U.S. Supreme Court to Review Private Right of Action in Cash Tender Offer

8 January 2019

On January 4, the U.S. Supreme Court agreed to review the decision of the U.S. Court of Appeals for the Ninth Circuit in Emulex v. Varjabedian. The Ninth Circuit’s Emulex decision created a split with five other circuit courts by holding that plaintiffs could maintain a private right of action under Section 14(e) of the Securities Exchange Act with a claim based merely on negligent omissions as opposed to the scienter (intentional or reckless conduct) required by the other courts.

Section 14(e) of the Exchange Act provides, in part, that it is 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,” and a private right of action has long been inferred under Section 14(e) by the lower courts. Emulex involved a cash tender offer made by a subsidiary of Avago Technologies Wireless Manufacturing, Inc. in connection with Avago’s acquisition of Emulex Corp. The heart of the plaintiff’s Section 14(e) claim in Emulex was the omission from the “Recommendation Statement” filed by Emulex with the SEC of an analysis, prepared by Emulex’s investment banker, of the premium being offered to Emulex’s shareholders. The analysis identified other semiconductor transactions similar to the proposed merger, reviewed the respective premiums stockholders received in those transactions and showed that the premium offered to Emulex’s shareholders fell within the normal range of those premiums but below the average.

The district court dismissed the plaintiff’s complaint due to a failure to plead scienter on the part of the defendants. The plaintiff then appealed to the Ninth Circuit, arguing that Section 14(e) required the plaintiff to show only that the defendants acted negligently by not including the premium analysis in the Recommendation Statement. The Ninth Circuit, breaking with the Second, Third, Fifth, Sixth and Eleventh Circuits, found that Section 14(e) permits a private right of action based on negligent omissions.

The Supreme Court’s grant of certiorari to the defendants/petitioners was not all that surprising in light of the Court’s recent willingness to review securities-related cases. However, the Supreme Court’s decision to review this case is potentially more significant because it provides an opportunity for the Court to decide whether Section 14(e) supports an inferred private right of action at all—a question that was squarely put before the Court in the petition for certiorari.

We will continue to monitor developments in this case and provide you with appropriate updates.