Ninth Circuit Creates Circuit Split by Ruling that Section 14(e) Claims Require Only Negligence

On April 20, 2018, in Varjabedian v. Emulex Corp., a panel of the Ninth Circuit Court of Appeals departed from five other circuits in holding that tender offer disclosure claims under Section 14(e) of the Exchange Act require a showing of negligence, not scienter. The board of target Emulex filed a recommendation statement in support of a tender offer, which discussed valuations performed by the company’s financial advisor in reaching its fairness opinion. However, the proxy omitted a summary of the premia paid analysis which depicted the tender offer as below the average, but within the range, of 17 selected comparable transactions. A shareholder brought suit alleging that omission of the premia analysis summary was misleading. The Court compared the first part of Section 14(e) with the “nearly identical” text found in Section 17(a)(2) and referred to the 1980 Supreme Court decision Aaron v. SEC, which found that Section 17(a)(2) does not require a showing of scienter. In contrast, other circuit courts analogized from the Supreme Court’s analysis of Rule 10(b)5 to conclude that Section 14(e) required a scienter standard. The Ninth Circuit rejected this reasoning, arguing that Rule 10(b)5 and the related statute were aimed at preventing manipulative and deceptive practices whereas broader concerns animated Section 14(e). This decision may make it easier for plaintiffs to challenge tender offer disclosures in the Ninth Circuit.