Ninth Splits with Five Sister Circuits in Holding that §14(e) Claims Require Negligence, Not Scienter, to State a Claim

On April 20, 2018, a Ninth Circuit Court of Appeals panel (Graber, Murguia and Christen, JJ.) broke ranks with five other circuit courts in holding that "Section 14(e) of the Exchange Act requires a showing of negligence, not scienter." Varjabedian v. Emulex Corp., No. 16-55088, Opinion at 4 (9th Cir. Apr. 20, 2018). The panel also affirmed the district court's decision that section 14(d)(4) does not establish a private right of action for shareholders confronted with a tender offer.

The underlying complaint alleged that the defendant Emulex Corp. issued a materially false and misleading tender offer statement that failed to fully include a one-page premium analysis summary by Emulex's investment bank, Goldman Sachs & Co., which allegedly demonstrated the transaction value was below average compared to similar mergers. Opinion at 7. The district court dismissed the complaint, holding that section 14(e) requires a showing of scienter and section 14(d)(4) does not establish a private right of action.

In reversing the district court's dismissal of the Section 14(e) claim—and creating a circuit split with five other circuit courts – the Ninth Circuit panel explained that its holding that Section 14(e) requires negligence rather than scienter is supported by the Williams Act, which "places more emphasis on the quality of information shareholders receive in a tender offer than on the state of mind harbored by those issuing a tender offer." Opinion at 17–18.

Practitioners should be aware that the Ninth Circuit's Varjabedian's holding directly conflicts with authority in the Second, Third, Fifth, Sixth and Eleventh Circuits. 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).

Practitioners should also watch Varjabedian for either a petition for rehearing en banc or Supreme Court petition in light of the circuit split.

Danielle Myers is a partner at Robbins, Geller, Rudman & Dowd LLP in San Diego, California.

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