Case No. 18-459 | 9th Cir.
Preview by John M. Hindley, Articles Editor
Varjabedian presents the Court with an opportunity to address a circuit split created by the Ninth Circuit when it held that Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (2012), created a private cause of action that requires a showing of negligence, rather than scienter, which five other circuits required. Varjabedian v. Emulex Corp., 888 F.3d 399, 408 (9th Cir. 2018).
The case arose out of an April 2015 tender offer made by Avago Technologies Wireless Manufacturing, Inc. to purchase outstanding stock in Emulex Corporation, “an electronic-equipment producer,” at $8.00 per share, a 26.4% premium, as part of a merger plan between the two companies. Brief for the Petitioner at 11, Emulex Corp. v. Varjabedian, No. 18-459 (U.S. filed Feb. 19, 2019). Emulex’s board filed a Recommendation Statement with the SEC, which included a “fairness opinion” from a Goldman Sachs financial advisor, encouraging shareholders to tender their shares. Brief for the Respondent at 2, Emulex Corp., No. 18-459 (U.S. filed Mar. 21, 2019). Respondents filed a federal securities class action, the lead plaintiff being Gary Varjabedian, against Emulex, its board, and Avago, pursuant to Section 14(e), alleging that they made material misstatements and omissions for promoting a below-average premium. Id. at 3. The district court dismissed the class’s amended complaint holding that it failed to adequately allege scienter (in other words, knowingly made misleading statements in its recommendation). Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226, 1240 (C.D. Cal. 2016).
The Ninth Circuit reversed by parsing out the following language of Section 14(e):
It shall be unlawful for any person [1] 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 [2] to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer . . . .
Varjadabedian, 888 F.3d at 404 (quoting 15 U.S.C. § 78n(e)) (emphasis and alterations in original). Relying on Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), and Aaron v. SEC, 446 U.S. 680 (1980), the Ninth Circuit held that the plain language of Section 14(e), which tracks Rule 10b-5’s language, see 17 C.F.R. § 240.10b-5, delineates two separate prohibited acts in which the first clause does not have a scienter, but rather a negligence, requirement. See Ernst & Ernst, 425 U.S. at 212–14 (holding that Rule 10b-5’s scienter requirement did not come from the text of the regulation but from the authorizing statute, Section 10(b), and therefore is only limited to intentional conduct); Aaron, 446 U.S. at 696–97 (citing 15 U.S.C. § 77q(a)(2)) (holding that Section 17(a)(2), which has parallel language to the first clause of Section 14(e), does not have a scienter requirement).
The Petitioner makes two primary arguments. First, Petitioner argues that Section 14(e) does not even create an inferred private cause of action because there was neither congressional intent to create such a right nor does the statute contain “rights-creating language” as required by Alexander v. Sandoval, 532 U.S. 275, 288 (2001). Interestingly, the Supreme Court already foreclosed a private right of action under Section 14(e) for “a tender offeror[] suing in his capacity as a takeover bidder” but did not explicitly foreclose the possibility for shareholders. Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 42 n.28 (1977). Second, even if there is a private right of action, Section 14(e) does not contain “reasonableness” language and procedural limitations typically associated with negligence in the securities laws whereas the scienter requirement usually contains language such as “fraudulent,” “deceptive,” and “manipulative.” Such language does not encompass negligence but imputes scienter like Rule 10b-5. See Ernst & Ernst, 425 U.S. at 212–14. Based on the “whole-text canon,” the text should be considered as a whole rather than parsed out like the Ninth Circuit did. Brief for the Petitioner at 27, Emulex Corp., No. 18-459 (U.S. filed Feb. 19, 2019).
In a twist of events, the government submitted a brief and will be arguing before the court as amicus curiae. The government’s position is that in fact Section 14(e) does allow a showing of negligence but does not create a private cause of action. Brief for the United States as amicus curiae in Support of Neither Party, Emulex Corp., No. 18-459 (U.S. filed Feb. 26, 2019).