In a terse, unsigned one-sentence April 23, 2019 per curiam opinion, the U.S. States Supreme Court has just one week after oral argument dismissed the grant of certiorari in the case of Emulex Corporation v. Verjabedian as “improvidently granted.” The Court had granted cert in the case in order to address a circuit split on the question of whether or not a claimant in must plead scienter in order to establish a tender offer misrepresentation claim under Section 14(e) of the Securities Exchange Act of 1934, or whether allegations of negligence are sufficient. In the merits briefing and at oral argument, the question arose whether or not there is even a private right of action under Section 14(e) at all. As discussed below, the Court’s dismissal leaves all of these questions unaddressed. The April 23, 2019 opinion in the case can be found here.
As discussed here, the case arises out of the 2015 merger of two technology companies, Emulex Corporation and Avago Wireless Technology. An Emulex shareholder filed a securities class action lawsuit against Emulex and certain of its directors and offices in the Central District of California. In an amended complaint in the action, the plaintiff alleged that in materials associated with Emulex’s tender offer recommendation statement misleadingly created the impression that the premium the Emulex shareholders were to receive in the transaction was significant.
In a January 13, 2016 order (here), Central District of California Judge Cormac J. Carney granted the defendants’ motion to dismiss. Judge Carney held, relying on case law from five different federal appellate courts, that in order to plead a viable claim for misrepresentation in connection with a tender offer under Section 14(e), a plaintiff must plead that the defendants acted with scienter. Judge Carney rejected the plaintiff’s argument that “only negligence” is required.
In an April 20, 2018 opinion written by Judge Mary Murguia for a unanimous three-judge panel of the Ninth Circuit (here), the Ninth Circuit reversed in relevant part Judge Carney’s ruling with respect to requirements to plead a claim under Section 14(e). The Ninth Circuit said, among other things, that “because the text of the first clause of Section 14(e) is devoid of any suggestion that scienter is required, we conclude that the first clause of Section 14(e) requires a showing of only negligence, not scienter.” The Ninth Circuit expressly declined to follow the Second, Third, Fifth, Sixth and Eleventh Circuits in holding that allegations that the defendants acted with scienter are required in order to state a claim under Section 14(e).
The company filed a petition to the United States Supreme Court for a writ of certiorari.
Supreme Court Proceedings
As discussed here, on January 4, 2019, the U.S. Supreme Court granted cert in order to determine what a plaintiff must plead to state a claim for false statements or omissions in connection with a tender offer under Section 14(e) .
While the nominal issue that the company’s cert petition raise was the question of the proper pleading standard to state a claim under Section 14(e), a larger (and intellectually prior) question emerged both in the merits briefs in and at oral argument. As discussed here, both the company’s briefs and briefs submitted by amicus curiae raised the question of whether or not there is even a private right of action under Section 14(e). At the request of the Court, the Solicitor General also submitted a brief (here), in which, in addition to arguing that negligence allegations are sufficient to state a claim under Section 14(e), the government argued that Section 14(e) does not create a private right of action.
At oral argument in the case on April 15, 2019, the discussion focused on the private right of action question rather than the pleading standard, as reported here. One question that seemed to particularly trouble a number of the justices was whether or not the private right of action question had been properly presented to the courts below and therefore whether the question was ripe for the U.S. Supreme Court to consider. Several of the Justices’ questions seemed to reflect a concern that the Court had granted cert on one issue (that is, the pleading standard question) but the petitioner was presenting arguments on another issue (the private right of action issue).
The court dismissed the case just one week after the oral argument, which is hardly the outcome the company was looking for in pursuing the case to the Supreme Court.
The practical effect of the Court’s dismissal order is that the case will now go back to the Ninth Circuit, which had overturned the dismissal of the case, and from there the case will go back to the district court. In its 2018 ruling, the Ninth Circuit had remanded the case to the district court for the district court to reconsider the defendants’ motion to dismiss in light of the negligence pleading standard. Presumably, that is what will happen now. The question for the company on remand is whether and how to raise the absence of the private right of action question as well.
Beyond the immediate question of what the parties in this case will now do is the larger question of what litigants in other pending 14(e) claims will now do, and also what the impact will be on future 14(e) cases as well.
Given the question raised before the Supreme Court in the Emulex case, it seems likely that the defendants in current and future 14(e) cases will now also include in their motions to dismiss a separate section in which they argue that there is no private right of action under Section 14(e), and it also seems likely this issue will get a workout at both the district court and the appellate court level. You can probably put a clock on it – the Section 14(e) private right of action question will be back before the U.S. Supreme Court in two or three years’ time. (In the interim, we will have a bunch of district court and appellate court opinions on the subject.)
Assuming the various district courts get past the private right of action question, the courts will then have to turn to the pleading standard question. With respect to the pleading standard question, the Supreme Court’s decision to dismiss the cert petition in Emulex leaves us with a state of affairs that the Supreme Court usually does everything it can to avoid; that is, in most of the rest of the country, plaintiffs in Section 14(e) cases will have to plead scienter, whereas in the Ninth Circuit, it will be sufficient for Section 14(e) claimants to plead negligence.
The upshot is, at least to the extent the district courts concluded there is a private right of action at all, cases the might be dismissed in other circuits under the scienter pleading standard may not be dismissed in the Ninth Circuit under the negligence pleading standard.
If you assume for the sake of argument that the private right of action question does not discourage plaintiffs from pursuing Section 14(e) claims, the split in the circuits on the pleading standard question would seem to encourage plaintiffs to file these kinds of claims in district courts in the Ninth Circuit, rather than the district courts in other federal judicial circuits.
Although the current state of affairs on the pleading standard issue does seem like it might encourage forum shopping, I am not sure we need to be worried the courts in the Ninth Circuit being flooded by these kinds of claims. Although there are a significant number of merger transactions that involve tender offers, many of the transactions that are the subject of merger objection lawsuits do not involve tender offers, and the merger objection lawsuits filed in connection with those transactions do not allege violations of Section 14(e). Most federal court merger objection lawsuits allege violations not of Section 14(e), but rather allege violations of Section 14(a), relating to solicitation of proxies.
To put these generalizations into perspective, let’s take a look at the 2018 federal court merger objection lawsuits. There were 185 federal court merger objection lawsuits filed in 2018. Of those 185, only 30 (or about 16%) were filed under Section 14(e). Almost all of the other federal court merger objection lawsuits (about 84%) alleged proxy misrepresentations in violation of Section 14 (a). In other words, the vast majority of federal court merger objection lawsuits do not involve allegations under Section 14(e).
Alison Frankel’s April 23, 2019 post on her On the Case blog about the Supreme Court’s dismissal of the Emulex cert petition can be found here. Among other things, Frankel makes the good point that these days so many of the merger objection lawsuits are voluntarily dismissed in exchange for the defendants’ agreement to pay a mootness fee to the plaintiffs’ lawyers, which might mean it could take longer for the Section 14(e) implied right of action issue to make it back to the Supreme Court.