Amicus Curiae Brief — Emulex Corporation, et al., Petitioners v. Gary Varjabedian, et al.
Supreme Court briefFeb 26, 2019
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No. 18-459
IN THE
Supreme Court of the United States
_____________________________
EMULEX CORPORATION, ET AL.,
Petitioners,
v.
GARY VARJABEDIAN AND JERRY MUTZA,
Respondents.
______________________________
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE NINTH CIRCUIT
BRIEF OF THE SECURITIES INDUSTRY AND
FINANCIAL MARKETS ASSOCIATION AS
AMICUS CURIAE IN SUPPORT OF PETITIONERS
Kevin Carroll
SECURITIES INDUSTRY
AND FINANCIAL
MARKETS
ASSOCIATION
1101 New York Avenue,
N.W.
8th Floor
Washington, D.C. 20005
(202) 962-7300
William M. Regan
Marc J. Gottridge
Counsel of Record
Allison M. Wuertz
HOGAN LOVELLS US
LLP
875 Third Avenue
New York, N.Y. 10022
(212) 918-3000
marc.gottridge@
hoganlovells.com
Counsel for Amicus Curiae SIFMA
ii
TABLE OF CONTENTS
TABLE OF AUTHORITIES......................................IV
INTEREST OF AMICUS CURIAE.............................1
INTRODUCTION AND SUMMARY OF
ARGUMENT ..........................................................2
ARGUMENT ...............................................................5
I. THE NINTH CIRCUIT ERRED BY ADOPTING A
NEGLIGENCE STANDARD FOR
SHAREHOLDER CLAIMS UNDER § 14(e) OF
THE EXCHANGE ACT. ..........................................6
A. The Ninth Circuit’s Negligence
Standard Is Inconsistent with the
Plain Text of the Statute.............................6
B. Congressional Intent Confirms That
§ 14(e) Claims Require Scienter. .............. 10
II. A NEGLIGENCE STANDARD WILL FURTHER
ENCOURAGE AND FEDERALIZE MERGER
OBJECTION LITIGATION.................................... 11
A. Trulia Eliminates Delaware as a
Friendly Forum for Merger Objection
Suits. .......................................................... 14
B. The Plaintiffs’ Bar Shifts Merger
Objection Suits to Federal Court. ............. 16
C. The Plaintiffs’ Bar Forum Shops
Within the Federal Court System. ........... 18
iii
III.OTHER POLICY CONSIDERATIONS STRONGLY
FAVOR A SCIENTER STANDARD FOR § 14(e)
CLAIMS............................................................. 19
A. A Negligence Standard for § 14(e)
Increases the Risk of Over-Disclosure...... 19
B. A Negligence Standard for § 14(e)
Violations Will Chill Tender Offers. ......... 22
C. A Negligence Standard for § 14(e)
Undercuts Settled Mergers and
Acquisitions Law. ...................................... 25
CONCLUSION .......................................................... 28
iv
TABLE OF AUTHORITIES
Federal Cases
Adams v. Standard Knitting Mills, Inc.,
623 F.2d 422 (6th Cir.), cert. denied, 449 U.S.
1067 (1980) ...................................................... 7, 10, 25
Alexander v. Sandoval,
432 U.S. 275 (2001) .....................................................6
Amgen Inc. v. Conn. Ret. Plans & Tr. Funds,
568 U.S. 455 (2013) .....................................................1
Biotechnology Value Fund, L.P. v. Celera Corp., No.
C 13-03248 WHA,
2014 WL 988913 (N.D. Cal. Mar. 10, 2014) ............. 27
Cent. Bank of Denver, N.A. v. First Interstate Bank
of Denver, N.A.,
511 U.S. 164 (1994) ................................................... 28
Chadbourne & Parke LLP v. Troice,
571 U.S. 377 (2014) .....................................................1
Chris-Craft Indus., Inc. v. Piper Aircraft Corp.,
480 F.2d 341 (2d Cir.), cert. denied, 414 U.S. 910
(1973) ..................................................................... 7, 10
Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund,
583 U.S. ___, 138 S. Ct. 1061 (2018)...........................1
In re Digital Island Sec. Litig.,
357 F.3d 322 (3d Cir. 2004)............................... 6, 7, 20
Erica P. John Fund, Inc. v. Halliburton Co.,
563 U.S. 804 (2011) .....................................................1
Ernst & Ernst v. Hochfelder,
425 U.S. 185 (1976) ................................................... 20
Gabelli v. SEC,
570 U.S. 254 (2011) .....................................................1
v
In re Goodyear Tire & Rubber Co. Sec. Litig.,
No. CIV. A. 88-8633, 1993 WL 130381
(E.D. Pa. Apr. 22, 1993),
aff’d, 16 F.3d 403 (3d Cir. 1993) ........................... 4, 21
In re Hatteras Fin., Inc., S’holder Litig.,
286 F. Supp. 3d 727 (M.D.N.C. 2017)....................... 17
Janus Capital Grp., Inc. v. First Derivative
Traders,
564 U.S. 135 (2011) ................................................... 27
Lorillard v. Pons,
434 U.S. 575 (1978) ................................................... 10
Matrixx Initiatives, Inc. v. Siracusano,
563 U.S. 27 (2011) .......................................................2
Merrill Lynch, Pierce, Fenner & Smith, Inc. v.
Curran,
456 U.S. 353 (1982) ................................................... 10
Mills v. Electric Auto-Lite Co.,
296 U.S. 375 (1970) ................................................... 25
Omnicare, Inc. v. Laborers Dist. Council Constr.
Indus. Pension Fund,
575 U.S. ___, 135 S. Ct. 1318 (2015)...........................1
Prudent Real Estate Tr. v. Johncamp Realty, Inc.,
599 F.2d 1140 (2d Cir. 1979)..................................... 20
Rosenfeld v. Time Inc.,
No. 17CV9886 (DLC),
2018 WL 4177938 (S.D.N.Y. Aug. 30, 2018)............. 17
SEC v. Ginsburg,
362 F.3d 1292 (11th Cir. 2004) ........................... 6, 7, 8
Schreiber v. Burlington N., Inc.,
472 U.S. 1 (1985) ................................................... 8, 20
Seaboard World Airlines, Inc. v. Tiger Int’l, Inc.,
600 F.2d 355 (2d Cir. 1979)....................................... 20
vi
Smallwood v. Pearl Brewing Co.,
489 F.2d 579 (5th Cir. 1974) ................................. 7, 10
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
Inc.,
552 U.S. 148 (2008) ................................................... 28
TSC Indus., Inc., v. Northway, Inc.,
426 U.S. 438 (1976) ....................................... 20, 21, 25
United States v. Morton,
467 U.S. 822 (1984) .....................................................9
In re Walgreen Co. Stockholder Litig.,
832 F.3d 718 (7th Cir. 2016) ............................... 13, 17
State Cases
In re 3Com S’holders Litig.,
Civil Action No. 5067-CC,
2009 WL 5173804 (Del. Ch. Dec. 18, 2009) .............. 26
Acevedo v. Aeroflex Holding Corp.,
No. 7930-VCL,
2015 WL 4127547 (Del Ch. July 8, 2015) ................. 15
Arnold v. Soc’y for Sav. Bancorp, Inc.,
650 A.2d 1270 (Del. 1994) ......................................... 22
In re Aruba Networks, Inc. Stockholders Litig.,
No. 10765-VCL (Del. Ch. Oct. 9, 2015)
(Transcript).......................................................... 14, 15
Assad v. World Energy Sols., Inc.,
No. 10324-CB (Del. Ch. Aug. 20, 2015)
(Transcript).......................................................... 14, 15
Dent v. Ramtron Int’l Corp.,
C.A. No. 7950-VCP, 2014 WL 2931180 (Del. Ch.
