Supreme Court To Hear Case Implicating Section 14(e) Of The Exchange Act

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...