Deus Ex Machina? Can the Supreme Court Infer a Private Cause of Action in Tender Offer Litigation?

By: Alexis Martinez

Last week, the Supreme Court heard oral arguments for Emulex Corp. v. Varjabedian, seeking review of a decision by the Court of Appeals for the Ninth Circuit.[1] It is a securities law case where the Court is determining whether 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.[2] Previously, the Ninth Circuit split from five other circuit courts and held that the requisite intent under Section 14(e) of the Securities Exchange Act of 1934 was mere negligence, instead of a showing of scienter.[3]

In February 2015, Emulex Corporation announced that it had entered into a merger agreement with Avago Technologies Wireless Manufacturing, Inc.  In this agreement, Avago offered to pay $8.00 per share for all shares of outstanding Emulex stock. A subsidiary then initiated a tender offer for the outstanding stock. The next step in a tender offer is for the Board to file a recommendation statement with the Securities Exchange Commission outlining their rationale for accepting the tender offer before submitting it to shareholders. In this step, Emulex chose to not include a summary of a one-page premium analysis showing that the transaction premium fell within the normal range, but was below average.[4]

Respondent, Gary Varjabedian, is one of a class of investors who claim that the petitioner, Emulex, failed to provide adequate information to allow investors to evaluate the price in a tender offer for the stock of Emulex. In April 2015, Varjabedian along with a class of plaintiffs brought a class action lawsuit claiming that Emulex violated various federal securities laws by failing to include a premium analysis summary for the recommendation statements. They claimed that this failure violated Section 14(e) of the Exchange Act which states that “it shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact […] or to engage in any fraudulent, deceptive or manipulative acts or practices, in connection with any tender offer.”[5] The District Court dismissed the complaint arguing that Section 14(e) is analogous to other antifraud provisions and requires an allegation of scienter to proceed.[6] However, the Ninth Circuit deviated substantially from five other circuit courts by holding that Section 14(e) requires only a showing of negligence.[7] The Ninth Circuit found that because the text of the first clause of Section 14(e) is devoid of any suggestion that scienter is required, the first clause of Section 14(e) requires a showing of only negligence, not scienter.”[8]

The Ninth Circuit’s analysis is tantamount to comparing apples to oranges. Here, the court’s central argument rests on the similarities between Rule 10b-5 and section 14(e).  The court reasoned that because the SEC did not explicitly include an intent requirement in Section 14(e), then the default standard should be negligence. However, this ignores the reality that the section is designed to address fraudulent practices in connection with tender offers. To rely on such sophistry, the court risks an increase in frivolous shareholder litigation over any perceived defect in communication.

The Supreme Court currently faces two options with respect to how to address this issue. The first is to side with the Second, Third, Fifth, Sixth, and Eleventh Circuits which in turn would make it easier for defendants to dismiss Section 14(e) claims by focusing on scienter. The second option is to affirm the Ninth Circuit’s decision which risks giving rise to potentially frivolous shareholder litigation for any disclosure that fails to reach the level of scienter. In all likelihood, the Supreme Court will choose the unmentioned third option of punting the issue to the lower courts on a technicality and thus fail to provide any adequate closure. The first half of oral arguments centered on whether the issue of an implied cause of action was properly raised for appeal and the Justices seemed heavily reticent to address the issue. Given the Court’s track record on securities issues, it is increasingly likely that it will fail to address the issue at all and save it for another day.   


[1] See Ronald Mann, Argument Preview: Justices to Consider Ability of Securities Investors to Sue for Faulty Disclosures About Tender Offers, SCOTUSblog (Apr. 8, 2019), https://www.scotusblog.com/2019/04/argument-preview-justices-to-consider-ability-of-securities-investors-to-sue-for-faulty-disclosures-about-tender-offers/

[2] See David A. Priebe, Granting Certiorari in Varjabedian, Supreme Court will Address Circuit Split Over Disclosure Claims in Tender Offers, Securities Litigation Alert (Jan. 7, 2019), https://www.dlapiper.com/en/us/insights/publications/2019/01/granting-certiorari-in-varjabedian/

[3] See id.

[4] See id.

[5] 15 U.S.C. § 78n(e)

[6] 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).

[7] Varjabedian v. Emulex Corp., 888 F.3d 399 (9th Cir. 2018), cert. granted, No. 18-459, 2019 WL 98542 (U.S. Jan. 4, 2019)

[8] See id.