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.

Background

In 2015, Emulex Corp. was acquired by a subsidiary of Avago Technologies Wireless Manufacturing Inc. Pursuant to the merger agreement, Avago launched a tender offer to acquire Emulex’s stock at $8 per share, reflecting a 26.4 percent premium over market price. Emulex’s investment bankers issued an opinion to Emulex that the sum was fair to Emulex shareholders, and Emulex filed a Schedule 14D-9 with the Securities and Exchange Commission recommending that its shareholders tender their shares at the offered price. A putative class of shareholders filed suit in the Central District of California under §14(e) of the Securities Exchange Act of 1934, alleging that Emulex’s recommendation statement failed to disclose that its investment bank found that the 26.4 percent premium its shareholders would receive was below average vis-à-vis a sample of 17 recent representative transactions.