United States: Justices Could Trigger Sea Change For Tender Offer Suits

This was originally published by Law360 on April 18, 2019.

On April 15, 2019, the U.S. Supreme Court heard oral argument in Emulex Corp. v. Varjabedian,1 a case that could significantly alter the landscape of tender offer litigation under Section 14(e) of the Securities Exchange Act of 1934.2 Emulex offers an opportunity for the court to take up key questions left unresolved by the court's prior precedent — first, the predicate question of whether Section 14(e) permits an inferred private right of action (an issue left unresolved in Piper v. Chris–Craft Industries Inc.3); and second, whether negligent misstatements and omissions, as opposed to those made with scienter, are sufficient to establish a violation of Section 14(e).

Oral arguments confirmed the potentially significant nature of the forthcoming Emulex decision, as well as the justices' sharp divide on these issues.

Section 14(e) regulates actions and statements made "in connection with any tender offer." In language similar to clause (b) of U.S. Securities and Exchange Commission Rule 10b-5, the first clause of Section 14(e) makes it "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." The second clause of Section 14(e) makes it unlawful for any person "to engage in any fraudulent, deceptive, or manipulative acts or practices" in connection with any tender offer, using language similar to clause (a) of Rule 10b-5.

In the case below, the U.S. District Court for the Central District of California rejected a stockholder plaintiff's claim that Emulex Corporation violated federal securities law by issuing a false and misleading Schedule 14D-9 recommendation statement in support of Avago's 2015 tender offer, applying a scienter standard. In the proposed transaction, Avago offered to pay $8 per share for Emulex's stock, reflecting a premium of 26.4% over Emulex's preannouncement stock price.

As the company considered the offer, Emulex's financial adviser prepared a premiums paid analysis for the Emulex board of directors, which showed that, while Emulex's 26.4% premium fell within the range of the semiconductor merger premiums for similar companies, it was below average. Nevertheless, Emulex's financial adviser found the proposed consideration fair to the company, and Emulex elected not to summarize the analysis in the Schedule 14D-9 filed with the SEC. The tender offer ultimately succeeded, but with close margins: only 60.58% of outstanding shares were tendered.

Stockholder plaintiffs sued Emulex, its board and Avago, claiming that the omission of the premiums paid analysis rendered Emulex's Scheduled 14D-9 false and misleading. The district court dismissed the action, finding that the "simple omission" of the premiums paid analysis alone failed to raise "an inference of scienter." The U.S. Court of Appeals for the Ninth Circuit reversed that decision, concluding that claims premised on Section 14(e)'s first clause require "a showing of negligence, not scienter." The Ninth Circuit's decision broke with the uniform holdings of five other courts of appeals, all of which applied the scienter standard. The Supreme Court granted certiorari on whether Section 14(e) "supports an inferred private right of action based on a negligent misstatement or omission made in connection with a tender offer."

In Emulex's briefing before the Supreme Court, Emulex also raised the predicate issue of whether the Ninth Circuit erred in inferring a private right of action because Section 14(e) lacks any of the necessary "rights-creating language," and because the Exchange Act's express creation of certain private causes of action creates a presumption against any implied right under Section 14(e). In addition, Emulex took on the Ninth Circuit's central holding, arguing that, by finding that Section 14(e) encompassed negligent conduct, the Ninth Circuit misread the statutory language.

On that latter issue, the stockholders' briefing emphasized Section 14(e)'s two separate and distinct clauses, and the court's decision in Aaron v. Securities and Exchange Commission,4 which held that negligence would violate the prohibition on material misstatements in Section 17(a) of the Exchange Act. Because Aaron predated Congress' enactment of the similar language in Section 14(a) (applicable to proxy statements), the stockholders argued that Congress intended Section 14(a), like Section 17(a), to extend to negligent acts.

On the question of an inferred private right of action, the stockholders argued both that Emulex waived the issue by failing to raise it below and that the issue had already been resolved in J.I. Case Co. v. Borak,5 where the court decided that the substantively identical Section 14(a) creates an inferred right of action.

Oral arguments in Emulex focused primarily on the predicate issue of whether Section 14(e) created an implied right of action. Certain justices, particularly Justices Sonia Sotomayor and Samuel Alito, questioned Emulex's counsel on the propriety of entertaining that argument, given that it had not been raised before the Central District of California or the Ninth Circuit. In response, counsel for Emulex cited Central Bank of Denver v. First Interstate Bank of Denver,6 a decision in which the court resolved the appeal on an issue first raised by the court itself, rather than the parties.

Emulex argued that it had presented the question in the petition for certiorari, and part of the court's grant of certiorari expressly included whether Section 14(e) "supports an inferred private right of action." By contrast, counsel for the stockholders argued that Emulex impliedly conceded an inferred right of action by not raising the issue below, making Central Bank distinguishable. Chief Justice John Roberts and Justice Neil Gorsuch pushed back against this argument, reminding stockholders' counsel that Ninth Circuit precedent recognizes a private right of action, rendering any argument Emulex could have raised against that right in the prior proceedings futile.

