In a bold new amicus brief backing Emulex’s petition for U.S. Supreme Court review of a decision reviving a shareholder M&A class action, the U.S. Chamber of Commerce argues that the justices should take the case to establish that investors have no right to sue under the federal securities provision at the heart of hundreds of recent class actions challenging proxy disclosures in M&A deals.
The brief, written by George Conway of Wachtell Lipton Rosen & Katz, argues that there’s nothing in the text of the provision, Section 14 of the Securities and Exchange Act, that provides shareholders with a private right of action for alleged misrepresentations in corporate proxy filings. (Conway, newly famous as a critic of President Donald Trump, was in the news Wednesday as one of the founders of Checks and Balances, a group of conservative lawyers that pledges to push back against policies that undermine the rule of law.)
Fifty years ago, the Chamber brief said, the Supreme Court was content to infer a private right to sue from laws that didn’t specify any such right – including Section 14. But according to the Chamber, the justices reversed course on implied rights of action in 1975’s Cort v. Ash (95 S.Ct. 2080). Now it’s time, according to Conway and the Chamber, for the justices to apply their textualist skepticism to the recent wave of shareholder class actions challenging M&A transactions under Section 14.
“In inferring a private right under Section 14(e), the courts of appeals have simply ignored this court’s post-1975 precedents on private rights of action. Those precedents foreclose any recognition of a private right,” the brief said. “By granting review and applying its private-right precedents here, this court can obviate the heavy burden of determining the elements of yet another complex, judicially-created liability scheme.”
The Chamber brief expands on a minor theme of the Emulex Supreme Court petition by Greg Garre of Latham & Watkins. As I’ve previously written, Emulex is seeking review because the 9th U.S. Circuit Court of Appeals split from at least four other federal circuits to hold that shareholders must only allege negligence, not fraudulent intent, to proceed with class actions claiming proxy misrepresentations. Emulex’s petition argued that the 9th Circuit’s negligence standard is wrong as a matter of law and dangerous as a matter of policy. Shareholders have recently flooded federal courts with Section 14 M&A shareholder suits, following a clampdown on fees in such cases by judges in Delaware Chancery Court. The 9th Circuit decision, Emulex said, will only encourage more unwarranted shareholder class actions, effectively imposing a tax on big M&A deals.
Emulex also argued, almost as an aside, that Section 14 doesn’t even give shareholders a right to sue. At the time, I said that argument seemed like an extremely long shot, given that the Supreme Court recognized a private cause of action under the provision way back in 1964’s J.I. Case Co. v. Borak (377 U.S. 426).
But in the new Chamber brief, Conway contends the Borak decision and others of its ilk have been discredited by the Supreme Court’s turn away from inferring private rights of action in laws that contain no such language. Since the justices drew a line in that 1974 Cort case, the Chamber said, the Supreme Court has never endorsed shareholders’ right to sue under Section 14.
Appellate courts surely have, in a long string of cases culminating in the 9th Circuit’s Emulex ruling. But those courts, the Chamber said, “simply assumed, without analysis, that such a private right existed, and went straight to the question of identifying who had standing to assert it ... Not one of those courts has properly applied this Court’s post-Cort v. Ash case law.”
You may be thinking that securities class action critics have been down a similar road before. A few years back, you may recall defendants and their amici tried to convince the Supreme Court to erase shareholder class actions under Section 10b-5 of the Exchange Act. The Supreme Court, in 2014’s Halliburton v. Erica P. John Fund (134 S.Ct. 2398), refused to take such a drastic step, instead tinkering around the edges of class certification.
This time is different, said Stanford law professor Joseph Grundfest, a former Securities and Exchange commissioner who collaborated with Conway on a brief in the Halliburton case at the Supreme Court and calls Conway’s new amicus filing “brilliant.” For one thing, Grundfest said, the justices wouldn’t be curtailing shareholders’ rights to sue over fraudulent misstatements if they held there’s no private cause of action under Section 14 because investors could still bring claims under Section 10b-5. “The real-world effect of reversing the 9th Circuit is simply to eliminate a newly created negligence exception to the scienter rule,” Grundfest said.
There’s also no body of Supreme Court precedent in the last several decades to support the inference of a private right of action under Section 14, in contrast to the many post-1975 cases in which the Supreme Court has endorsed Section 10b-5’s implied right, Grundfest said.
His prediction: The Supreme Court will agree to hear the Emulex case and will end up deciding both that the 9th Circuit’s negligence standard was wrong and that there is no private right to sue under Section 14. “Conway’s straightforward textualist argument is likely to resonate with this court,” Grundfest said.
The Emulex shareholders are represented at the Supreme Court by Daniel Geyser of the eponymous firm Geyser. He said in an email that the Chamber is overreaching with an argument Emulex failed to push in the lower courts. “Section 14(e) contains exactly the same ‘hints’ that have supported private rights under related securities laws for decades,” Geyser wrote. “And Congress has repeatedly revamped core features of securities litigation without once suggesting that these private rights should not exist....The Supreme Court is a court of review, not first view. If it wants to rethink half a century of settled practice, it should at least wait for a vehicle where the question presented wasn’t expressly abandoned below.”
(This article has been updated to include comment from Emulex shareholders’ counsel.)
Reporting by Alison Frankel
The views expressed in this article are not those of Reuters News.