Source: https://www.arnoldporter.com/en/perspectives/publications/2019/01/supreme-ct-to-hear-case-implicating-section-14e
Timestamp: 2019-04-24 18:02:31+00:00

Document:
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.
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.
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.
© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
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.
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).
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).
The Second, Third, Fifth, Sixth, and Eleventh Circuits have held that Section 14(e) claims require proof of scienter.
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).
Varjabedian, 888 F.3d at 406.
Brief of Petitioners at 5, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. Oct. 11, 2018) (citing 430 U.S. 1, 24 (1977)).
Id. (citing Alexander v. Sandoval, 532 U.S. 275, 286–87 (2001)).
Id. at 20 (emphasis added).
Brief of the Securities Industry and Financial Market Association at 7–21, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. Nov. 13, 2018).
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).
Brief of Respondents at 7–14, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. Nov. 30, 2018).

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