Justice Elena Kagan then raised the court's decision in Cannon v. University of Chicago,7 as applicable to Section 14(e). There, the court held that congressional silence in the face of earlier interpretations inferring a private right of action could provide a basis for the implication of one involving similar language. Justice Kagan stated that, under Cannon, if Congress repeats language that the court has already held to create an implied private right of action, "then that counts as a pretty strong indicator that Congress has meant for the same result to obtain."

Stockholders' counsel also relied on the court's decision in J.I. Case Co. v. Borak,8 which recognized an implied private right of action in Section 14(a) cases. Counsel for Emulex responded by emphasizing the court's subsequent holding in Alexander v. Sandoval,9 which cast doubt on Borak and similar decisions that have inferred private rights of action in the absence of supportive statutory language.

Chief Justice Roberts echoed this argument and quoted the late Justice Antonin Scalia who characterized Borak as an "ancient regime." Stockholders' counsel agreed that Borak might have been decided differently today, but argued that Congress enacted Section 14(e) with knowledge of the inferred right under Section 14(a)'s closely matched language. However, certain justices expressed discomfort with the entire notion of an implied right of action, including Justice Brett Kavanaugh, who focused on Section 14(e)'s plain text.

On the issue of the appropriate state of mind, to which the parties and the court gave far less attention during oral arguments, counsel for Emulex restated the importance of Rule 10b-5's scienter requirement, and warned that enlarging Section 14(e) to encompass negligence would cause tender offer litigation to proliferate, and prompt a counterproductive "document dump" on stockholders. Counsel for the stockholders, by contrast, rested his argument on Section 14(e)'s plain language, which does not impose any scienter requirement.

As the justices' commentary at oral argument indicated, Emulex presents a clear opportunity for the court to answer an issue left unresolved in the court's prior precedent: whether Section 14(e) creates an inferred right of action. That gating issue gained unexpected preeminence in the parties' merits briefing and at oral arguments, but the tenor of the justices' questioning left the tea leaves difficult to decipher.

On the one hand, the court often looks to resolve cases on the narrowest possible ground, and finding no inferred private right of action would obviate the court's need to determine the complicated culpability questions. In order to reach that result, the justices would have to address Section 14(e)'s similarities to Section 14(a), and harmonize the court's holdings in Cannon, Borak and Sandoval.

Likewise, Emulex never raised this issue below, and the court generally avoids reaching issues not presented below. Justices Sotomayor and Alito expressly addressed the preservation issue, but Chief Justice Roberts and Justice Gorsuch appeared less concerned. Nevertheless, because courts of appeals have uniformly concluded that Section 14(e) creates an inferred private right of action, a decision in Emulex's favor on this issue seems unlikely, given the seemingly settled nature of the law.

Interestingly, the justices' questioning focused far less on the culpability question, the more closely watched question by practitioners. The court's recent decision in Lorenzo v. Securities and Exchange Commission,10 may provide some indication of where the majority of justices stand on the scope of liability under the federal securities laws. In Lorenzo, a 6-2 majority of the court expanded the scope of liability under Rule 10b-5, by concluding that the dissemination of false or misleading statements could trigger liability for fraudulent schemes and practices under Rule 10b-5(a) and (c), even if the disseminator of that information could not be liable for making the statements under Rule 10b-5(b).

Justices Gorsuch and Clarence Thomas dissented from that decision, and although Justice Kavanaugh took no part in the court's consideration, he dissented in the underlying decision as a then-judge of the U.S. Court of Appeals for the D.C. Circuit. The Lorenzo decision makes clear that the court will not reflexively reject expanded liability in the securities context. The question will be whether the court believes negligence-based liability is consistent with the statutory scheme.

As with nearly all oral arguments, the ultimate outcome remains unknown. The tenor of the justices questioning certainly suggests that the court may be prepared to address the threshold issue of whether a private right of action may be inferred under Section 14(e).

As for the issue of the proper standard for assessing culpability under Section 14(e), a decision reversing the Ninth Circuit's decision on the merits would preserve the status quo across on this issue as it had been understood for decades by the courts of appeals. By contrast, an affirmance on that issue could result in a dramatic increase in the number of class action suits involving disclosure claims under Section 14(e) in federal district courts, as we have already seen under Section 14(a), given certain developments in the Delaware Court of Chancery.


1 Emulex Corp. v. Varjabedian, No. 18-459

2 15 U.S.C. § 78n(e)

3Piper v. Chris–Craft Industries Inc. , 430 U.S. 1 (1977)

4 Aaron v. Securities and Exchange Commission , 446 U.S. 680 (1980)

5 J.I. Case Co. v. Borak , 377 U.S. 426 (1964)

6 Central Bank of Denver v. First Interstate Bank of Denver , 511 U.S. 164 (1994)

7 Cannon v. University of Chicago , 441 U.S. 677 (1979)

8 J.I. Case Co. v. Borak, 377 U.S. 426 (1964)

9 Alexander v. Sandoval , 532 U.S. 275 (2001)

10 Lorenzo v. Securities and Exchange Commission , 139 S. Ct. 1094 (2019)

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.

In association with
Related Topics
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