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Joseph M. McLaughlin and Shannon K. McGovern. Courtesy photos

Section 14(e) of the Securities Exchange Act prohibits material misstatements or omissions, and other “fraudulent, deceptive, or manipulative acts or practices,” in connection with tender offers. For decades, the Second Circuit has held that an implied private cause of action under §14(e) requires a showing of scienter, consistent with the elements required for a private securities fraud cause of action under §10(b) and Rule 10b-5 of the Securities Exchange Act. Four additional Circuit Courts to address the issue are in accord. Last year, the Ninth Circuit diverged from this nearly 50-year consensus, holding in Varjabedian v. Emulex Corp., 888 F.3d 399 (9th Cir. 2018), that mere negligence is enough to plead and prove a claim for a material misstatement or omission under §14(e). The Supreme Court recently granted certiorari to resolve this Circuit split, the resolution of which will surely affect the number of federal securities lawsuits challenging mergers consummated through tender offers. The importance of this question is magnified by the widespread migration of “merger objection” suits to federal court under §14 of the Exchange Act, in response to Delaware law hostility to disclosure-only merger settlements. See In re Trulia, Inc. S’holder Litig., 129 A.3d 884 (Del. Ch. 2016). With “merger objection” litigation increasingly a part of the federal court docket, allowing stockholder plaintiffs to bring §14(e) disclosure claims on a showing of mere negligence would result in still more lawsuits and make them more challenging to resolve.

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