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Supreme Court will hear case to determine M&A negligence standard

The U.S. Supreme Court agreed to hear a case that will determine whether under the Securities Exchange Act a shareholder suing a company needs to prove intent of wrongdoing or only that company's actions were negligent during a merger or acquisition.

On Friday, the nation's highest court granted a petition to hear Emulex Corp. vs. Varjabedian, a case that stems from a 2015 merger between Emulex Corp. and Avago Technologies Wireless Manufacturing Inc.

In February 2015, in a joint news release with Emulex, Avago offered to pay $8 for every share of outstanding Emulex stock, which reflected a premium of 26.4% on Emulex's stock price the day before the merger was announced. Under the merger agreement, a subsidiary of Avago, Emerald Merger Sub Inc. then initiated a tender offer for Emulex's outstanding stock, according to court documents.

Before issuing a statement to shareholders recommending they sell their shares, Emulex hired Goldman Sachs to determine whether the proposal was fair to shareholders. After a review, Goldman determined the deal was fair and Emulex filed the recommendation with the SEC, court documents show.

But some shareholders thought the $8 offer was inadequate and filed a lawsuit against Emulex, Avago, Emerald Merger Sub and the Emulex board of directors. The plaintiffs believe that the defendants failed to summarize part of Goldman's analysis, which would have disclosed that the 26.4% premium was below average compared to similar mergers, according to court documents.

In 2016, U.S. District Court in Los Angeles dismissed the claim, but last year the 9th U.S. Circuit Court of Appeals, based in San Francisco, ruled that the plaintiffs were not required to show intent, only negligence.

A ruling is expected before the Supreme Court adjourns in late June.