Source: https://www.omm.com/resources/alerts-and-publications/alerts/scotus-grants-certiorari-to-resolve-circuit-split-on-scienter-requirement-regarding-tender-offers/
Timestamp: 2019-07-18 09:38:37
Document Index: 75242652

Matched Legal Cases: ['§ 14', '§ 14', '§ 14', '§ 14', '§ 14', '§ 17', '§ 14', '§ 14', '§ 17']

On April 20, 2018, the Ninth Circuit in Varjabedian v. Emulex, 888 F.3d 399 (2018), held that plaintiffs seeking to recover under § 14(e) of the Securities Exchange Act (Exchange Act) for material misstatements or omissions in tender-offer filings need plead (and prove) only negligence, not scienter. In so holding, the Ninth Circuit split from five of its sister circuits, instantly making California and other Ninth Circuit courts plaintiff-friendly forums for tender-offer litigation. Given the circuit split on this important aspect of tender-offer disclosure and litigation, we predicted last year that the US Supreme Court would grant certiorari to review the Ninth Circuit’s decision.1
The Ninth Circuit reversed based on the language and structure of the statute. The court noted that § 14(e) contains two separate clauses, “each proscribing different conduct”: (i) making or omitting an untrue statement of material fact, and (ii) engaging in fraudulent, deceptive, or manipulative acts or practices.2 Varjabedian, 888 F.3d at 404. The court reasoned that while the conduct prescribed by the second clause necessarily incorporates a scienter element, the same could not be said for the conduct that the first clause addresses. Id.
The court disagreed with the other circuits for two principal reasons. First, the court deemed it inappropriate to rely on the “similarities between Rule 10b-5 and § 14(e)”3 to import Rule 10b-5’s scienter requirement to § 14(e) claims. That is because the Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), implied a scienter requirement for Rule 10b-5 claims by reference to the language of Rule 10b-5’s authorizing statute, Section 10(b) of the Securities Exchange Act of 1934, whereas § 14(e) is itself a statute, not a rule. 888 F.3d at 406. Second, the court relied on the Supreme Court’s decision in Aaron v. SEC, 446 U.S. 680 (1980), that § 17(a)(2) of the Securities Act of 1933—which has similar language as § 14(e)4—“does not require a showing of scienter.” Id.
The Supreme Court’s Task
The Supreme Court will address “[w]hether the US Court of Appeals for the Ninth Circuit correctly held, in express disagreement with five other courts of appeals that Section 14(e) of the Securities Exchange Act of 1934 supports an inferred private right of action based on the negligent misstatement or omission made in connection with a tender offer.”
1 See Ninth Circuit Creates Circuit Split For Section 14(e) Claims Regarding Tender Offers, 28 No. 11 J. Mergers & Acquisitions 01 (May 10, 2018).
2 Section 14(e) provides in relevant part: “It shall be unlawful for any person [1] 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 [2] to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer….”
3 Compare § 14(e) (“It shall be unlawful for any person [1] 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 [2] to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer….”), with Rule 10b-5 (“It shall be unlawful for any person … [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.’”).
4 Under § 17(a)(2), “[i]t shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) … to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jonathan Rosenberg, an O’Melveny partner licensed to practice law in New York, Edward Moss, an O’Melveny partner licensed to practice law in New York, Anton Metlitsky, an O’Melveny partner licensed to practice law in the District of Columbia and New York, William K. Pao, an O'Melveny partner licensed to practice law in California, and Yaira Dubin, an O’Melveny associate licensed to practice law in Maryland, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.