Ninth Circuit Court of Appeals Holds That Negligence Applies in Section 14(e) Cases

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) (the “Exchange Act”), which governs tender offers, requires a showing of negligence, not scienter. The Ninth Circuit’s decision brings the standard of liability for tender offers in line with a case involving proxy statements and stockholder votes.

W. Scott Holleman, a partner in the New York office of Johnson Fistel, LLP who handles the firm’s merger litigation practice, commented on the Ninth Circuit’s decision. “This is a good decision for stockholders, and we’re pleased that the court decided to apply the same negligence standard regardless of whether stockholders are asked to vote on a deal or tender their shares.”

In February 2015, Emulex Corp. (“Emulex”) and Avago Technologies Wireless Manufacturing, Inc. (“Avago”) announced that they had entered into a merger agreement under which Avago would acquire Emulex for $8.00 per share in cash. Emulex and Avago structured the acquisition as a tender offer, which an affiliate of Avago would commence shortly after the deal was announced.

Avago’s affiliate commenced the tender offer in early April 2015, and the offer closed and the deal was completed in early May 2015.

In response to the acquisition, a group of Emulex stockholders filed suit in federal court, alleging that Emulex, its board of directors, and Avago and its affiliate violated the federal securities laws, including Section 14(e), which mandates that tender offer documents not contain any material misrepresentations or omit any material information in such a manner as to render the tender offer documents misleading.

The defendants moved to dismiss the plaintiffs’ complaint, arguing, among other things, that the plaintiffs had not adequately alleged “scienter,” which is a state of mind tantamount to fraud or bad faith.

Although other courts have held that scienter applied in cases where a merger was accomplished through a tender offer, the law governing cases involving proxy statements and stockholder votes requires only a showing of negligence.

The plaintiffs argued to the trial court that negligence should apply, but the trial court sided with the defendants and dismissed the case. The plaintiffs appealed, however, and the Ninth Circuit Court of Appeals reversed the trial court’s decision and reinstated the case.

The Ninth Circuit held that Section 14(e) required only a showing of negligence, not scienter, based on several grounds. The court looked at, among other things, the legislative history and circumstances surrounding the Williams Act, which brought about Section 14(e), and the court also regarded the text of Section 14(e) as being similar to a different section of the Exchange Act which did not require a showing of scienter.

Johnson Fistel is a law firm recognized throughout the country as a leader in complex business litigation. Our lawyers are highly adept at all stages of commercial litigation, having represented clients ranging from individuals and small businesses to publicly-traded companies. Our interests are aligned with those of our clients. Their success determines our own.

If you would like to discuss this decision, or if you are a stockholder and have any questions about your rights with respect to certain transactions, please do not hesitate to contact Johnson Fistel at (619) 230-0063.

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