Important Legal Updates for Investors
The U.S. Justice Department Announces that Shareholders No Longer Have the Right to Sue over Allegedly Misleading Tender Offer Disclosures
In the past, private shareholders had the right to sue over tender offer disclosures, according to a brief in a Supreme Court case known as Piper v. Chris-Craft Industries.
In January of 2018, the U.S. Supreme Court made an agreement to review the 9th U.S. Circuit Court of Appeal’s ruling of Emulex v. Varjabedian, which revived a shareholder class action challenging the company’s disclosures in connection with a 2015 acquisition. The case presented 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.
Put more simply, a very large question hung over the Emulex case:
Do shareholders have the private right to sue over tender offer disclosures?
The answer soon came. The U.S. government recently told the U.S. Supreme Court in a brief from Emulex v. Varjabedian that investors no longer have a right to sue corporations for misleading tender offer disclosures.
The U.S. Department of Justice (DOJ) argued that it has altered its view to reflect the Supreme Court’s changed attitude about inferring a private right to sue when Congress has not specified that it exists.
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, and the Supreme Court had reportedly abandoned its old regime of conferring private rights to sue when private enforcement would advance Congressional purposes.
The DOJ Stated that there is No Contradiction in Now Arguing Against Investors’ Right to Sue for Misleading Tender Offer Disclosures
This is a huge shift. The Justice Department, on behalf of the SEC, had for many years sided with shareholders defending challenges to their right to sue corporations for fraudulent misrepresentations in securities filings. The DOJ, however, 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.
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.
The DOJ’s brief states:
The (SEC) has advocated for and continues to believe that (shareholder) actions serve as an important adjunct to government enforcement suits. 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.
Finally, the U.S. Chamber of Commerce lobbied strongly for the Supreme Court to take up the issue of shareholder class actions over tender offer disclosures, turned in a fresh brief arguing that taking the right to sue away from investors will not lead to 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.