(Reuters) - On Friday, the U.S. Supreme Court agreed to review the 9th U.S. Circuit Court of Appeal’s ruling in Emulex v. Varjabedian, which revived a shareholder class action challenging the company’s disclosures in connection with its 2015 acquisition by Avago Technologies, a Broadcom subsidiary. On its face, as my Reuters colleague Lawrence Hurley reported, the case presents the narrow question of whether shareholders suing over allegedly deficient tender offer disclosures must allege fraud, as most federal circuits have concluded, or just negligence, as the 9th Circuit held in its Emulex ruling.
But there’s a much bigger question looming over the Emulex case: Do shareholders even have a private right to sue over tender offer disclosures? Emulex’s lawyer, Gregory Garre of Latham & Watkins, hinted in his petition for certiorari that there’s no such right in Section 14 of the Securities and Exchange Act, which regulates disclosures in proxy materials and tender offers. George Conway of Wachtell Lipton Rosen & Katz elaborated on that theme in a bold amicus brief for the U.S. Chamber of Commerce that explicitly called on the Supreme Court to shut down shareholder class actions claiming tender offer disclosure violations.
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That makes the Emulex case much more consequential than it would be if this were merely a fight over pleading standards. As you know, shareholder class actions challenging M&A deals have become a booming industry in federal court, after Delaware Chancery Court made it clear in late 2015 that its judges would no longer approve fees for M&A class action settlements that delivered only additional proxy disclosures to shareholders. Delaware’s crackdown pushed plaintiffs’ lawyers to federal court, where, in the last two years, they’ve filed hundreds of securities class actions in the wake of merger announcements. Most of those cases end up being voluntarily dismissed – in exchange for additional disclosures and a mootness fee for plaintiffs’ lawyers – without meaningful litigation. In effect, defendants pay a fee to shareholder lawyers to police their disclosures in federal court.
With Emulex now on the Supreme Court’s docket, it’s going to be really, really interesting to see what the Trump administration has to say about shareholders’ right to bring these Section 14 class actions, known derisively as “deal tax” litigation. The Securities and Exchange Commission, as I’ll explain, has a long history of backing private shareholder litigation to enforce securities laws, arguing time and again that private class actions bolster government enforcement. But backing an implied right of action in a statute that does not mention private shareholder suits would cut against the philosophy of the Trump Justice Department, especially when the business lobby contends that plaintiffs’ lawyers are abusing that private right of action.
Typically, the SEC strongly influences the government’s position in securities cases at the Supreme Court, even though the solicitor general represents the executive branch. In a case like Emulex, according to a lawyer familiar with the process, the SEC commissioners will typically vote on the agency’s view of the issues after hearing from career lawyers. That formal vote is passed along to the solicitor general, who also hears from both sides before deciding what (if anything) the Justice Department will say in an amicus brief in the case. It would be quite unusual for the Justice Department to take a position contrary to the recommendation of the SEC commissioners, although we won’t necessarily know about it because the SEC vote and the SG’s deliberations are private.
The SEC, as I mentioned, traditionally backs shareholders in securities class action disputes at the Supreme Court. In 2014’s Halliburton v. Erica P. John Foundation, for instance, the Justice Department urged the justices to reaffirm the precedent that makes it possible for shareholders to sue as a class over fraudulent corporate representations. And lest you protest that Halliburton was litigated during a Democratic presidential administration, consider that the Justice Department previously sided with shareholders in the case that set the crucial precedent under scrutiny in Halliburton, 1988’s Basic v. Levinson. That case was litigated when Ronald Reagan was president. In fact, the only example I found of the Justice Department backing a securities class action defendant in a major case at the Supreme Court was a 2004 amicus brief in Dura Pharmaceuticals v. Broudo, when the George W. Bush administration asked the justices to tighten the definition of loss causation.
Interestingly, the government has previously take a stance on the private right of action under Section 14. Back in 1976, when the SEC used to file its own amicus briefs at the Supreme Court instead of being represented by the solicitor general’s office, the SEC opined in Piper v. Chris-Craft Industries that Congress intended to give private parties a right to sue over misleading tender offer disclosures when lawmakers passed 1968 changes to the Securities and Exchange Act. Those changes, passed in response to a wave of abusive tender solicitations, anticipated enforcement by both the SEC and private parties, according to the SEC.
“Rarely is the commission in a position to take court action before it is not already too late to ‘unscramble the eggs,’” the amicus brief said. “On the other hand, the contestants who have a significant economic stake in the manner in which the contest is conducted also have the greatest ‘incentive to detect violations and vigorously pursue remedies,’ all in furtherance of the purposes of the act.” (The Supreme Court ended up siding against the plaintiff in the Christ-Craft case, finding that a spurned tender offerer does not have a right to sue under Section 14 but leaving open the question of whether shareholders can sue.)
Of course, 1976 was a long time ago, and the Supreme Court, as the U.S. Chamber’s brief in the Emulex case argues, has become increasingly reluctant to discern an implied private right of action in statutes that don’t specifically address suits by private plaintiffs. Conway told me he wouldn’t be surprised if tension between the SEC’s history of backing securities plaintiffs and the solicitor general’s reluctance to endorse an implied right of action leads the government to skip filing any amicus brief at all in the Emulex litigation.
I’d be surprised if the Justice Department sits on the sidelines of a major securities case. But DOJ didn’t respond to my email query. Emulex counsel Garre declined to comment on DOJ’s potential involvement and shareholder counsel Daniel Geyser didn’t get back to me. So we’ll just have wait and see what, if anything, DOJ has to say.
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