June 30, 2014) ........................................................... 26
Lee v. Pincus,
C.A. No. 8458-CB, 2014 WL 6066108 (Del. Ch.
Nov. 14, 2014)............................................................ 27
vii
Malpiede v. Townson,
780 A.2d 1075 (2001)................................................. 26
In re Micromet Inc. S’holders Litig.,
C.A. No. 7197-VCP, 2012 WL 681785 (Del. Ch.
Feb. 29, 2012) ............................................................ 22
In re Riverbed Tech., Inc. Stockholders Litig.,
No. 10484-VCG (Del Ch. July 27, 2015)
(Transcript)................................................................ 15
In re Trulia, Inc. Stockholder Litig.,
129 A.3d 884 (Del. Ch. 2016) .......................... 4, 15, 16
In re Zale Corp. Stockholders Litig.,
C.A. No. 9388-VCP, 2015 WL 6551418 (Del. Ch.
Oct. 29, 2015)............................................................. 26
Federal Statutes
15 U.S.C. § 78n(e) ......................................................... 8, 9
Securities Litigation Uniform Standards Act, Pub
L. No. 105-353, 112 Stat. 3227 (1998) ...................... 10
Private Securities Litigation Reform Act, Pub. L.
No. 104-67, 109 Stat. 737 (1995)............................... 10
The Williams Act, Pub. L. No. 90-439, 82 Stat. 455...... 20
Legislative Materials
S. Rep. No. 105-182 (1998) ............................................. 11
S. Rep. No. 104-98 (1995) ............................................... 10
S. Rep. No. 90-550 (1967) ......................................... 22, 23
Rules
17 C.F.R. § 240.14d-1(c) (2019) ...................................... 24
17 C.F.R. § 240.14d-10.................................................... 23
17 C.F.R. § 240.14e-8(c) (2019)....................................... 24
viii
Secondary Sources
Matthew D. Cain & Steven Davidoff Solomon, A
Great Game: The Dynamics of State Competition
and Litigation,
100 Iowa L. Rev. 465 (2015)...................................... 13
Matthew D. Cain et al., The Shifting Tides of
Merger Litigation,
71 Vand. L. Rev. 603 (2018) ................................ 11, 13
Matthew D. Cain & Steven Davidoff Solomon,
Takeover Litigation in 2015,
Berkeley Cent. for L. Bus. Econ. (Jan. 14, 2016),
https://ssrn.com/abstract=2715890........................... 17
Jill E. Fisch et al., Confronting the Peppercorn
Settlement in Merger Litigation: An Empirical
Analysis and A Proposal for Reform,
93 Tex. L. Rev. 557 (2015)................................... 12, 13
Browning Jeffries, The Plaintiffs’ Lawyer’s
Transaction Tax: The New Cost of Doing
Business in Public Company Deals,
11 Berkeley Bus. L.J. 55 (2014).......................... 12, 14
Geoffrey A. Manne, The Hydraulic Theory of
Disclosure Regulation and Other Costs of
Disclosure, 58 Ala. L. Rev. 473 (2007) ...................... 21
David Offenberg & Christo Pirinsky, How Do
Acquirers Choose between Mergers & Tender
Offers?, 116 J. Fin. Econ. 331 (2015) ........................ 24
Troy A. Paredes, Blinded by the Light:
Information Overload and Its Consequences
for Securities Regulation,
81 Wash. U. L.Q. 417 (2003) ..................................... 19
ix
Elliott J. Weiss & Lawrence J. White, File Early,
Then Free Ride: How Delaware Law
(Mis)shapes Shareholder Class Actions,
57 Vand. L. Rev. 1797 (2004) .................................... 12
Annual Report Statistics, Del. Division of Corps.,
https://corp.delaware.gov/stats/ ..................................9
Cornerstone Research, Securities Class Action
Filings: 2018 Year in Review (Jan. 30, 2019),
https://www.cornerstone.com/Publications/Repor
ts/Securities-Class-Action-Filings-2018-Year-inReview........................................................................ 18
Cornerstone Research, Shareholder Litigation
Involving Acquisitions of Public Companies:
Review of 2017 M&A Litigation (2018),
https://www.cornerstone.com/Publications/
Reports/Shareholder-Litigation-InvolvingAcquisitions-of-Public-Companies-Reviewof-2017-M-and-A-Litigation .................... 13, 14, 16, 17
NERA, Recent Trends in Securities Class Action
Litigation: 2016 Full-Year Review (Jan. 23,
2017), https://www.nera.com/content/dam/nera
/publications/2017/PUB_2016_Securities_YearEnd_Trends_Report_0117.pdf .................................. 17
NERA, Recent Trends in Securities Class Action
Litigation: 2018 Full-Year Review (Jan. 29,
2019), https://www.nera.com/content/dam/nera
/publications/2019/PUB_Year_End_Trends_012
819_Final.pdf................................................. 16, 17, 18
Treatise
Thomas L. Hazen, Treatise on the Law of Securities
Regulation § 1:16 (7th ed. 2017) ............................... 20
INTEREST OF AMICUS CURIAE1
The Securities Industry and Financial Markets
Association (“SIFMA”) is the leading securities
industry trade association, representing the interests
of more than 650 securities firms, banks, and asset
managers. SIFMA’s mission is to support a strong
financial industry while promoting investor
opportunity, capital formation, job creation, economic
growth, and trust and confidence in the financial
markets. SIFMA works to represent its members’
interests locally and globally – it has offices in New
York and Washington, D.C. and is the U.S. regional
member of the Global Financial Markets Association.
On behalf of the industry’s nearly one million
employees, SIFMA advocates on issues affecting
retail and institutional investors, equity and fixed
income markets, and related products and services.
To further that mission, SIFMA regularly files
amicus briefs in cases that raise issues of concern to
securities industry participants. See, e.g., Cyan, Inc.
v. Beaver Cty. Emps. Ret. Fund, 583 U.S. ___, 138 S.
Ct. 1061 (2018); Omnicare, Inc. v. Laborers Dist.
Council Constr. Indus. Pension Fund, 575 U.S. ___,
135 S. Ct. 1318 (2015); Chadbourne & Parke LLP v.
Troice, 571 U.S. 377 (2014); Amgen Inc. v. Conn. Ret.
