United States: Supreme Court Hearing Raises Questions About Private Rights Of Action Under § 14 Of Securities Exchange

One of the more intriguing rulings of this Supreme Court Term is the Court's one-sentence order yesterday dismissing as improvidently granted the writ of certiorari issued in Emulex Corp. v. Varjabedian (No. 18-459). The Court had taken the case to review a Circuit split on the liability standard under § 14(e) of the Securities Exchange Act, which regulates tender offers. Along the way, however, the petitioner argued that a private right of action does not exist at all under § 14(e) – an issue that had not been raised in the lower courts. That issue occupied a large portion of the oral argument held on April 15, 2019, with the parties and the Justices exploring whether the Court should entertain the previously unraised issue and, if so, what the outcome should be.

One week later, the Court dismissed the writ of certiorari as improvidently granted, even though a Circuit split remains on the substantive liability issue. The dismissal virtually ensures that both the liability standard and the existence of a private right of action under § 14(e) will reach the Court in the future. But, perhaps more important, the tenor of the oral argument could lead litigants to ask the Court to overrule longstanding precedent holding that a private right of action exists under § 14(a), which governs proxy litigation.

A ruling that no private right of action exists under § 14(a) could have dramatic implications for merger litigation, which has recently been migrating from state to federal courts in light of the Delaware courts' crack-down on disclosure-only settlements of suits challenging mergers. Some members of the plaintiffs' bar have sought to avoid the Delaware courts' antipathy to those cases by bringing them in federal court and pleading subject-matter jurisdiction under § 14(a) for allegedly false or misleading disclosures in proxy solicitations. If a private right of action does not exist for those claims, a federal forum might be foreclosed, and plaintiffs would have to resort to state courts again.


The Emulex case involves § 14(e) of the Exchange Act, which concerns statements made in connection with tender offers. Section 14(e) forbids "any person [i] to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or [ii] to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer" (brackets and emphasis added). Starting in 1973, five federal appellate courts – the Second, Fifth, Third, Sixth, and Eleventh Circuits – held that § 14(e) requires a showing of scienter (knowing or reckless misconduct), not mere negligence.

The appellate courts had reached that conclusion by analogizing § 14(e) to Exchange Act § 10(b) and SEC Rule 10b-5. Section 10(b) prohibits the use or employment of "any manipulative device or contrivance" in contravention of SEC rules in connection with the purchase or sale of a security. And Rule 10b-5, promulgated under § 10(b), forbids any person (a) "[t]o employ any device, scheme, or artifice to defraud," (b) "[t]o make any untrue statement of a material fact," or any material omission, in connection with the purchase or sale of a security, or (c) "[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit."

The Supreme Court held in Ernst & Ernst v. Hochfelder (1976) that claims under § 10(b) and Rule 10b-5 require proof of scienter, not mere negligence. Accordingly, courts viewing § 14(e) as analogous to § 10(b) have applied the scienter standard to § 14(e) claims.

The Emulex Case

The Ninth Circuit panel unanimously concluded in Emulex that those five Circuits were wrong in light of Ernst & Ernst and the Supreme Court's subsequent decision in Aaron v. SEC (1980).

According to the Ninth Circuit, Ernst & Ernst had held that misrepresentation claims under § 10(b) and Rule 10b-5 require proof of scienter because § 10(b) itself applies only to "manipulative devices and contrivances" – a concept that involves intent to deceive. The Supreme Court had acknowledged that Rule 10b-5's second prong – which prohibits "any untrue statement of a material fact" or any material omission – could be read in isolation as proscribing any type of material misrepresentation or omission, whether intentional or not. But unless a statute otherwise provides, a regulation cannot exceed the scope of the authorizing statute, and § 10(b) itself prohibits only intent-based "manipulative devices and contrivances." Accordingly, all prongs of Rule 10b-5 require proof of scienter.

The Ninth Circuit noted that, in contrast to § 10(b), § 14(e) contains two prongs: one prohibiting materially "untrue statements" or omissions, and another prohibiting "fraudulent, deceptive, or manipulative acts or practices." The latter clearly requires scienter; however, as the Supreme Court had observed regarding Rule 10b-5, the former – viewed in isolation – does not necessarily do so. The Ninth Circuit also noted that the first prong of § 14(e) is almost identical to § 17(a)(2) of the Securities Act, which the Supreme Court had held in Aaron does not require a showing of scienter. Accordingly, the Ninth Circuit held that § 14(e) misrepresentation or omission claims can be predicated on simple negligence.

