United States: Departing From Five Other Circuit Courts, The Ninth Circuit Holds That Section 14(e) Of The Exchange Act Requires Only A Showing Of Negligence


On April 20, 2018, the Court of Appeals for the Ninth Circuit held in Varjabedian v. Emulex Corp. that a violation of Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (Exchange Act), which governs tender offers, requires a showing of negligence, not scienter.1 In so holding, the Ninth Circuit departs from five other Circuit Courts—the Second, Third, Fifth, Sixth, and Eleventh Circuits—that have held that Section 14(e) claims require proof of scienter (the intent to defraud).


In February 2015, Emulex Corp. (Emulex) and Avago Technologies Wireless Manufacturing, Inc. (Avago) announced that they had entered into a merger agreement, with Avago offering to pay $8.00 for all shares of outstanding Emulex stock as consideration. The $8.00 per share price reflected a premium of 26.4 percent on Emulex's stock price the day before the merger was announced. A little more than a month later, a subsidiary of Avago, Emerald Merger Sub, Inc. (Merger Sub), initiated a tender offer of Emulex's outstanding stock. Emulex filed a recommendation statement with the Securities and Exchange Commission that supported the tender offer and recommended that shareholders tender their shares. In that recommendation statement, Emulex elected not to include a summary of a one-page premium analysis that had been performed by an outside bank showing that the transaction premium fell within the normal range but was below average.

In April 2015, a class of plaintiffs brought a putative securities class action against Emulex, Avago, the Merger Sub, and the Emulex Board of Directors (collectively, Defendants) alleging that Defendants violated various federal securities laws, including Section 14(e) of the Exchange Act, by failing to summarize the premium analysis in the recommendation statement.2 Plaintiffs alleged that a claim under Section 14(e) required only a showing that Defendants were negligent by failing to include the premium analysis in the recommendation statement. The District Court for the Central District of California disagreed, concluding that "the similarities between Rule 10b-5 and § 14(e) require a plaintiff bringing a cause of action under § 14(e) to allege scienter."3 In so holding, the District Court relied on decisions from five other Circuit Courts—the Second, Third, Fifth, Sixth, and Eleventh Circuits—that have held that Section 14(e) claims require scienter.4 The District Court dismissed the complaint with prejudice for failure to plead a strong inference of scienter in connection with the alleged violations of Section 14(e). Following that decision, Plaintiff appealed to the Ninth Circuit.


On appeal, a panel of the Ninth Circuit reversed the District Court's dismissal of the complaint and remanded the case for reconsideration of Defendants' motion to dismiss under a negligence standard. The Ninth Circuit disagreed with the district court's as well as the five Circuit Courts' interpretation of Section 14(e).

In making this determination, the Ninth Circuit relied on two decades-old Supreme Court decisions. In the first Supreme Court decision, Ernst & Ernst v. Hochfelder, the Supreme Court held that claims under Section 10(b) of the Exchange Act and Rule 10b-5 must allege scienter.5 In that case, the Supreme Court began by addressing the text of Rule 10b-5(b), which provides that "It shall be unlawful . . . [t]o make any untrue statement of a material fact or omit to state any material fact . . ." Interpreting that phrase, the Supreme Court stated that viewed in isolation, this "could be read as proscribing, respectively, any type of material misstatement or omission . . . whether the wrongdoing was intentional or not."6 In other words, Rule 10b-5(b) could be reasonably read as imposing a scienter or a negligence standard. Thus, said the Ninth Circuit, "Rule 10b-5(b)'s text, and by extension the identical phrasing in the first clause of Section 14(e), did not necessarily compel finding a scienter requirement."7

In Ernst & Ernst, the Supreme Court nonetheless went on to conclude that Rule 10b-5 requires a showing of scienter.8 The Ninth Circuit observed that the Supreme Court reached this conclusion given the relationship between Rule 10b-5 and its authorizing legislation, Section 10(b) of the Exchange Act. According to the Ninth Circuit, "Rule 10b-5 requires a showing of scienter because it is a regulation promulgated under Section 10(b) of the Exchange Act, which allows the SEC to regulate only 'manipulative or deceptive device[s].' This rationale regarding Rule 10b-5 does not apply to Section 14(e), which is a statute, not an SEC Rule."9