Plans & Tr. Funds, 568 U.S. 455 (2013); Gabelli v.
SEC, 570 U.S. 254 (2011); Erica P. John Fund, Inc.
1
All parties consented to the filing of this brief. This brief
was not authored in whole or in part by counsel for any party,
and no person or entity other than SIFMA, its members, or its
counsel made a monetary contribution intended to fund the
preparation or submission of this brief.
2
v. Halliburton Co., 563 U.S. 804 (2011); Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011).
The issues raised by this appeal are of vital
importance to SIFMA and its members. The
plaintiffs-side securities class action bar files
lawsuits challenging the vast majority of U.S. public
company merger transactions. These “merger
objection” suits frequently focus on the financial
advice provided to the seller’s board of directors –
stockholders routinely allege that the financial
advisors’ analyses were flawed and accompanied by
inadequate or incomplete disclosures. The financial
analyses targeted in these “merger objection” class
actions typically are provided by SIFMA members.
Until recently, stockholders filed most “merger
objection” class actions in state court under theories
based on state law. Since early 2016, however, and
for reasons discussed more fully below, stockholders
have changed strategies and now are filing “merger
objection” cases in federal court invoking § 14 of the
Securities Exchange Act of 1934 (the “Exchange
Act”). The appeal here concerns § 14(e), the
subsection of the statute governing mergers
completed by tender offer. The Ninth Circuit’s
decision erroneously adopting a negligence standard
for § 14(e) claims will, if upheld, have an enormous
impact on the mergers and acquisitions industry and
especially on financial advisors.
INTRODUCTION AND
SUMMARY OF ARGUMENT
The Ninth Circuit incorrectly held that a
stockholder asserting a claim under § 14(e) of the
Exchange Act is required to plead and prove facts
showing that the defendant, in making a false
statement or misleading omission in connection with
3
a tender offer, was merely negligent. This Court
should reverse the Ninth Circuit and hold that
§ 14(e) claims require a showing of scienter – the
intent to deceive investors – for several reasons.
First, to reach its conclusion that mere negligence
is sufficient to state a claim for money damages
under § 14(e), the Ninth Circuit improperly focused
on a single clause in the opening sentence of the
statute, while ignoring the overall context and
structure of § 14(e). As every other court that has
addressed the issue over forty years has found,
§ 14(e) – when the plain text is read in context and
as a whole – is an anti-fraud statute that was
modeled on Rule 10b-5. In addition to the text of the
statute, this conclusion is supported by the
congressional record since the adoption of § 14(e),
which shows Congress repeatedly chose not to amend
§ 14(e) to impose a negligence standard after
multiple courts interpreted the statute to require
scienter.
Second, the Ninth Circuit’s negligence standard
will encourage and federalize frivolous “merger
objection” litigation. The elements of a § 14(e) claim
have become critically important given recent
developments in the “merger objection” litigation
industry. “Merger objection” suits have been around
for many decades, but beginning in or around 2000,
plaintiffs-side securities class action firms began
filing an increasing number of lawsuits challenging
the vast majority of public company merger
transactions. By 2015, more than 90% of all public
company deals were targeted with “merger objection”
litigation. The vast majority of these cases were filed
in state court, most frequently in Delaware.
4
In early 2016, however, the Delaware Chancery
Court issued the landmark decision In re Trulia, Inc.
Stockholder Litigation, 129 A.3d 885 (Del. Ch. 2016),
which discouraged stockholders from bringing
“merger objection” litigation in state court by
limiting “disclosure only” settlements (discussed
below). To avoid the impact of the Trulia decision,
stockholders began filing their “merger objection”
suits in federal court, relying on § 14 of the Exchange
Act. As a result, the number of “merger objection”
cases in federal courts has more than doubled since
2016. “Merger objection” litigation has become a
federal court and federal law problem that likely will
be exacerbated if stockholders can state viable
causes of action based on allegations of mere
negligence.
Third, other important policy considerations
strongly support requiring a scienter standard for
claims under § 14(e). For example, the Ninth
Circuit’s negligence standard creates a substantial
risk of over-disclosure. If merger participants can be
held personally liable for money damages in multibillion dollar merger transactions solely on the basis
of negligent omissions, merger parties are likely to
err on the side of extreme caution and include in
already voluminous tender offer documents every
potential fact that a stockholder, with the benefit of
hindsight, could claim was significant in some way.
A negligence standard encourages parties to “bury
shareholders in an avalanche of trivial information.”2
2
In re Goodyear Tire & Rubber Co. Sec. Litig., No. CIV.
A. 88-8633, 1993 WL 130381, at *6 (E.D. Pa. Apr. 22, 1993),
aff’d, 16 F.3d 403 (3d Cir. 1993).
5
Similarly, a negligence standard creates a
potential chilling effect on tender offers that are
beneficial to the financial markets in general and
stockholders in particular. The potential for massive
liability arising from an inadvertent omission may
cause bidders to refrain from conducting tender
offers to replace an entrenched but inefficient
management team. A decline in tender offers hurts
the market generally and shareholders in particular.
Finally, the Ninth Circuit’s adoption of a
negligence standard undercuts settled rules in the
law of mergers and acquisitions. For example,
Delaware law has long held that merger parties
must provide stockholders with a “fair summary” of
any fairness opinion provided by a financial advisor,
while at the same time rejecting claims that seek
disclosure of the minutiae and underlying details
and assumptions relating to a financial advisor’s
analysis. The Ninth Circuit’s negligence standard
creates a strong incentive to disclose every
conceivable fact relating to a fairness opinion and not
merely a “fair summary.”
ARGUMENT
U.S. public companies implement M&A
transactions through a variety of legal mechanisms.
The mechanism chosen for any particular merger
transaction depends on an array of factors, including
tax, regulatory, and financial issues. One common
structure is the tender offer. In a tender offer, the
buyer goes directly to the target’s stockholders and
offers to purchase their shares, typically at a
premium to the prevailing market price. Tender
offers may be used in connection with both hostile
and friendly mergers. Stockholder disclosures in the
tender offer context are governed by state law as well
6
as federal law, in particular § 14(e) of the Exchange
Act and the SEC’s rules promulgated thereunder.3
Merger transactions are obviously significant
events in the life of public companies, posing
economic risks for boards of directors, management,
employees, stockholders and creditors. Capitalizing
on these risks, the plaintiffs-side securities class
action bar has developed a litigation strategy
designed to extract quick settlements from merger
participants by threatening the parties’ ability to
timely close on agreed transactions, even where the
underlying claims lack merit. As explained below,
this Court should hold that claims under § 14(e)
require scienter because the Ninth Circuit’s
negligence standard is not supported by the text of
§ 14(e), case law, congressional intent, or public
policy.
I.
THE NINTH CIRCUIT ERRED BY ADOPTING A
NEGLIGENCE STANDARD FOR SHAREHOLDER
CLAIMS UNDER § 14(e) OF THE EXCHANGE ACT.
