Source: https://wlflegalpulse.com/2019/01/22/with-emulex-corp-supreme-court-could-raise-bar-for-merger-tax-securities-suits/
Timestamp: 2019-04-21 14:27:04+00:00

Document:
Emulex was the target of a tender offer by what was then Avago Technologies Ltd. (subsequently merged into and becoming BroadCom Corporation). Emulex issued a favorable Recommendation Statement,4 which plaintiffs—purporting to represent a class of Emulex shareholders—claimed omitted an analysis of comparable transactions that would have shown the premium offered by Avago was below the premia offered in those comparable deals.
Nothing in the Exchange Act explicitly creates a private right of action against alleged violators of § 14(e), but the existence of an implied private right of action thereunder has long been accepted.9 The courts have thus been faced with the oft-contentious task of dividing what elements Congress would have wanted included in a remedy Congress never contemplated.
In response, the Ninth Circuit made essentially two arguments. First, the Ninth Circuit relied on the Supreme Court’s decision in United States v. O’Hagan,19 which held “under § 14(e), the [SEC] may prohibit acts not themselves fraudulent under the common law or § 10(b), if the prohibition is ‘reasonably designed to prevent … acts and practices [that] are fraudulent.’”20 The difficulty with that argument is that O’Hagan simply upheld the SEC’s authority to adopt Rule 14e-3. The SEC has never defined the state of mind necessary to support a private cause of action under the rule. Even if the SEC attempted to, moreover, it would have to show that such a prophylactic measure “reasonably designed to prevent … acts and practices [that] are fraudulent,” which means they must be reasonably designed to prevent conduct motivated by an intent to deceive.
Given the surge in federal cases following Trulia, these policy concerns seem pertinent once again.
In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016).
See generally Ryan Lewis, What Happens in Delaware Need Not Stay in Delaware: How Trulia Can Strengthen Private Enforcement of the Federal Securities Laws, 2017 B.Y.U. L. Rev. 715, 740 (2017) (discussing the impact of Trulia on state versus federal filings).
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. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.
15 U.S. Code § 78n(e).
Emulex filed a Schedule 14d-9 as per Rule 14d-9. 17 CFR § 240.14d-9.
Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226 (C.D. Cal. 2016), aff’d in part, rev’d in part and remanded, 888 F.3d 399 (9th Cir. 2018), cert. granted, 2019 WL 98542 (U.S. Jan. 4, 2019).
Varjabedian v. Emulex Corp., 888 F.3d 399, 406 (9th Cir. 2018), cert. granted, 2019 WL 98542 (U.S. Jan. 4, 2019).
The Supreme Court has defined scienter in the securities law context as “mental state embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). The Supreme Court has reserved the question of “whether, under some circumstances, scienter may also include reckless behavior.” Aaron v. Securities and Exch. Commn., 446 U.S. 680, 686 n.5 (1980). Every circuit court to have considered the question has determined that recklessness can satisfy the scienter requirement, although the circuits have disagreed as to degree of recklessness necessary. See Rubinstein v. Gonzalez, 241 F. Supp. 3d 841, 855 (N.D. Ill. 2017) (discussing status of scienter requirement under Exchange Act § 10(b)).
Varjabedian, 888 F.3d at 407. The Ninth Circuit agreed with the District Court that there is no implied private right of action under Rule 14d-9 and therefore dismissed plaintiffs’ claims purporting to sound thereunder. Id. at 409. That ruling is not before the Supreme Court.
See, e.g., Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 55 (1977) (Stevens, J., dissenting) (“No one seriously questions the premise that Congress implicitly created a private right of action when it enacted § 14(e) in 1968.”); Liberty Nat. Ins. Holding Co. v. Charter Co., CV82-H-233-S, 1982 WL 1304, at *5 (N.D. Ala. Apr. 27, 1982), aff’d, 734 F.2d 545 (11th Cir. 1984) (noting “the now well established principle that a private right of action does exist under Section 14(e)”).
Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 10, (1985).
Am. Carriers, Inc. v. Baytree Inv’rs, Inc., 685 F. Supp. 800, 808 (D. Kan. 1988) (“Since section 14(e) and rule 10b–5 are coextensive in their anti-fraud prohibitions, they are construed in pari materia by courts.”).
See, e.g., Smallwood v. Pearl Brewing Co., 489 F.2d 579, 605 (5th Cir. 1974) (holding that “the same elements must be proved to establish a violation of either [statute]”); Chris–Craft Indus. Inc., v. Piper Aircraft Corp., 480 F.2d 341, 362 (2d Cir. 1973) (holding that “we shall follow the principles developed under Rule 10b-5 regarding the elements of [Section 14(e)] violations”).
Aaron v. Securities and Exch. Commn., 446 U.S. 680 (1980).
See, e.g., Securities and Exch. Commn. v. Texas Intern. Co., 498 F. Supp. 1231, 1252 (N.D. Ill. 1980).
Schreiber, 472 U.S. at 10 n.10.
Varjabedian v. Emulex Corp., 888 F.3d 399, 404 (9th Cir. 2018), cert. granted, 18-459, 2019 WL 98542 (U.S. Jan. 4, 2019).
See Aaron v. SEC, 446 U.S. 680, 701 (1980) (discussing § 17(a)(2)).
Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226, 1233 (C.D. Cal. 2016) (emphasis in original), aff’d in part, rev’d in part and remanded, 888 F.3d 399 (9th Cir. 2018).
Pryor v. U.S. Steel Corp., 591 F. Supp. 942 (S.D.N.Y. 1984), aff’d in part, rev’d in part, 794 F.2d 52 (2d Cir. 1986).
Id. at 163-64 (citations omitted).

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