Emulex sought and obtained certiorari based on the Circuit split on the liability standard. Its merits brief, however, also argued that courts should not imply a private right of action under § 14(e) – a point that Emulex had not litigated in the lower courts.

The United States filed an amicus brief in support of neither party. The United States agreed with the Ninth Circuit that § 14(e)'s first prong does not contain a scienter requirement and can be satisfied by mere negligence. However, the Government argued that the case should have been dismissed because § 14(e) does not provide a private right of action for damages – a position contrary to the SEC's stance in earlier litigation before the Supreme Court.

Supreme Court's Decision

The Supreme Court argument on April 15, 2019 focused on three issues: (i) whether the Court should consider a challenge to the private right of action, inasmuch as the issue had not been raised below; (ii) whether a private right of action exists, if the issue had not been waived; and (iii) what the liability standard should be (negligence or scienter). On April 23, 2019, the Court issued a one-sentence order dismissing the writ of certiorari as having been improvidently granted – probably because the Court concluded that this case was not the best vehicle to consider the § 14(e) issues in light of Emulex's not having challenged the private right of action in the lower courts.

During oral argument, however, certain Justices made comments that could go beyond the § 14(e) context and implicate § 14(a), which, in conjunction with implementing regulations promulgated by the SEC, prohibits false and misleading statements in proxy solicitations. The Supreme Court had held in J.I. Case Co. v. Borak (1964) that a private right of action exists under § 14(a), and litigants have frequently exercised that right to attack proxy solicitations for mergers and other corporate actions. But the Emulex argument seems to have revealed doubts about Borak among at least some Justices.

Chief Justice Roberts appeared expressly to question Borak's validity in light of the significant change in the Court's jurisprudence on implied rights of action in the 55 years since Borak was decided. Chief Justice Roberts observed that "we now know that that was not the right approach [in Borak]," that "Borak would not be decided the same way today," and that, "from today's perspective, what we did back then was a mistake." In response, the plaintiff's counsel conceded that "Borak may not be decided the same way today" and that "maybe Borak was wrongly decided," although he sought to differentiate § 14(e) from the Borak rationale.

Several other Justices also wondered whether any difference should exist as to the availability of a private right of action under § 14(a) versus under § 14(e), inasmuch as corporate transactions can be accomplished either through mergers (implicating § 14(a)) or through tender offers (implicating § 14(e)). These comments collectively suggest that attacks on private rights of action under § 14(e) could cause litigants to raise the same questions about § 14(a) and ask the Court to overrule Borak.


The Emulex punt will undoubtedly lead to efforts to present the § 14(e) issues to the Supreme Court in future cases. Defendants will attack the existence of a private right of action, and the Circuit split on the liability standard must be resolved in any event, because the SEC can bring enforcement actions under § 14(e) even if private litigants cannot sue. The Government took the position at oral argument that § 14(e) covers negligent misrepresentations regardless of whether a private right of action exists.

The more important ramifications, however, could involve any spillover into § 14(a) jurisprudence, because § 14(a) cases are more common than are § 14(e) actions. Section 14(a) has provided a means to attack proxy solicitations for mergers, election of corporate directors, and other significant corporate transactions. If shareholders cannot invoke that section to establish federal jurisdiction and assert a cause of action, large swaths of securities litigation could be affected.

The impact on merger litigation could be particularly important. When the Delaware Court of Chancery began to crack down on what it viewed as meritless lawsuits leading to settlements providing only additional proxy disclosures of questionable significance (plus attorneys' fees for plaintiffs' counsel), a number of those cases moved to federal courts. Those lawsuits have asserted § 14(a) claims attacking the proxy solicitations in addition to the standard state-law fiduciary-duty claims that would otherwise have been pled in state-court litigation. A decision overruling Borak could close the federal courts to at least some of those cases.

For now, everyone will await the next round of cases teeing up § 14(a) and § 14(e) issues.

Supreme Court Hearing Raises Questions About Private Rights Of Action Under § 14 Of Securities Exchange

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions