(Reuters) - Historically a defender of private shareholder litigation to enforce securities laws, the U.S. government told the U.S. Supreme Court in an amicus brief in Emulex v. Varjabedian that investors do not have a right to sue corporations for misleading tender offer disclosures.
The Justice Department acknowledged (as I’ve reported) that back in 1976, the Securities and Exchange Commission took the exact opposite position about shareholders’ right to sue over tender offer disclosures in an amicus brief in a Supreme Court case called Piper v. Chris-Craft Industries (430 U.S. 1), in which the justices opted not to answer the question. But in this week’s Emulex brief, DOJ argued that it has changed its view to reflect the Supreme Court’s changed attitude about inferring a private right to sue when Congress hasn’t specified that it exists.
Beginning with the Piper case, DOJ said, the justices have repeatedly refused to recognize new private rights of action and have rejected attempts to broaden implied rights already established in Supreme Court precedent. The court made that sentiment explicit, according to DOJ’s brief, in 2001’s Alexander v. Sandoval (121 S.Ct. 1511), which said the Supreme Court had “abandoned” its old regime of conferring private rights to sue when private enforcement would advance Congressional purposes.
The Justice Department, on behalf of the SEC, has long sided with shareholders defending challenges to their right to sue corporations for fraudulent misrepresentations in securities filings, but DOJ said in its Emulex brief that there’s no contradiction in now arguing against investors’ right to sue for misleading tender offer disclosures because the Supreme Court has already upheld the former but not the latter. (As DOJ’s brief noted, the justices have also held, in 1964’s J.I. Case v. Borak, 84 S.Ct. 1555, that shareholders can sue over deficient disclosures in proxy materials; the Justice Department is not calling in its Emulex brief for the justices to roll back that right.)
“The (SEC) has advocated for and continues to believe that (shareholder) actions serve as an important adjunct to government enforcement suits,” the DOJ brief said. “But because this court has not previously recognized a private right of action (when it comes to tender offer disclosures), the same reasoning does not apply here.”
You may recall that the question presented in the Emulex case is technically whether shareholders must prove a corporation’s fraudulent intent in a class action alleging misrepresentations in tender offer disclosures. The 9th U.S. Circuit Court of Appeals held that investors need only show negligence, breaking with several other federal circuits. In Emulex’s Feb. 19 merits brief (2019 WL 764208), Gregory Garre of Latham & Watkins argued both that the Supreme Court should clarify the pleading standard to require a showing a scienter and that the justices should take the next step and get rid of shareholder class actions for tender offer disclosures.
“The 9th Circuit was wrong to extend the private cause of action it had previously inferred … to mere negligence,” the Emulex brief said. “But the bigger problem is that there is no basis for inferring any private right of action … at all.”
DOJ disagreed with Emulex about the pleading standard, arguing that the language of the statute does not require evidence of fraudulent intent – and that, if it’s right that the SEC bears all responsibility for policing tender offer disclosures, the agency needs the broad discretion of a negligence standard.
But, critically, it agreed that the Supreme Court must resolve the big question of investors’ right to sue as well as the follow-up issue of the appropriate pleading standard. That’s important because the shareholders who sued over disclosures in Avago Technologies’ 2015 acquisition of Emulex have told the Supreme Court that Emulex waived the right to claim investors can’t sue because the company failed to raise that argument in the lower courts.
Emulex’s merits brief disputed that assertion, insisting that the company first challenged shareholders’ right to sue in an en banc petition at the 9th Circuit, which was the first time the argument could be raised in light of 9th Circuit precedent allowing shareholder class actions over tender offer disclosures. DOJ argued in its amicus brief that the justices can’t decide the narrow pleading standard question without looking at the big picture, regardless of whether Emulex raised right-to-sue arguments in the lower courts. “The question whether a private right of action exists … is ‘fairly included’ within the question on which this court granted certiorari,” the brief said. “The determination whether a private right exists is ‘predicate to an intelligent resolution of the question’ whether Section 14(e) (of the Securities and Exchange Act) encompasses negligent misrepresentations.”
The U.S. Chamber of Commerce, which pushed hard for the Supreme Court to take up the issue of shareholder class actions over tender offer disclosures, submitted a new amicus brief arguing that taking the right to sue away from investors won’t cause any practical harm because these cases have “increasingly and largely become a vehicle through which plaintiffs’ lawyers extract attorneys’ fees from corporate acquisitions involving tender offers, by bringing cursory litigation that benefits no one but themselves.”
The Chamber brief, by George Conway of Wachtell, Lipton, Rosen & Katz, analyzed all of the shareholder class actions claiming tender offer disclosure violations over the last 23 years, using data from the Stanford Securities Class Action Clearinghouse. Wachtell’s 155-case data set showed that 116 of the cases brought under Section 14(e) involved no meaningful litigation activity. “Sometimes a motion for a temporary restraining order or preliminary injunction is filed, but usually not; and when one is filed, almost invariably it is quickly withdrawn, before any response is submitted,” the Chamber brief said.
Plaintiffs lawyers typically dismiss these cases quickly, after the defendant agrees to add disclosures to address its supposedly deficient tender offer filings – and to pay a mootness fee to the shareholder firm that filed the case, the Chamber brief said. The Chamber cited a study positing that such fees average nearly $300,000. Plaintiffs lawyers have told me that the number is actually more in the $100,000 range, but that’s still a lot of money for cases in which, in the Chamber’s description, “no significant litigation activity” takes place.
It will come as news to few of you – but perhaps will have been unknown to the justices – that the pace of M&A class actions in federal court, including cases alleging Section 14(e) violations, has drastically accelerated since Delaware’s 2016 crackdown on attorneys’ fees in so-called disclosure-only settlements. (The Chamber named five shareholder firms – Rigrodsky & Long, WeissLaw, Monteverde & Associates, Levi & Korsinsky and Faruqi & Faruqi – that dominate the practice, filing dozens of tender offer disclosure class actions in the last three years.)
The Chamber brief quantified the trend for the Supreme Court. It also offered a vivid opinion of the merits of these filings: “What all this shows is that Section 14(e) has become, for the most part, a vehicle used not for making whole shareholders who are victims of fraud in tender offers, but a means by which plaintiffs’ lawyers can secure a place at the bargaining table in extracting attorneys’ fees in a farcical genre of ‘litigation’ that benefits no one but themselves,” the brief said. “Section 14(e) litigation mostly now amounts to a ‘litigation tax’ on acquisitions involving tender offers.’
It’s going to be interesting to see whether shareholders’ counsel of record in the Emulex case, Daniel Geyser, addresses the Chamber’s contention that tender offer disclosure class actions are a worthless enterprise for everyone except plaintiffs lawyers. I emailed Geyser to ask about the Justice Department’s brief but didn’t hear back.
Emulex counsel Garre said in an email that his client is “pleased with the government’s support.”