Supreme Court Review for Deal-Related Shareholder Litigation

George T. Conway, III is of counsel and David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

In an important development that may ultimately provide relief from some frivolous deal-related shareholder litigation in federal courts, the Supreme Court agreed to decide a case that could bring an end to private actions under Section 14(e) of the Securities Exchange Act of 1934, the general anti-fraud provision that governs tender offers. Emulex Corp. v. Varjabedian, No. 18–459 (U.S.).

As we explained in a memo last April, the case arose from the acquisition of a public company, Emulex, by a tender offer. The plaintiffs sued to enjoin the deal and for damages. After the district court denied a preliminary injunction and dismissed the complaint, the Ninth Circuit reversed the dismissal. And in doing so, the court of appeals created a square circuit conflict—it held that only negligence was required to state a Section 14(e) claim, in contrast to six other circuits, which require scienter, an actual intent to defraud.

In petitioning for certiorari, Emulex cited this circuit split, and argued that the Supreme Court should grant review to hold that scienter is required. But in a separate amicus brief that our Firm prepared, the United States Chamber of Commerce went a significant step further: The Chamber argued that the recognition of any private right of action at all under Section 14(e) defies long-standing Supreme Court precedents on implying private rights of action. Those precedents make clear that, if Congress shows no intent to create a private right, then “a cause of action does not exist and courts may not create one, no matter how desirable that might be as a policy matter.” Indeed, as then-Circuit Judge Kavanaugh noted recently for the D.C. Circuit, since 1975, “the Supreme Court has been very hostile to implied rights of action.” Section 14(e) provides not even the slightest hint of a private right. And by inexplicably continuing to infer one, the lower courts have essentially ignored the Supreme Court—for decades.

Yet, however the Court decides the case, it should prove to be important for mergers-and-acquisitions practitioners. Emulex exemplifies a trend apparent since Delaware’s crackdown (which we describe here) on the disclosure settlement racket: Deal disclosure cases have flooded into other states and into federal court. In deals involving tender offers, the legal vehicle of choice has been Section 14(e). If the Ninth Circuit’s decision endorsing a negligence standard is allowed to stand, the ongoing flood of tender-offer disclosure cases into the federal courts could become a deluge. But if it is reversed, and depending on how, that flood could be slowed—or altogether stemmed.

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