Following oral arguments earlier this month, the U.S. Supreme Court stated in Emulex Corporation v. Varjabedian on April 23rd that it will not consider a securities fraud lawsuit involving the acquisition of semiconductor company Emulex Corporation.
In a putative class action stemming from a 2015 merger between Emulex and Avago Technologies Wireless Manufacturing Inc., a former Emulex shareholder alleged violations of Section 14(e) of the Securities Exchange Act of 1934 in connection with Emulex’s recommendation that its shareholders accept a takeover tender offer from Avago. According to the shareholder, in stating that the deal was fair to investors, Emulex improperly failed to disclose a price analysis that was utilized by the company’s investment bank. In 2016, a district court dismissed the shareholder’s claim with prejudice, determining that Section 14(e) necessitates a showing of scienter, which the court found the shareholder failed to adequately plead.
On appeal in 2018, the Ninth Circuit of Court of Appeals addressed the proper mental state standard for Section 14(e) claims and instituted a standard of “negligence.” The panel reversed the district court’s decision, ruling that, in filing a private right of action, Emulex shareholders did not need to show that the company knew that their disclosures were faulty but instead only needed to claim that defendants acted negligently. Five other circuits disagreed with the Ninth Circuit’s determination, finding that such plaintiffs must show that defendants acted with an intent to defraud. The Supreme Court at that point granted Emulex’s writ of certiorari to resolve the disagreement between the circuits.
At this month’s oral argument, shareholder counsel Daniel Geyser argued that Emulex waived the question of shareholders’ right to sue when its case was before the Ninth Circuit, and asked that the justices not go beyond the narrow question that Emulex offered in its petition for Supreme Court review, which was whether shareholders must prove fraudulent intent or mere negligence in class actions over tender offer disclosures. The Supreme Court ultimately withdrew its consideration on the issue of whether shareholders in tender offer cases must only claim that defendants had acted in a negligent manner instead of with an intent to defraud. In a one-sentence order, the Court dismissed the writ of certiorari and simply stated that its previous decision to review the case was “improvidently granted.”
Although the Court issued its opinion without offering an explanation, Reuters speculated that the justices sided with Emulex’s arguments that it would be senseless to rule narrowly on the appropriate pleading standard for a shareholder’s tender offer lawsuits when the viability of such class actions is uncertain. Reuters further surmised that the Court agreed with shareholder counsel Geyser that the instant case is not the proper vehicle for determining whether a shareholder may sue over tender offer disclosures. Other observers supposed that the Court found it premature to rule on the idea of the “private right of action,” since that concept has not been previously decided upon.
According to SCOTUSblog, although the Supreme Court had previously routinely considered that private rights of action are “implied” within federal securities laws, it has more recently seen that practice as interfering with Congress’ authority to define causes of action that can be considered by federal courts. However, as Emulex did not raise that argument in the lower courts, some of the Supreme Court justices found that a decision looking at the broader question of whether there should be a private right of action would reward defendants for not bringing up that question to the lower courts. As a result, the SCOTUSBlog suggested, the Supreme Court’s April 23rd dismissal gives it the opportunity to delay consideration of the broader question until that question has been directly presented.
