On April 20, 2018, the United States Court of Appeals for the Ninth Circuit held that scienter is not required for securities claims brought under Section 14(e) of the Securities Exchange Act of 1934. Varjabedian v. Emulex Corporation, et al., No. 16-55088 (9th Cir. Apr. 20, 2018). In so holding, the Ninth Circuit rejected the decisions of five other circuit courts and ruled Section 14(e) claims require only a showing of negligence.
Plaintiff was a shareholder of Emulex Corp. (“Emulex”), a technology company that sold storage adapters, network interface cards, and other products. In February 2015, Emulex announced that it had entered into a merger agreement with Avago Technologies Wireless Manufacturing, Inc. (“Avago”), with Avago offering to pay $8.00 for every share of outstanding Emulex stock—a price reflecting a 26.4% premium on Emulex’s stock price the day before the merger was announced. Avago subsequently initiated a tender offer pursuant to the terms of the merger agreement, and Emulex issued a statement to its shareholders recommending that they accept the tender offer. That recommendation was based in part on financial analyses and fairness opinion rendered by Emulex’s financial advisor, which determined that the transaction was fair to Emulex’s shareholders. Among the analyses performed by the financial advisor but not disclosed to the shareholders was a premium analysis, which indicated that Emulex’s 26.4% premium fell within the normal range of similar mergers, but was below average. The merger was subsequently consummated, and plaintiff brought a securities action for a violation of Section 14(e), among others, for allegedly misleading shareholders into believing that the merger was better than it actually was. The district court dismissed the complaint with prejudice, concluding that Section 14(e) requires a showing of scienter, and that plaintiff had failed to meet that standard.
The Ninth Circuit reversed. The Court noted that Section 14(e) is divided into two clauses, each proscribing different conduct. Although the second clause prohibits “fraudulent, deceptive, or manipulative acts” (thus requiring scienter), the first clause prohibits the making of any “untrue statement of a material fact or omit[ting] to state any material fact,” with no reference to state of mind. In analyzing the first clause, the Court declined to adopt the reasoning of the Second, Third, Fifth, Sixth, and Eleventh Circuit courts, which held that the first clause required a showing of scienter based, in part, on the similarities between the text of Rule 10b-5 and Section 14(e). The Court reasoned that Rule 10b-5 and Section 14(e) were distinct because Rule 10b-5’s scienter requirement is rooted in the fact that the rule was promulgated under Section 10(b) of the Exchange Act, whereas Section 14(e) “place[d] more emphasis on the quality of the information shareholders receive in a tender offer than on the state of the mind harbored by those issuing a tender offer.”
As noted, the Ninth Circuit’s decision creates a clear circuit split with five other circuits, thereby increasing the likelihood that the Supreme Court will address this issue.