which prohibits material misstatements and omissions—does not concern scienter.20 Finally, Respondents argued that this case lacks any broader significance warranting review.21
Significance
Now that the Supreme Court has granted certiorari to review the Ninth Circuit's decision in Varjabedian, it has the opportunity to close a significant gap that currently exists between the Ninth Circuit and the Second, Third, Fifth, Sixth, and Eleventh Circuits on a key issue concerning federal tender offer litigation. By siding with the majority of circuits, the Court would make it far easier for defendants to dismiss Section 14(e) claims at the motion to dismiss stage by requiring plaintiffs to plead scienter. On the other hand, were the Court to affirm the Ninth Circuit's decision, it could herald a new trend of nationwide Section 14(e) tender offer litigation similar to the rise of Section 14(a) proxy statement litigation in recent years in light of the absence of a scienter pleading standard for 14(a) claims in many jurisdictions. Should the Court choose to address the argument advanced by Petitioner and Amici Curiae regarding the threshold issue of whether an implied right of action exists under Section 14(e), it will have the opportunity to supersede the decisions of the lower courts thereby potentially providing businesses with further protections against securities class actions, although tendering stockholders could still bring cases based on alleged defects in the bidder's disclosures under Rule 10b-5 if they could show scienter.
Footnotes
1 For more information on this decision, see our previous advisories: Departing from Five Other Circuit Courts, the Ninth Circuit Holds That Section 14(e) of the Exchange Act Requires Only a Showing of Negligence; Supreme Court Has Opportunity to Reexamine Implied Private Right of Action Under Section 14(e) of the Exchange Act.
2 Section 14(e) provides that: 'It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. . . ." 15 U.S.C. § 78n(e).
3 Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226, 1233 (C.D. Cal. 2016), aff'd in part, rev'd in part and remanded, 888 F.3d 399 (9th Cir. 2018).
4 The Second, Third, Fifth, Sixth, and Eleventh Circuits have held that Section 14(e) claims require proof of scienter.
5 Varjabedian v. Emulex Corp., 888 F.3d 399 at 406 (9th Cir. 2018), cert. granted, No. 18-459, 2019 WL 98542 (U.S. Jan. 4, 2019) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).
6 Id.
7 Id. at 407.
8 446 U.S. 680 (1980).
9 Varjabedian, 888 F.3d at 406.
10 Id. at 408.
11 Brief of Petitioners at 5, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. Oct. 11, 2018) (citing 430 U.S. 1, 24 (1977)).
12 Id. at 18–19.
13 Id. (citing Alexander v. Sandoval, 532 U.S. 275, 286–87 (2001)).
14 Id. at 20 (emphasis added).
15 Brief of the Securities Industry and Financial Market Association at 7–21, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. Nov. 13, 2018).
16 Brief of the Chamber of Commerce of the United States of America, 5–16, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. Nov. 13, 2018).
17 Brief of Respondents at 7–14, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. Nov. 30, 2018).
18 Id.
19 Id. at 2.
20 Id. at 14–24.
21 Id. at 24–31.
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