(Reuters) - For the past five months, beginning with my story last October about a petition for U.S. Supreme Court review by Emulex Corporation, I’ve been reporting on the tantalizing proposition that the justices could use the Emulex case to rein in shareholder class actions challenging M&A deals.
Emulex’s lawyer, Gregory Garre of Latham & Watkins, suggested in Emulex’s cert petition that the Securities and Exchange Act doesn’t specifically grant a shareholders a private right to sue for allegedly inadequate tender offer disclosures, and the Supreme Court hasn’t endorsed such a right. (The court, as Garre acknowledged, has held that shareholders have a right to sue over proxy disclosures but hasn’t addressed the private right to sue over allegedly misleading tender offer filings.) George Conway of Wachtell Lipton Rosen & Katz picked up that theme in an amicus brief in which the U.S. Chamber urged the Supreme Court to grant review in Emulex to clarify that shareholders can’t sue over tender offers.
Once the justices took the case in January, Emulex homed in on the issue of shareholders’ right to file tender offer disclosure class actions. Crucially, so did the Justice Department. In an amicus brief last month, DOJ argued that Congress only gave a right to police tender offer disclosures to the Securities and Exchange Commission, not to investors. “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.”
But what if, despite all the hoopla, shareholders’ right to sue isn’t actually at issue in the Emulex case?
That’s the argument advanced in a new brief by the shareholders who sued Emulex over its 2015 acquisition by Avago Technologies. Shareholders’ counsel Daniel Geyser contended that the only issue actually before the justices is the pleading standard for investor class actions alleging deficient tender offer disclosures. In the decision the Supreme Court agreed to review, the 9th U.S. Circuit Court of Appeals broke with several other circuits to hold that shareholders need only allege negligence, not fraud. And that, according to shareholders, is the only holding that the justices should decide – not the overarching question of whether investors even have a right to sue.
Emulex’s challenge to the private right of action “is both meritless and not properly before the court,” the brief said. “There is no circuit conflict; not a single court below grappled with any of the relevant arguments; indeed, it appears that not a single court anywhere has assessed the full panoply of arguments. And percolation would have an added benefit here, since it would put Congress on notice; if this Court guesses wrong and uproots the uniform practice below, it will have upset a securities scheme that has ably protected shareholder rights for decades. A short delay will give the political branches time to weigh in — should they see any need to revise the overwhelming consensus on this issue.”
Shareholders offered two arguments against Supreme Court consideration of the big question: Emulex waived the issue at the 9th Circuit, they allege; and the Supreme Court is not supposed to be a court of first impression. Emulex has conceded that it didn’t challenge shareholders’ right to sue before the three-judge 9th Circuit panel that heard its appeal, but the company’s lawyers said that was because 9th Circuit precedent precluded the argument. In its merits brief to the Supreme Court, Emulex contended that it raised questions about the private right of action at the earliest possible point before the 9th Circuit, in a brief requesting en banc review.
The new investors’ brief refuted Emulex’s assertion. At best, according to the investors’ brief, Emulex referred only obliquely in its en banc brief to the possibility that the law’s tender offer provision does not confer a private right of action, at the end of a paragraph addressing an entirely different point. “There was no express statement that Section 14(e) was not privately enforceable, much less any argument that existing circuit precedent had been undermined by subsequent authority,” shareholders’ new brief said. “If petitioners tried to assert this argument below, it would be deemed waived. There is no reason this court should be more lenient.”
The Justice Department, investors said, didn’t even try to defend the proposition that Emulex had preserved a challenge to the private right to sue in the 9th Circuit, arguing instead that the big question is nevertheless before the Supreme Court because the justices can’t decide the pleading standard for shareholder tender offer disclosure claims unless shareholders, in fact, have a right to sue. In the new brief, shareholder counsel Geyser said DOJ’s argument “misses the point. Nothing in this court’s rule says that the phrasing of a question presented can revive an abandoned or conceded point — a narrow question simply creates an opportunity to abandon a point that was actually preserved below.”
It’s worth pointing out that shareholders similarly argued in their brief opposing Supreme Court review that Emulex had waived any challenge to investors’ right to sue. The Supreme Court took the case anyway – but, of course, we don’t know whether the justices intend simply to resolve the circuit split over the pleading standard or to confront the fundamental question of whether shareholders are entitled to sue.
Emulex lawyer Garre declined to comment on the new shareholders’ brief, but it’s going to be interesting to see what the company (now part of Avago) has to say in its reply brief.
The views expressed in this article are not those of Reuters News.