On April 23, 2019, the Supreme Court of the United States dismissed as improvidently granted its earlier grant of certiorari in Emulex Corp. v. Varjabedian, No. 18-459. The Justices had been poised to resolve a circuit split about whether plaintiffs must plead scienter to state a claim arising from tender-offer disclosures under Securities Exchange Act § 14(e) (15 U.S.C. § 77n(e)). Although the Court’s one-sentence Order did not explain why the case had been dismissed, the Justices’ questions at oral argument suggest they viewed the case as a flawed vehicle because it did not present the more basic question of whether there even is a private right of action under 14(e).
The Supreme Court’s Order has at least two practical implications. First, plaintiffs seeking to litigate § 14(e) claims are likely to flock to the Ninth Circuit to avoid having to plead scienter. Second, defendants would be wise to argue both that plaintiffs do not have a private right of action under § 14(e), and that plaintiffs must plead scienter if they can bring a claim at all.
How Emulex Got to the Court
The Emulex case centered on a merger between Emulex and Avago Technologies Wireless Manufacturing, Inc. The two companies issued a joint press release announcing the deal, with Avago offering to pay $8.00 (a 26.4% premium) for every share of outstanding Emulex stock. Emulex issued a statement recommending that shareholders tender their shares for nine different reasons. Emulex’s recommendation included a summary of an investment bank’s fairness opinion, but not a summary of a separate analysis showing that the 26.4% premium was below average. After enough Emulex shareholders tendered and the deal was consummated, unhappy shareholders sued, alleging that Emulex’s failure to disclose the separate premium analysis had violated Exchange Act § 14(e). Under that statute, “It shall be 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, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer ....”
Defendants moved to dismiss. Addressing a novel issue in the Ninth Circuit, the district court followed what it viewed as “the wealth of persuasive case law” in five other circuits and concluded that “the similarities between Rule 10b-5 and § 14(e) require a plaintiff bringing a cause of action under § 14(e) to allege scienter.” Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226, 1233 (C.D. Cal. 2016). The court then dismissed plaintiffs’ claims, finding they had alleged negligence but had not alleged facts creating a strong inference of scienter. Id. at 1238.
On appeal, the Ninth Circuit reversed, holding that § 14(e) “requires a showing of negligence, not scienter.” Varjabedian v. Emulex Corp., 888 F.3d 399, 409 (9th Cir. 2018). The panel acknowledged that its holding conflicted with decisions by the Second, Third, Fifth, Sixth and Eleventh Circuits. But the panel was “persuaded that the rationale underpinning those decisions does not apply to Section 14(e)” because they “rest on the shared text found in both Rule 10b-5 and Section 14(e).” Id. at 405. In the Ninth Circuit’s view, “important distinctions exist between Rule 10b-5 and Section 14(e)—distinctions that strongly militate against importing the scienter requirement from the context of Rule 10b-5 to Section 14(e).” Id. In particular, the “use of the word ‘or’ separating the two clauses in Section 14(e) shows that there are two different offenses that the statute proscribes,” and the first clause requires only negligence because it is not tied to Section 10(b) or Rule 10b-5. Id. at 404. The court also believed that requiring “a showing of negligence, as opposed to scienter, finds some support in the legislative history and purpose of the Williams Act.” Id. at 408. And “because the text of the first clause of Section 14(e) is devoid of any suggestion that scienter is required,” the court concluded “that the first clause of Section 14(e) requires a showing of only negligence, not scienter.” Id. at 408.
What Happened at the Court and What Happens Next
The Supreme Court granted Emulex’s certiorari petition, which presented the question whether § 14(e) “supports an inferred private right of action based on a negligent misstatement or omission made in connection with a tender offer.” At argument, however, multiple Justices questioned whether the implied private right issue was properly presented. The Justices noted that in the lower courts Emulex had not disputed that § 14(e) provides for a private right of action, and that the lower courts had not addressed that question. About a week after argument, the Court issued an Order dismissing the writ as improvidently granted.
The Supreme Court’s Order, which leaves the Ninth Circuit’s outlier decision intact, is likely to have two immediate impacts. First, the Order encourages plaintiffs to assert § 14(e) claims within the Ninth Circuit to take advantage of the lower pleading standard that applies there. Second, the Order signals that there is a foundational question whether there is an implied private right of action to bring § 14(e) claims. And if private plaintiffs have no such right, then non-tendering shareholders of the target corporation who cannot bring 10b-5 claims because they did not purchase or sell a security may be left without an alternative remedy.
The Order also has practical implications for defendants facing § 14(e) claims. Defendants in § 14(e) suits should be sure to raise the implied private right question—arguing that no such right exists—and to preserve arguments that plaintiffs must plead scienter, not negligence, in any event. Doing so will not only give defendants two different grounds for securing dismissal, but also ensure that both issues are properly presented for the Supreme Court to resolve, should the case get that far.