A.
The Ninth Circuit’s Negligence
Standard Is Inconsistent with the Plain
Text of the Statute.
In adopting a negligence standard for § 14(e), the
Ninth Circuit expressly acknowledged that it was
rejecting past decisions by the Second, Third, Fifth,
3
This Court has never held that there is an implied private
right of action under § 14(e). The Ninth Circuit assumed that
such a private right of action exists without analyzing the issue
under Alexander v. Sandoval, 532 U.S. 275, 287 (2001). See
Pet. App. 19a. The Court may reverse the Ninth Circuit for the
separate and independent reason that that there is no implied
private right of action under § 14(e).
7
Sixth, and Eleventh Circuits, all of which require
scienter as an element of a § 14(e) claim.4
The circuits adopting a scienter standard have
correctly emphasized the similarities between § 10(b)
(15 U.S.C. § 78j), which requires scienter, and
§ 14(e).5 In Chris-Craft Industries, for example, the
Second Circuit stated that although § 14(e) applied to
tender offers while § 10(b) applied to the purchase or
sale of securities, “the underlying proscription of
§ 14(e) is virtually identical to . . . Rule 10b-5.” 470
F.2d at 362. The following year, the Fifth Circuit
also concluded that the elements of a § 14(e) violation
and a § 10(b) violation “are identical.” Smallwood,
489 F.2d at 606.
The Sixth Circuit next adopted a scienter
standard for § 14(e). Adams, 623 F.2d at 431. There,
analyzing the plain language of § 14(e), the Sixth
Circuit held that the “language of the Williams Act
clearly demonstrations that Congress envisioned
scienter” to be required to prove a § 14(e) violation.
Id.
Over 20 years later, the Third Circuit joined the
Second, Fifth, and Sixth, again comparing § 14(e) to
§ 10(b) and concluding that the two should be
4
See SEC v. Ginsburg, 362 F.3d 1292, 1297-98 (11th Cir.
2004); In re Digital Island Sec. Litig., 357 F.3d 322, 328 (3d Cir.
2004); Adams v. Standard Knitting Mills, Inc., 623 F.2d 422,
428-29, 431 (6th Cir.), cert. denied, 449 U.S. 1067 (1980);
Smallwood v. Pearl Brewing Co., 489 F.2d 579, 596, 605 (5th
Cir. 1974); Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480
F.2d 341, 362 (2d Cir.), cert. denied, 414 U.S. 910 (1973).
5
See Ginsburg, 362 F.3d at 1298; In re Digital Island Sec.
Litig., 357 F.3d at 328; Adams, 623 F.2d at 432; Smallwood,
489 F.2d at 596; Chris-Craft Indus., Inc., 480 F.2d at 363-64.
8
“construed . . . consistently.” In re Digital Island Sec.
Litig., 357 F.3d at 328. That same year, the
Eleventh Circuit adopted a scienter standard.
Ginsburg, 362 at 1297 (“In order to establish liability
under § 10(b) and § 14(e) . . ., the SEC must prove
that Ginsburg acted with scienter. . . . .”). And this
Court likewise has recognized the similarity between
§ 10(b) and § 14(e), noting that both are anti-fraud
statutes designed to prevent knowing violations of
the securities laws. See Schreiber v. Burlington N.,
Inc., 472 U.S. 1, 10-11 (1985).
The Ninth Circuit rejected the rationale of these
courts, instead engaging in a textual analysis of
§ 14(e) – after assuming the existence of a private
right of action – to conclude that negligence is the
proper standard. But the Ninth Circuit’s analysis is
flawed.
In the opinion below, the Ninth Circuit divided
§ 14(e) into two completely separate parts:
“It shall be unlawful for any person [1] to
make any untrue statement of a material
fact or omit to state any material fact
necessary in order to make the statement
made, in the light of circumstances under
which they are made, not misleading, or [2]
to engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection
with any tender offer . . . .”
Pet. App. 8a (quoting 15 U.S.C. § 78n(e)) (emphasis
and alterations in original). Construing the statute
as creating “two different offenses,” the Ninth Circuit
concluded that “because the text of the first clause of
Section 14(e) is devoid of any suggestion that
scienter is required, we conclude that the first clause
9
of Section 14(e) requires a showing of only
negligence, not scienter.” Pet. App. 8a, 16a.
This analysis, however, violated the principle that
courts should not “construe statutory phrases in
isolation.” United States v. Morton, 467 U.S. 822,
828 (1984). Despite the Ninth Circuit’s decision to
parse § 14(e) into two parts, § 14(e) is a single
sentence that includes the language of an anti-fraud
provision, including the words “misleading,”
“fraudulent,” “deceptive,” and “manipulative.” 15
U.S.C. § 78n(e). The Ninth Circuit artificially drew a
line between this language and the first portion of
§ 14(e) without any basis for such a division, and
therefore its analysis is wrong.6
The Ninth Circuit also ignored Congress’s grant
of authority to the SEC in the final sentence of
§ 14(e):
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). This regulatory authority
provision confirms that Congress intended § 14(e) to
serve as an anti-fraud rule.
This Court should reject the Ninth Circuit’s
negligence standard and instead adopt a scienter
6
Moreover, even if the Ninth Circuit were correct in dividing
§ 14(e) into two clauses, the first clause in no way suggests that
negligence is required; it says nothing about the mental state
necessary to support a claim for making a material false
statement.
10
standard for violations of § 14(e) based on the
rationale articulated by the Second, Third, Fifth,
Sixth, and Eleventh Circuits.
B.
Congressional Intent Confirms That
§ 14(e) Claims Require Scienter.
The Ninth Circuit also ignored the significance of
Congress’s decision to leave § 14(e) untouched when
enacting the Private Securities Litigation Reform Act
of 1995 (the “PSLRA”) and the Securities Litigation
Uniform Standards Act of 1998 (“SLUSA”). SLUSA,
Pub. L. No. 105-353, 112 Stat. 3227 (1998); PSLRA,
Pub. L. No. 104-67, 109 Stat. 737 (1995). “Congress
is presumed to be aware of an administrative or
judicial interpretation of a statute and to adopt that
interpretation when it re-enacts a statute without
change . . . .” Merrill Lynch, Pierce, Fenner & Smith,
Inc. v. Curran, 456 U.S. 353, 409 n.66 (1982)
(quoting Lorillard v. Pons, 434 U.S. 575, 580 (1978)).
The Second, Fifth, and Sixth Circuits adopted a
scienter standard for § 14(e) prior to the passage of
both the PSLRA and SLUSA. In fact, the last of
those three decisions was adopted in 1980, fifteen
years before the PSLRA was adopted. See Adams,
623 F.2d at 428; Smallwood, 489 F.2d at 605; ChrisCraft Indus., 480 F.2d at 362. Congress, however,
did not revise § 14(e) in connection with either the
PSLRA or SLUSA, both of which presented an
opportunity to do so. See, e.g., S. Rep. No. 104-98, at
4 (1995) (noting that the purpose of the PSLRA was
“to encourage the voluntary disclosure of information
by corporate issuers; . . . to empower investors so
that they—not their lawyers—exercise primary
control over private securities litigation; and . . . to
encourage plaintiffs’ lawyers to pursue valid claims
and defendants to fight abusive claims.”).
