(Reuters) - It’s no secret that the U.S. Chamber of Commerce believes that securities class actions – and, in particular – shareholder class actions challenging M&A transactions – are at best an inefficient way to police corporate conduct. In the view of the Chamber, securities class actions benefit lawyers, not shareholders. That’s why the business group launched a lobbying campaign in October to encourage Congress to restrict shareholder class actions by revising federal securities laws.
Then last month, George Conway of Wachtell Lipton Rosen & Katz hit upon a way to accomplish that end by different means: In an amicus brief filed at the U.S. Supreme Court for the Chamber of Commerce in Emulex v. Varjabedian, Conway argued that the provision plaintiffs' lawyers rely upon to bring M&A class actions in federal court – Section 14(e) of the Securities and Exchange Act – does not include a private right of action. Under Conway’s theory, which expanded on an argument previously posited by Emulex counsel Gregory Garre of Latham & Watkins in the company’s petition for Supreme Court review, shareholders can’t sue over allegedly misleading tender offer disclosures. His brief for the Chamber urged the justices to grant review in the Emulex case to clarify the principle that investors can’t use Section 14 to file class actions challenging M&A deals in federal court.
Emulex’s shareholders, represented by Daniel Geyser of the eponymous firm, have now weighed in in a brief opposing Supreme Court review. I suspect you will not be surprised to hear that the Emulex investors not only argue there’s no reason for the justices to hear their case but also contend that Emulex and the Chamber are dead wrong about shareholders’ right to sue under Section 14(e) – as Emulex itself conceded in the lower courts.
Most of Geyser’s brief is devoted to explaining why the 9th U.S. Circuit Court of Appeals was right last April when it revived a shareholder class action challenging the company’s disclosures about its $610 million sale to Avago Technologies in 2015. The appeals court held that investors must show only that Emulex negligently failed to disclose material information (in this case, a Goldman Sachs analysis of premiums over trading price in similar deals), not that the company acted with fraudulent intent. According to Geyser, Supreme Court precedent is clear that the negligence standard applies in cases in which companies have omitted important information from tender offer disclosures.
The 9th Circuit itself said in its Emulex decision that it was splitting with five other circuits that have required shareholders to allege scienter in Section 14 cases. But Geyser’s Supreme Court brief contends there’s actually no circuit split because the other rulings involved alleged misstatements, not omissions. Section 14(e) addresses the two sorts of disclosure failures separately, the brief argues, so it’s wrong to conflate the pleading standards for these distinct causes of action.
But even if the Supreme Court decides (wrongly, in the view of the shareholders) to grant review of the 9th Circuit’s ruling, the opposition brief said, the justices should not use the case as an opportunity to decide whether Section 14(e) gives investors a right to sue. For decades, Congress and the courts have allowed shareholders to bring Section 14 claims, the brief said.
“According to (Emulex) and the U.S. Chamber, ‘Section 14(e) contains no private right, not even a hint of one,’” the opposition brief said. “Yet Section 14(e) contains exactly the same ‘hints” that have supported private rights under related securities laws for decades. And Congress has repeatedly revamped core features of securities litigation without once suggesting that these private rights should not exist. Since its enactment, courts have repeatedly confirmed that ‘a private right of action may be inferred from Section 14(e),’” the brief argued, citing the 5th Circuit’s 1974 ruling Smallwood v. Pearl Brewing.
And even if the justices, despite all of the brief’s arguments against review, decide to take the Emulex case, they can’t use it as a vehicle for reevaluating the viability of private actions under Section 14(e) for the simple reason that Emulex conceded that very point in the lower courts, the brief said. “The Supreme Court is ‘a court of review, not of first view,’” shareholders argued. “If the court wants to rethink half a century of settled practice, it should at least wait for a vehicle where the question presented was not expressly abandoned below.”
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