(Reuters) - I was wrong. Dead wrong.
In a column last week about oral arguments at the U.S. Supreme Court in Emulex v. Varjabedian, I predicted that the court’s five conservative-leaning justices would push the court to answer the big question at the heart of the Emulex case – does the Securities and Exchange Act give shareholders a right to sue over allegedly deficient tender offer disclosures? Whether the Supreme Court would reach that broad question was no sure thing: Shareholder counsel Daniel Geyser contended that Emulex had waived the issue of shareholders' right to sue when its case was before the 9th U.S. Circuit Court of Appeals. Geyser urged the justices not to venture beyond the narrow question Emulex presented in its petition for Supreme Court review: Do shareholders have to prove fraudulent intent or mere negligence in class actions over tender offer disclosures?
It turns out that the Supreme Court will answer neither question.
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On Tuesday, the court issued an opinion dismissing the Emulex case as improvidently granted. As is usual in such dismissals, the justices offered no explanation of their reasoning. But I’m guessing that the justices agreed with Emulex counsel Gregory Garre of Latham & Watkins and U.S. Justice Department lawyer Morgan Ratner that it wouldn’t make sense to rule narrowly on the proper pleading standard for shareholders’ tender offer suits when the entire viability of such class actions is in doubt. But more importantly, the court also appears to have agreed with Geyser that this case isn’t the right vehicle for deciding whether shareholders are entitled to sue over tender offer disclosures.
The dismissal is a huge win for Geyser, who has been pushing his argument that Emulex waived any challenge to shareholders’ private right of action since his brief opposing the network connectivity company’s bid for Supreme Court review.
It’s also a big relief for plaintiffs’ lawyers who file shareholder class actions challenging M&A transactions in federal court. As you know, those filings have exploded since Delaware’s Chancery Court pretty much abolished attorneys’ fees for shareholders’ lawyers who obtained only additional proxy or tender offer disclosures for class members. Most M&A class actions in federal court allege proxy disclosure failures, a cause of action that the Supreme Court upheld in 1964’s J.I. Case v. Borak.
But when deals are structured as tender offers, shareholders’ lawyers cite Section 14(e) of the Exchange Act, which governs tender offer disclosures. According to an analysis by the U.S. Chamber of Commerce in an amicus brief in the Emulex case, 86 shareholder class actions since 2016 – including the Emulex case, in which shareholders challenged the company’s 2015 acquisition by Avago Technologies – have asserted Section 14(e)claims. The Supreme Court has never opined specifically on whether shareholders have a right to sue under 14(e). Emulex, the Chamber and even the Justice Department and the Securities and Exchange Commission argued that under the court’s modern precedent, which frowns on courts inferring private rights of action in statutes that don’t specify them, the Supreme Court should clarify that shareholders can’t sue over tender offer disclosures.
That may yet happen, but the threat to 14(e) shareholder class actions is no longer imminent. Presumably, the Supreme Court will now wait, as Geyser urged them to, until the issue has been fully aired and decided by at least one circuit court. Few M&A shareholder suits in federal court even get to a trial court ruling on dismissal motions – most are voluntarily tossed after defendants agree to make additional disclosures and pay a mootness fee to plaintiffs’ lawyers. So it could be quite a long while until the next 14(e) case comes to the Supreme Court. On the other hand, the Supreme Court’s interest in the issue of shareholders’ right to sue under 14(e) may embolden defendants in M&A class actions to litigate motions to dismiss more vigorously than they have in the past few years.
Emulex counsel Garre declined to comment on the Supreme Court dismissal. Shareholders’ Supreme Court counsel Geyser told me in an email that he considers the resolution of the Emulex case “a pretty solid ground-rule double.” He pointed out that his side argued at every opportunity that this case was not the right vehicle for a decision on whether shareholders have a right to sue over tender offer disclosures. “We’re thrilled the court ultimately saw it our way,” Geyser said. “Today’s decision leaves in place the same private right that has existed now for half a century.”
Geyser agreed that future M&A class action defendants will likely pick up Emulex’s argument that shareholders can’t sue. But he said by email that he believes the Securities Act provision “is the exceptionally rare statute that satisfies the court’s demanding standard for recognizing implied rights of action.”
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