11
When passing SLUSA, the Senate Committee on
Banking, Housing, and Urban Affairs:
emphasize[d] that the clear intent in 1995
and our continuing intent in this legislation
is that neither the PSLRA nor S. 1260 [the
precursor bill to SLUSA] in any way alters
the scienter standard in federal securities
fraud suits. It was the intent of Congress, as
was expressly stated during the legislative
debate on the PSLRA, and particularly
during the debate on overriding the
President’s veto, that the PSLRA establish a
uniform federal standard on pleading
requirements by adopting the pleading
standard applied by the Second Circuit
Court of Appeals. . . . The Committee
emphasizes that neither the PSLRA nor S.
1260 makes any attempt to define that state
of mind.
S. Rep. 105-182, at 6 (1998).
Congress’s decision to leave § 14(e) untouched –
despite the unanimous view at the time that scienter
was required to prove a violation of § 14(e) –
indicates that Congress viewed scienter as the
appropriate standard for state of mind.
II.
A NEGLIGENCE STANDARD WILL FURTHER
ENCOURAGE AND FEDERALIZE MERGER
OBJECTION LITIGATION.
Beginning in or around the early 2000s, “merger
objection” litigation started to become a cottage
industry, with stockholders challenging an
increasing percentage of public company mergers
through shareholder class action litigation. See, e.g.,
Matthew D. Cain et al., The Shifting Tides of Merger
12
Litigation, 71 Vand. L. Rev. 603, 610-11 (2018). The
complaints in these “merger objection” cases often
are nearly verbatim versions of prior complaints with
only the parties’ names changed, and they typically
are filed within days of the announcement of the
mergers. See Elliott J. Weiss & Lawrence J. White,
File Early, Then Free Ride: How Delaware Law
(Mis)shapes Shareholder Class Actions, 57 Vand. L.
Rev. 1797, 1827-28 (2004).
In these “merger objection” cases, the stockholder
plaintiff generally alleges that the seller’s board of
directors sold the company for a price that was too
low and through a sales process that was unfair in
some way. See Browning Jeffries, The Plaintiffs’
Lawyer’s Transaction Tax: The New Cost of Doing
Business in Public Company Deals, 11 Berkeley Bus.
L.J. 55, 56-57, 68 (2014). Once the seller files the
required public disclosures (e.g., a proxy statement
or tender offer recommendation), the stockholder
plaintiff alleges that the disclosures are false and
misleading with respect to the background or terms
of the transaction. See Jill E. Fisch et al.,
Confronting the Peppercorn Settlement in Merger
Litigation: An Empirical Analysis and A Proposal for
Reform, 93 Tex. L. Rev. 557, 565 (2015).
In a typical case, the stockholder plaintiff
immediately files a motion for a temporary
restraining order and a preliminary injunction,
arguing that the court should enjoin the closing of
the transaction until the disclosure document is
corrected or supplemented. After creating the risk
that a transformative bet-the-company transaction
might be enjoined, the stockholder plaintiff takes
advantage of that risk by making an offer to settle
with the merger parties. The standard proposal is
13
for a “disclosure-only” settlement: if the defendants
make certain supplemental disclosures and pay
plaintiffs’ counsel a substantial fee award, plaintiffs
will provide defendants with a broad release covering
alleged misconduct in connection with the challenged
transaction. The stockholder class receives only the
supplemental disclosures. As the Seventh Circuit
has observed, such a “class action that yields fees for
class counsel and nothing for the class” is “no better
than a racket.” In re Walgreen Co. Stockholder
Litig., 832 F.3d 718, 724 (7th Cir. 2016).
Such offers are nevertheless difficult for the
merger parties to refuse. Faced with the
uncertainty, expense, and distraction of litigation,
and the risk (however small) that a court might
enjoin a critical corporate transaction on the basis of
an expedited litigation record, many defendants
choose to settle even meritless “merger objection”
cases. See Fisch et al., supra, at 565-66; Matthew D.
Cain & Steven Davidoff Solomon, A Great Game:
The Dynamics of State Competition and Litigation,
100 Iowa L. Rev. 465, 478 (2015) (“Settlements which
only require disclosure constitute 55.1% of the
settlement types in the sample and are the most
common type of settlement.”).
The attorneys’ fees associated with these
“disclosure only” settlements have reached into the
millions of dollars. See Cain et al., supra, at 624.
Able to obtain large fees for little work, the plaintiffs’
bar has made the filing of “merger objection”
lawsuits increasingly routine. In 2008,
approximately 54% of all public M&A deals were
challenged. See Cornerstone Research, Shareholder
Litigation Involving Acquisitions of Public
Companies: Review of 2017 M&A Litigation (2018)
14
at 2, https://www.cornerstone.com/
Publications/Reports/Shareholder-LitigationInvolving-Acquisitions-of-Public-Companies-Reviewof-2017-M-and-A-Litigation (hereinafter “2017
Cornerstone Review”). This number rose sharply to
86% in 2009, and continued to rise until its peak of
94% in 2013. See id. The percentage of deals subject
to suit hovered between 85% and 90% through 2015.
See id.
These “merger objection” lawsuits are so common
that they are viewed as a “merger tax” and part of
the cost of doing M&A transactions. See Jeffries,
supra, at 108 (“Through this overabundance of
litigation, plaintiffs’ attorneys have successfully
attached what amounts to a transaction tax to an
overwhelming majority of large public company
deals. Attorneys extort this tax – in the form of
attorneys’ fees – from defendant companies who fear
their deals will die after being tied up in lengthy,
often frivolous litigation.”).
A.
Trulia Eliminates Delaware as a
Friendly Forum for Merger Objection
Suits.
Prior to 2016, the majority of these abusive
“merger objection” suits were filed in Delaware
pursuant to the “internal affairs doctrine.” Over
time, Delaware courts expressed increasing
skepticism of “merger objection” cases generally and
“disclosure-only” settlements in particular. See
Assad v. World Energy Sols., Inc., No. 10324-CB
(Del. Ch. Aug. 20, 2015) (“It just can’t be that there
are meaningful disclosure violations in every single
M&A case that’s being filed in this court.”); see also
In re Aruba Networks, Inc. Stockholders Litig., No.
10765-VCL (Del. Ch. Oct. 9, 2015) (“[W]e have
15
reached a point where we have . . . a real systemic
problem.”); In re Riverbed Tech., Inc. Stockholders
Litig., No. 10484-VCG (Del Ch. July 27, 2015) (“[A]t
least some members of this Court have been thinking
in some depth about what the value of disclosureonly settlements is.”).
The primary reason for the Delaware courts’
skepticism was that the supplemental disclosures in
many cases addressed immaterial details that did
not aid stockholders in deciding whether to approve
a transaction. See In re Aruba Networks, No. 10765VCL; Assad, No. 10324-CB; In re Riverbed Tech., No.
10484-VCG; Acevedo v. Aeroflex Holding Corp., No.
7930-VCL. (Del. Ch. July 8, 2015).
In Trulia, the Delaware Chancery Court largely
eliminated “disclosure-only” settlements in order to
reduce frivolous “merger objection” litigation. The
Trulia court emphasized that:
[s]cholars have criticized disclosure
settlements, arguing that non-material
supplemental disclosures provide no benefit
to stockholders and amount to little more
than deal “rents” or “taxes,” while the
liability releases that accompany settlements
threaten the loss of potentially valuable
claims related to the transaction in question
or other matters falling within the literal
scope of overly broad releases.
129 A.3d at 887.
Accordingly, the Chancery Court rejected the
parties’ “disclosure-only” settlement, finding that the
supplemental disclosures that plaintiffs’ attorneys
obtained for the class were not “material or even
helpful.” Id. The Chancery Court made clear that
16
going forward, it would approve disclosure-only
settlements only where “the supplemental
disclosures address a plainly material
misrepresentation or omission.”
B.
The Plaintiffs’ Bar Shifts Merger
Objection Suits to Federal Court.
The Trulia decision had an immediate impact on
the plaintiffs’ bar’s tactics in “merger objection”
litigation.7 Since Trulia, the plaintiffs’ bar has
redirected “merger objection” litigation to federal
courts. The post-Trulia transfer of “merger
objection” litigation to federal courts has been
immediate and substantial. In 2014, the federal
courts saw 40 “merger objection” filings. See NERA,
Recent Trends in Securities Class Action Litigation:
2018 Full-Year Review (Jan. 29, 2019) at 5,
https://www.nera.com/content/dam/nera/publications/
2019/PUB_Year_End_Trends_012819_Final.pdf
(hereinafter “2018 NERA Review”). In 2015, that
number rose to 42 “merger objection” filings. Id. In
2016, the federal courts saw more “merger objection”
filings than the past two years combined, with 92
“merger objection” suits filed. See id. That number
more than doubled in 2017, reaching 204 federal
court “merger objection” suits. See id. That high
level was sustained in 2018, with 210 “merger
objection” suits filed. See id. The number of “merger
objection” filings in federal courts in 2017 and 2018
is more than the number of filings in the years 2009
through 2015 combined. See id.
7
The number of challenged mergers dropped from 84% in
2015 to 71% in 2016 and 73% in 2017. See 2017 Cornerstone
Review, supra, at 2.
17
This increase in federal filings corresponds to a
decrease in “merger objection” lawsuits filed in
Delaware. Pre-Trulia, when suing a company
incorporated in Delaware, stockholders filed 60% of
suits in Delaware. See NERA, “Recent Trends in
Securities Class Action Litigation: 2016 Full-Year
Review” (Jan. 23, 2017) (citing Matthew D. Cain and
Steven Davidoff Solomon, Takeover Litigation in
2015, Berkeley Cent. for L. Bus. Econ. (Jan. 14,
2016), https://ssrn.com/abstract=2715890). That
number dropped to 23% in 2016 and to just 6% in
2017. See 2017 Cornerstone Review, supra, at 5.
Experts project that this trend will continue. 210
of the 441 securities class action filings in 2018 were
“merger objection” cases in federal court. See 2018
NERA Review, supra, at 5.
The plaintiffs’ bar has turned to federal courts in
the hope that those courts would be willing to
approve the type of disclosure-only settlements
rejected in Trulia. See Rosenfeld v. Time Inc., No.
17CV9886 (DLC), 2018 WL 4177938, at *2 (S.D.N.Y.
Aug. 30, 2018) (“Post-Trulia, plaintiffs have begun
bringing M&A lawsuits in other courts, particularly
federal courts.”). Plaintiffs have had mixed results,
with some courts following Trulia and others willing
to approve disclosure-only settlements. Compare In
re Walgreen Co. Stockholder Litig., 832 F.3d at 72426 (adopting the rationale of Trulia), with In re
Hatteras Fin., Inc., S’holder Litig., 286 F. Supp. 3d
727, 730-31 (M.D.N.C. 2017) (approving settlement
despite finding that supplemental disclosures were
immaterial).
18
C.
The Plaintiffs’ Bar Forum Shops Within
the Federal Court System.
Decisions by federal courts have had immediate
impacts on “merger objection” litigation. For
instance, the number of “merger objection” suits filed
in the Seventh Circuit dropped by 60% within a year
following its disapproval of disclosure-only
settlements in In re Walgreen Co. Stockholder
Litigation. 2018 NERA Review, supra, at 5.
Even prior to the Ninth Circuit’s decision below,
plaintiffs were flocking to the Ninth Circuit in
disproportionate numbers. Although 50% of all U.S.
corporations and over 67% of all Fortune 500
companies are incorporated in Delaware,8 in 2017,
only 20% of all federal-court challenges to M&A
deals were filed in the Third Circuit; in 2018, less
than 35% of all challenges were in the Third Circuit.
See Cornerstone Research, Securities Class Action
Filings: 2018 Year in Review (Jan. 30, 2019) at
14,https://www.cornerstone.com/Publications/Reports
/Securities-Class-Action-Filings-2018-Year-inReview. This mismatch reflects a distinct pivot to
courts in the Ninth Circuit. In the three-year period
from 2012 through 2014, only two “merger objection”
suits were filed annually in district courts in that
circuit; only eight cases were filed there in 2015. Id.
However, in 2016, 25 such cases were filed in district
courts in the Ninth Circuit, a figure which increased
to 41 cases in 2017. Id. Thirty-three cases were filed
in the Ninth Circuit in 2018. Id.
8
Annual Report Statistics, Del. Division of Corps.,
https://corp.delaware.gov/stats/ (last visited Feb. 26, 2019).
19
The shift in where plaintiffs file their suits even
within the federal court system demonstrates that
the plaintiffs’ bar reacts to the perceived friendliness
of courts to their “merger objection” suits. If this
Court adopts the Ninth Circuit’s negligence
standard, plaintiffs will almost certainly abandon
state court litigation and instead file nearly all
“merger objection” cases in federal courts.
*
*
*
In the event the Court upholds the existence of an
implied private right of action under § 14(e), the
Court should adopt a scienter standard because
negligence will burden the federal court system with
an increasing number of frivolous “merger objection”
cases that the plaintiffs-side class action bar
continues to file without any concomitant benefit to
corporations and society.
III.
OTHER POLICY CONSIDERATIONS STRONGLY
FAVOR A SCIENTER STANDARD FOR § 14(e)
CLAIMS.
A.
A Negligence Standard for § 14(e)
Increases the Risk of Over-Disclosure.
In addition to inviting more “merger objection”
cases into federal courts, a negligence standard for
§ 14(e) will change the type and volume of
disclosures corporations make in connection with
tender offers. The Exchange Act was intended to
increase disclosure from companies to investors,
“arming investors with information” in order to
improve market efficiency, curb corporate abuse,
limit insider trading, and reduce the need for
government intervention. Troy A. Paredes, Blinded
by the Light: Information Overload and Its
Consequences for Securities Regulation, 81 Wash. U.
20
L.Q. 417, 418 (2003); see also Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 195 (1976); Thomas L.
Hazen, Treatise on the Law of Securities Regulation
§ 1:16 (7th ed. 2017). Section 14(e), enacted in 1968
as part of the Williams Act (amending the Exchange
Act), serves this goal as well. See Pub. L. No. 90-439,
82 Stat. 455; see also Schreiber, 472 U.S. at 11
(“Nowhere in the legislative history is there the
slightest suggestion that § 14(e) serves any purpose
other than disclosure . . . .”).
The Exchange Act and the Williams Act
amendments, of course, do not require disclosure to
shareholders of every fact. Rather, the statute and
this Court have required disclosure of only material
information. See TSC Indus., Inc. v. Northway, Inc.,
426 U.S. 438, 448 (1976). In the tender offer context,
federal courts find “a misstatement or omission [to
be] ‘material if there is a substantial likelihood that
a reasonable shareholder would consider it
important in deciding’ whether to accept the tender
offer.” Seaboard World Airlines v. Tiger Int’l, Inc.,
600 F.2d 355, 361 (2d Cir. 1979) (quoting Prudent
Real Estate Tr. v. Johncamp Realty, Inc., 599 F.2d
1140, 1146 (2d Cir. 1979) (Friendly, J.)) (additional
quotation marks omitted); accord In re Digital Island
Sec. Litig., 357 F.3d at 328. This is essentially the
same standard that this Court announced in TSC
Industries, and which federal courts apply to § 10(b)
cases. TSC Indus., 426 U.S. at 448.
In recent years, however, attempts to comply with
these disclosure requirements in the context of an
aggressive litigation environment have created a risk
of “over-disclosure,” as management teams are
21
incentivized to “bury shareholders in an avalanche of
trivial information,”9 in order to minimize risk and
“avoid liability.” In re Goodyear Tire & Rubber Co.
Sec. Litig., 1993 WL 130381, at *6. This practice of
over-disclosure is not “conducive to informed
decision-making.” TSC Indus., 426 U.S. at 448-49.
Over-disclosure causes companies to waste resources
by disclosing immaterial information, which in turn
causes investors to waste their time, money, and
effort attempting to distill the material from the
immaterial in disclosure documents that are often
hundreds of pages long. See Geoffrey A. Manne, The
Hydraulic Theory of Disclosure Regulation and Other
Costs of Disclosure, 58 Ala. L. Rev. 473, 507 (2007).
A negligence standard encourages overdisclosure. Instead of making judgments to ensure
that no material misstatements or omissions appear
in the documents, companies will have every reason
to attempt to avoid liability under a negligence
standard by erring in favor of over-inclusive
disclosures. A negligence standard thus upsets the
balance struck by this Court’s jurisprudence, which
seeks to ensure that shareholders obtain material
information without being drowned in a sea of
mundane, immaterial details.
This Court has recognized the danger of overdisclosure. See TSC Indus., 426 U.S. at 448 (“Some
information is of such dubious significance that
insistence on its disclosure may accomplish more
harm than good.”).10 Here, a negligence standard
9
10
TSC Indus., 426 U.S. at 448.
Delaware courts, too, have cautioned against overdisclosure. See In re Micromet Inc. S’holders Litig., C.A. No.
22
tips the materiality bar too far in one direction – the
wrong direction – and invites management to make
voluminous tender offer documents even longer,
without providing any additional material
information to shareholders. If a negligence
standard is adopted, the issue of over-disclosure is
likely to affect all future tender offers.
B.
A Negligence Standard for § 14(e)
Violations Will Chill Tender Offers.
As noted above, § 14(e) was added to the
Exchange Act as part of the amendments contained
in the Williams Act, enacted in 1968. In the 1960s,
tender offers grew in popularity and were not
otherwise regulated by the SEC. S. Rep. No. 90-550,
at 2 (1967) (noting that “[t]he cash tender offer has
become an increasingly favored method of acquiring
control of publicly held corporations”). While
Congress sought to regulate tender offers through
the Williams Act amendments to the Exchange Act
in order to avoid potential abuses, id. at 2-3, its
intent was to avoid discouraging tender offers
7197-VCP, 2012 WL 681785, at *11 (Del. Ch. Feb. 29, 2012)
(“The duty to disclose is not a mandate for prolixity. Instead,
balanced against the requirement of complete disclosure is the
pragmatic consideration that creating a lenient standard for
materiality poses the risk that the corporation will bury the
shareholders in an avalanche of trivial information, a result
that is hardly conducive to informed decision-making.”)
(internal citations, quotation marks, and alterations omitted);
Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1280 (Del.
1994) (“Delaware law does not require disclosure of inherently
unreliable or speculative information which would tend to
confuse stockholders or inundate them with an overload of
information.”).
23
because it viewed them as useful in providing a
check on inefficient management:
It was strongly urged during the hearings
that takeover bids should not be discouraged
because they serve a useful purpose in
providing a check on entrenched but
inefficient management. It was also
recognized that these bids are made for
many other reasons, and do not always
reflect a desire to improve the management
of the company. The committee has taken
extreme care to avoid tipping the balance of
regulation either in favor of management or
in favor of the person making the takeover
bid. The bill is designed to require full and
fair disclosure for the benefit of investors
while at the same time providing the offeror
and management equal opportunity to fairly
present their case.
Id. at 2-4.
Tender offers continue to prove beneficial to the
market today. Originally, tender offers were often
used in connection with a hostile takeover or to
circumvent a board of directors that was unwilling to
entertain a merger offer. In the late 1980s, the SEC
enacted the “Best Price Rule,” which required,
among other things, that all shareholders, whether
owning a single share or owning a large block, were
paid the same price. See 17 C.F.R. § 240.14d-10
(2019). This made tender offers fairer and nearly
eliminated their use in hostile takeovers.
Today, companies seeking a business combination
may prefer tender offers for a variety of reasons. For
example, tender offers are often faster to complete
than mergers due to less onerous public filing
24
requirements, faster antitrust review, and SEC rules
requiring a bidder to pay for shares within three
days, or else return those shares to the shareholders.
See David Offenberg & Christo Pirinsky, How Do
Acquirers Choose between Mergers and Tender
Offers?, 116 J. Fin. Econ. 331, 340-42 (2015). Based
on empirical analysis, tender offers are often
complete one to two months faster than mergers. See
id. at 340.
Tender offers also can be more beneficial than
mergers for shareholders. As noted above,
shareholders are paid quickly for their shares due to
SEC requirements that funding for a tender offer be
in place before the tender offer begins and that
shareholders be paid (or have their shares returned)
within three days of the close of the tender offer. See
id. at 33; see also 17 C.F.R. § 240.14d-1(c) (2019); 17
C.F.R. § 240.14e-8(c) (2019). In addition, tender
offers are associated with higher premiums than
mergers. See Offenberg & Pirinsky, supra, at 34243.
Imposing a negligence standard for violations of
§ 14(e) risks chilling tender offer activity. Parties
interested in a tender offer transaction in order to
capture the numerous benefits, including those
discussed above, may be deterred from pursuing a
tender offer if they will be liable to potential
shareholders based on mere negligence.11 As a
11
This key difference between tender offers and mergers –
that tender offers often involve representations by third parties
to shareholders whereas mergers involve representations by
management to shareholders – provides one possible reason for
adopting a higher standard for § 14(e) violations than for § 14(a)
violations. Note, however, that while several lower courts have
25
result, shareholders will lose a meaningful check on
inefficient but entrenched management, and
corporations will lose an efficient way to effect a
business transaction.
C.
A Negligence Standard for § 14(e)
Undercuts Settled Mergers and
Acquisitions Law.
The adoption of a negligence standard adversely
affects financial institutions participating in merger
activity. Financial institutions are often involved in
merger activity as advisors. In most mergers, the
seller obtains a “fairness opinion” from a financial
advisor, which provides the financial advisor’s view
on whether the price terms of the merger – usually
the per share price to be received by the seller’s
shareholders – are fair.
As the facts of this case illustrate, shareholders
often challenge the financial advisor’s analyses. See
Pet. App. at 4a-5a. Respondent Varjabedian
challenged, among other things, the
Recommendation Statement’s failure to summarize
Goldman Sachs’ Premium Analysis conducted in
connection with the Avago-Emulex merger. Pet.
App. 5a-6a.
Under Delaware law, a seller must disclose only a
“fair summary” of the fairness opinion. See, e.g.,
Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP,
adopted a negligence standard for § 14(a) claims, this Court has
twice declined to decide the issue and the Sixth Circuit has
affirmatively held that scienter is required. See Mills v.
Electric Auto-Lite Co., 396 U.S. 375 (1970); TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438 (1976); see also, e.g., Adams, 623
F.2d at 423 & n.2.
26
2014 WL 2931180, at *12 (Del. Ch. June 30, 2014).
Stockholder plaintiffs, however, routinely bring
“merger objection” cases premised on the notion that
merger parties failed to disclose every conceivable
detail regarding the financial advisor’s fairness
opinion. Although Delaware courts have long
rejected these claims as a matter of state law,12
negligence-based § 14(e) claims give plaintiffs the
potential opportunity to do what Delaware has
prohibited – nitpick the details and assumptions
underlying financial analyses.
Moreover, the lower standard may entice
stockholder plaintiffs to allege § 14(e) claims directly
against financial advisors. Plaintiffs sometimes
allege aiding and abetting claims against a financial
advisor, but such claims often fail (or are not made)
because they require scienter. See, e.g., In re Zale
Corp. Stockholders Litig., C.A. No. 9388-VCP, 2015
WL 6551418 (Del. Ch. Oct. 29, 2015) (dismissing
aiding and abetting claim against financial advisor
Merrill Lynch); Malpiede v. Townson, 780 A.2d 1075,
1098 (Del. Ch. 2001) (“[P]laintiffs’ aiding and
abetting claim fails as a matter of law because the
allegations in the complaint do not support an
12
See, e.g., Dent, 2014 WL 2931180, at *13 (“This is simply a
‘tell me more’ request that, unlike a viable disclosure claim,
fails to identify how the analysis is misleading or incomplete if
it does not disclose specifically which publicly available sources
of information Needham used to do its work.”); In re 3Com
S’holders Litig., Civil Action No. 5067-CC, 2009 WL 5173804, at
*6 (Del. Ch. Dec. 18, 2009) (“There are limitless opportunities
for disagreement . . . . Considering this reality, quibbles with a
financial advisor’s work simply cannot be the basis of a
disclosure claim.”).
27
inference that [defendant] knowingly participated . .
. .”); Lee v. Pincus, C.A. No. 8458-CB, 2014 WL
6066108, at *13 (Del. Ch. Nov. 14, 2014) (“To
demonstrate the ‘knowing participation’ element of
an aiding and abetting claim, it must be reasonably
conceivable from the well-pled allegations that ‘the
third party act[ed] with . . . knowledge . . . .’
Knowing participation has been described as a
‘stringent’ standard that ‘turn[s] on proof of
scienter.’”) (alterations in original; internal citations
omitted).
A negligence standard opens the door to claims
that would have failed under Delaware law, as
plaintiffs need only allege negligence, not scienter, to
assert § 14(e) claims directly against financial
advisors. This Court has long rejected aiding and
abetting claims for violations of the securities laws.13
See Stoneridge Inv. Partners, LLC v. ScientificAtlanta, Inc., 552 U.S. 148, 158 (2008) (holding the
reforms of the PSLRA do not permit private aiding
13
This Court’s decision in Janus Capital Group, Inc. v. First
Derivative Traders, 564 U.S. 135 (2011), requires that a
defendant be the “maker” of a statement in order to be the
target of a federal securities claim. Janus and its progeny bar
§ 14(e) claims against financial advisors and other third parties.
The transition of “merger objection” litigation to federal court is
a relatively new, post-Trulia phenomenon, however, and it will
take time to § 14(e) case law to catch up with more settled
§ 10(b) law. Further, at least one court – the United States
District Court for the Northern District of California – has
found that alleged misrepresentations in a recommendation
statement that relate to a fairness opinion are attributable to
the financial advisor. See Biotechnology Value Fund, L.P. v.
Celera Corp., No. C 13-03248 WHA, 2014 WL 988913, at *3-4
(N.D. Cal. Mar. 10, 2014).
28
and abetting claims under § 10(b)); Cent. Bank of
Denver, N.A. v. First Interstate Bank of Denver, N.A.,
511 U.S. 164, 183 (1994) (holding that private
plaintiffs cannot maintain aiding and abetting claims
under § 10(b)). The adoption of a negligence
standard conflicts with this Court’s jurisprudence,
which establishes that there should be no private
civil aiding and abetting liability under the securities
laws. For that reason, this Court should reverse the
Ninth Circuit’s erroneous decision and adopt a
scienter standard for § 14(e) claims.
CONCLUSION
For the reasons discussed above, this Court
should reverse the Ninth Circuit’s opinion and adopt
a scienter standard for violations of § 14(e).
Kevin Carroll
SECURITIES INDUSTRY
AND FINANCIAL
MARKETS
ASSOCIATION
1101 New York Avenue,
N.W.
8th Floor
Washington, D.C. 20005
(202) 962-7300
William M. Regan
Marc J. Gottridge
Counsel of Record
Allison M. Wuertz
HOGAN LOVELLS US
LLP
875 Third Avenue
New York, N.Y. 10022
(212) 918-3000
marc.gottridge@
hoganlovells.com
Counsel for Amicus Curiae SIFMA
February 26, 2019
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.