The U.S. Supreme Court heard arguments Monday in a case that could potentially make it easier for shareholders to take legal action following mergers or acquisitions, if they need only prove negligence rather than intentional wrongdoing.
Emulex Corp. vs. Varjabedian stems from a 2015 merger between Emulex Corp. and Avago Technologies Wireless Manufacturing Inc. The group of shareholders approved the merger but later filed a lawsuit claiming that the investment bank's price analysis was not properly disclosed.
After the U.S. District Court in Los Angeles dismissed the claim in 2016, the 9th U.S. Circuit Court of Appeals in San Francisco reversed, ruling last year that the plaintiffs were not required to show intent, only negligence to file a private right of action. Five other circuit courts have ruled the opposite.
One question the Supreme Court justices will have to decide is whether private rights of action apply to tender offers. If they say no, "it would change law that lawyers had considered settled," said O'Melveny & Myers attorney Brittany Rogers.
The case involves Section 14(e) of the Securities Exchange Act, which prohibits making untrue statements of a material fact in connection with a tender offer. At issue are two questions: if investors can sue for damages under Section 14(e) and, if so, what they are required to prove.
Three former Securities and Exchange Commission commissioners warned in their amicus brief that if the 9th Circuit decision is allowed to stand, it "will cause substantial disruption to and distortion of the nation's securities markets." The SEC is best equipped to enforce Rule 14e, said former SEC Commissioners Charles Cox, Daniel Gallagher and Joseph Grundfest, while the 9th Circuit's interpretation would result in "a legal framework that portends suits in connection with virtually every merger," they warned.