888 F.3d 399
9th Cir.2018Background
- Emulex and Avago announced a merger with Avago offering $8.00 per share (26.4% premium). Emulex filed a Recommendation Statement recommending shareholders tender, relying in part on a Goldman Sachs fairness opinion.
- Goldman Sachs prepared a one-page "Premium Analysis" chart comparing premiums from 17 semiconductor transactions; Emulex did not summarize that chart in the Recommendation Statement.
- Plaintiff (Mutza, lead plaintiff) sued on behalf of former Emulex shareholders, alleging violations of Section 14(e) (failure to disclose the Premium Analysis) and seeking to hold directors liable under Section 20(a); also alleged a claim under Section 14(d)(4).
- The district court dismissed with prejudice, holding Section 14(e) claims require scienter and that plaintiff failed to plead scienter; it also held Section 14(d)(4) does not create a private right of action and dismissed Merger Sub because it ceased to exist after the merger.
- The Ninth Circuit reversed in part: it held the first clause of Section 14(e) requires negligence (not scienter), reinstated the Section 14(e) claim (remanding materiality for the district court), left Section 14(d)(4) as no implied private right, preserved Section 20(a) to the extent it depends on surviving primary claims, and affirmed dismissal of Merger Sub as improper defendant.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §14(e) require scienter or negligence for omissions/misstatements in its first clause? | §14(e) first clause requires only negligence; plaintiff pleaded negligence for omitting the Premium Analysis. | §14(e) should be read like Rule 10b-5 and require scienter. | Held: First clause of §14(e) requires negligence, not scienter; reversed district court's scienter-based dismissal and remanded. |
| Was omission of the Premium Analysis material? | The omitted Premium Analysis (showing below-average premium) was materially misleading by omission. | The omission was not necessarily material; district court did not reach materiality. | Held: Court did not decide; remanded to district court to consider materiality under negligence standard. |
| Does §14(d)(4) create an implied private right of action? | Plaintiff argued for an implied private remedy under §14(d)(4) / Rule 14d-9. | Defendants argued §14(d)(4) does not create an implied private right and would be redundant with §14(e). | Held: Affirmed district court — §14(d)(4) does not create an implied private right of action. |
| Is Merger Sub a proper defendant and does §20(a) survive? | Plaintiff included Merger Sub as defendant; sought controlling-person liability under §20(a). | Defendants: Merger Sub ceased to exist post-merger; §20(a) depends on primary violation. | Held: Merger Sub dismissal affirmed (corporate capacity governed by charter law); §20(a) claim survives to the extent §14(e) survives and remanded. |
Key Cases Cited
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (recognizing scienter requirement for Rule 10b-5 based on §10(b) authority)
- Aaron v. SEC, 446 U.S. 680 (holding Section 17(a)(2) requires negligence, not scienter)
- United States v. O’Hagan, 521 U.S. 642 (noting §14(e) authorizes broader prophylactic SEC rulemaking than §10(b))
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (pleading standard for omissions/materiality in securities cases)
- Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341 (Second Circuit decision holding §14(e) requires scienter; discussed and distinguished)
- Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200 (Fifth Circuit decision treating §14(e) like Rule 10b-5)
- In re Digital Island Sec. Litig., 357 F.3d 322 (Third Circuit decision holding scienter required under §14(e))
- In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (explaining §20(a) depends on a primary securities-law violation)