On April 23, 2019, the Supreme Court dismissed as improvidently granted the writ of certiorari granted in Emulex Corp. v. Varjabedian, No. 18-459. The case originated in the Northern District of California where shareholders had asserted claims under Section 14(e) of the Securities Exchange Act of 1934 to challenge the Recommendation Statement soliciting Emulex shareholders to tender their shares as part of the merger agreement between Emulex and Avago Technologies Wireless Manufacturing, Inc. The district court dismissed the complaint on the ground that allegations of scienter were required under Section 14(e). On appeal, the Ninth Circuit reversed the district court and created a circuit split by ruling that the pleading standard for section 14(e) cases is negligence, the same standard that applies to private actions under Section 14(a) in the case of shareholder votes on a merger transaction. Following the Ninth Circuit’s reversal, Emulex appealed to the Supreme Court.
The briefing before the Supreme Court addressed not only the appropriate pleading standard, but also a threshold issue of whether shareholders possess an implied right of action under Section 14(e). The implied right of action issue had not been raised before the district court or the Ninth Circuit, which Justices Ginsberg and Sotomayor immediately addressed at oral argument as precluding the Court’s consideration of the issue. Although oral argument went on to focus on the merits of a private right of action under Section 14(e), the Court ultimately dismissed the case apparently due to the failure of Emulex to raise the threshold issue with the lower courts. The case now goes back to the district court to be reviewed under the negligence standard.
The decision is a win for shareholders asserting Section 14(e) claims in tender offer cases in the Ninth Circuit as their allegations will be reviewed under the more reasonable negligence standard that applies to mergers involving shareholder votes under Section 14(a). However, the win may be temporary. The decision leaves in place the split among the circuits as to the pleading standard. Currently, the Ninth Circuit is the only circuit which has interpreted 14(e) to require negligence while the Second, Third, Fifth, Sixth and Eleventh Circuits require allegations of scienter. Based on the remarks during oral argument by certain other justices, defendants in federal securities cases under Section 14(e) will surely raise the issue of a private right of action again in an appropriate manner to bring it back to the Supreme Court.
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About Maxwell Michael
Maxwell Michael's practice is focused on shareholder merger and securities litigation. Maxwell is an associate in Faruqi & Faruqi, LLP's New York office. During law school, Maxwell was awarded the Masin Family Academic Excellence Award for outstanding performance. Maxwell was also a research assistant whose primary research was on Delaware General Corporation Law and State Fiduciary Duties. Maxwell earned his J.D from UCLA School of Law (2018) with specializations in Mergers and Acquisitions and Securities Regulation. Maxwell earned his undergraduate degree from Baruch College (B.B.A, 2015, summa cum laude) where he majored in Finance with a double minor in Advanced Business Analysis and History. Maxwell is licensed to practice law in New York.