John Coffee thinks Emulex will prove to be much ado about nothing:
Defendants are hoping that the Supreme Court’s decision earlier this month to grant certiorari in Varjabedian v. Emulex Corp.[11] will produce a decision that slows the spread of merger objection cases. In that case, the Ninth Circuit panel held that because Section 14(e) of the Securities Exchange Act authorizes the SEC to prohibit acts not themselves fraudulent under the common law or Section 10(b) (at least if the prohibition was reasonably designed to prevent acts and practices that were fraudulent), the plaintiff in such a case need not allege scienter, but only negligence. Although this position is arguable, every other circuit that has ruled has decided to the contrary, and the Ninth Circuit has not done well in the Supreme Court when it is the lone dissenter among the circuits. More importantly, some hope that the Supreme Court will rule (as some amici have requested it to do) that there is no implied private cause of action under Section 14(e). Although this is possible, the issue was not discussed in any detail in Emulex. Thus, the court is more likely to insist on scienter, while noting in a parenthesis or footnote that “for purposes of this case we have assumed with the parties that a private cause of action exists under Section 14(e), which issue we reserve for a future day.”
Still, assume that the court either says that there is no private cause of action under Section 14(e) or mandates that scienter must be plead. What will the impact be? Either decision will, of course, provoke hundreds of law firm memos to clients, but the real world impact may be very modest. Plaintiffs could simply assert the same allegations under Section 10(b) and Rule 10b-5. Or, if a merger vote by a publicly listed corporation is involved, a cause of action might also be plead under the proxy rules and Section 14(a) (and such a suit in some circuits requires no allegation of scienter). The false premise in expecting Emulex to restrict the flood of merger objection cases is the assumption that plaintiffs want to take their cause of action to trial. In the vast majority of such cases, however, they do not. Rather, they are either (a) exploiting the lawsuit’s potential ability to disrupt the merger’s timetable or (b) selling preclusion to the defendant because settling the current frivolous suit may prevent other litigation with greater merit. Hence, the fact that plaintiffs must base their cause of action on Rule 10b-5 (where they cannot satisfy the pleading requirements) is not prohibitive because they plan to settle, not fight.
First, judges could solve that problem by smacking plaintiff lawyers who bring such cases with Rule 11 sanctions. But most federal judges lack the spine to do so. Second, somebody like Ted Frank or Sean Griffith could intervene in such settlements.
Update:
I think you’re right now that I stop and think about it. Section 14(e) lacks the purchase or sale requirement, which allows for standing for non-tendering shareholders. See Piper v. Chris-Craft, 430 US 1, 39.
— Professor Bainbridge (@ProfBainbridge) January 23, 2019