In concluding that only a negligence standard applies to Section 14(e), the Ninth Circuit also reasoned that Section 14(e) differs fundamentally from Section 10(b) because the SEC is authorized under Section 14(e) to regulate a broader array of conduct than under Section 10(b). According to the Ninth Circuit, "[i]f the SEC can prohibit 'acts themselves not fraudulent' under Section 14(e), then it would be somewhat inconsistent to conclude that Section 14(e) itself reaches only fraudulent conduct requiring scienter."10 Further, the Ninth Circuit noted that the legislative history of the Williams Act—under which Section 14(e) was added as an amendment to the Exchange Act—supports its interpretation with its "emphasis on the quality of information shareholders receive in a tender offer [rather] than on the state of mind harbored by those issuing a tender offer."11

The Ninth Circuit also relied on the Supreme Court's 1980 decision, Aaron v. SEC.12 That case involved the Supreme Court's interpretation of Section 17(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77a–77aa (the Securities Act).13 The Ninth Circuit noted that both Section 17(a)(2) and the first clause of Section 14(e) contain nearly identical wording, as each section prohibits "any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statement made . . . not misleading."14 The Ninth Circuit determined that because the Supreme Court in Aaron held that Section 17(a)(2) does not require a showing of scienter, neither does Section 14(e).15

At the same time, the Ninth Circuit expressed doubt about whether the particular omission alleged by Plaintiffs—the failure to include the premium analysis in the recommendation statement—was a material fact. The Ninth Circuit noted that it is "difficult to show that this omitted information was indeed material" and suggested that the level of culpability that Plaintiffs would need to demonstrate as something closer to gross negligence.16


In light of the Ninth Circuit's stark departure from five other Circuit Courts' interpretation of Section 14(e), this issue may eventually make its way up to the Supreme Court to resolve the current circuit split. In the meantime, we expect plaintiffs to file Section 14(e) cases in the Ninth Circuit wherever possible to avail themselves of the more plaintiff friendly negligence standard. Potential acquirers of public companies should be mindful of the changed landscape in the Ninth Circuit. While it is uncertain how Varjabedian will affect acquirers' behavior moving forward, it is possible that acquirers may begin to increase the level of detail and amount of information contained in disclosure documents, which already commonly run hundreds of pages long. The Ninth Circuit's decision, paired with the increase in federal court proxy cases in the current mergers and acquisition environment, instructs companies and their counsel to be more vigilant when preparing disclosure documents.


1. No. 16-55088, 2018 WL 1882905 (9th Cir. Apr. 20, 2018).

2. Section 14(e) provides that: "It shall be unlawful for any person 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 to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative." 15 U.S.C. § 78n(e).

3. Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226, 1233 (C.D. Cal. 2016), aff'd in part, rev'd in part and remanded, No. 16-55088, 2018 WL 1882905 (9th Cir. Apr. 20, 2018).

4. See, e.g., Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir. 2009); In re Digital Island Sec. Litig., 357 F.3d 322, 328 (3d Cir. 2004); SEC v. Ginsburg, 362 F.3d 1292, 1297 (11th Cir. 2004); Conn. Nat'l Bank v. Fluor Corp., 808 F.2d 957, 961 (2d Cir. 1987); Adams v. Standard Knitting Mills, Inc., 623 F.2d 422, 431 (6th Cir. 1980).

5. 425 U.S. 185, 193 (1976).

6. Id. at 212 (emphasis added).

7. Varjabedian, 2018 WL 1882905, at *5.

8. See 425 U.S. 185 at 212–14.

9. Varjabedian, 2018 WL 1882905, at *5 (internal citation omitted).

10. Id. at *7.

11. Id.

12. 446 U.S. 680 (1980).

13. Section 17(a)(2) provides that: "It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement . . . by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly . . . to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading." 15 U.S.C. § 77q(a)(2).

14. Varjabedian, 2018 WL 1882905, at *6.

15. 446 U.S. 680 at 696¬–97; Varjabedian, 2018 WL 1882905, at *6.

16. See id. at *8. In observing this, the Ninth Circuit cited Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009) ("{T}he plaintiff must plead a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions