In Varjabedian v. Emulex Corp. (Varjabedian), the Ninth Circuit held that a claim for failure to satisfy a statutory disclosure provision concerning tender offers under Section 14(e) of the
1934 Act only requires a pleading of negligence, not scienter. The Ninth Circuit’s holding in Varjabedian departs from half a century of established case law and creates a circuit split with the Second, Third, Fifth, Sixth, and Eleventh circuits. The Varjabedian decision opens the door for the very litigation abuses that Congress has sought to prevent in order to protect businesses and markets. However, while the federal securities laws are critical to the efficient and effective functioning of markets, they are not immunized against abusive litigation practices. Abusive merger objection suits have become practically inevitable for businesses with a record 94% of all public M&A deals challenged in 2013, facilitating a practice of over-disclosure by businesses. This litigious environment is not conducive to the promotion efficient markets. Further, the elimination of a scienter requirement for Section 14(e) pleadings exposes an entirely new class of potential defendants, namely financial advisors for and commentators on transactions. As witnessed following the Delaware Court of Chancery’s crackdown on “disclosure-only” fee awards, the securities law plaintiffs’ bar, as a rational economic actor, does forum shop. The Ninth Circuit is not immune to this established economic principle, as the 1934 Act’s liberal jurisdiction and venue provisions will create a de facto nationwide negligence standard for all Section 14(e) cases. In addition to both the immense financial stakes and the creation of a de facto nationwide negligence standard, the Ninth Circuit’s legal analysis in Varjabedian is misguided. In reviewing Section 14(e)’s legislative history, the Varjabedian decision cuts against Rule 10b-5, which is the very antifraud rule after which Section 14(e) was modeled. Moreover, the Ninth Circuit’s textual analysis fails to examine Section 14(e) in light of its appropriate context, as words in the same sentence cannot merely be read in isolation. Emulex’s petition for certiorari was granted by the Supreme Court on January 4, 2019. The Supreme Court should reverse the Ninth Circuit’s Varjabedian holding to avoid market inefficiencies resulting from frivolous merger objection suits as well as to prevent plaintiffs from forum shopping and capitalizing on the de facto nationwide negligence standard.
The balance of this Article is as follows: First, the background of Varjabedian, including basic facts and procedural steps in detail; Second, the legislative history of The Williams Act concerning tender offers, which includes Sec. 14(e); third, a review of the most significant case law considered by the Ninth Circuit panel; fourth, an analysis of the Ninth Circuit’s reasoning in Varjabedian; and fifth, a conclusion.
Matthew A. Powell,
The Vital Need to Eliminate a De Facto Negligence Standard Under Section 14(e) of the Exchange Act,
15 Hastings Bus L.J. 253
Available at: https://repository.uchastings.edu/hastings_business_law_journal/vol15/iss2/3