Tuesday, April 02, 2019

NASAA supports Ninth Circuit’s private right for tender offer shareholders

By Jay Fishman, J.D.

The North American Securities Administrators Association, Inc. (NASAA) and a number of securities law scholars submitted two separate amicus briefs asking the United States Supreme Court to dismiss a petition for writ for certiorari as improvidently granted or affirm the Ninth Circuit Court of Appeals’ decision granting tender offer shareholders a private right to sue for negligence under Williams Act, Section 14(e). According to the respondents, the certiorari petition contended that the appellate court exceeded Congress’s authorizing statute by extending a private right of action for proxy solicitation shareholders onto tender offer shareholders (Emulex Corp. v. Varjabedian, March 28, 2019).

But both respondent groups debunked this argument by asserting that the private right of action for tender offer shareholders was implied in the statute, thereby conferring a judicial right upon the court to grant it, with the caveat that Congress could always later revoke it. NASAA’s supporters (including the SEC’s Investor Advocate Rick Fleming) and the law scholar supporters (including Rochester University Professor and Wolters Kluwer securities treatise writer Joel Seligman) emphasized slightly different points to support the court of appeals’ decision.

The Williams Act. The Williams Act comprises tender offer amendments to the Securities Exchange Act of 1934 that were proposed in 1968 by New Jersey Senator Harrison A. Williams. The amendments specifically require that corporations proposing to make a cash tender offer first disclose certain information to the shareholders. The tender offer type of corporate takeover, by the mid-1960’s, became the favored type of takeover instead of the previously favored proxy solicitation type, which attempted to obtain the votes of enough shareholders to gain control of a corporation's board of directors. But because of the way companies were abusing cash tender offers at the time, Congress passed the Williams Act in 1968 to mandate full and fair disclosure for the stockholders’ benefit. Section 14(a) of the Williams Act. involving the proxy solicitation type of takeover, allowed aggrieved shareholders a private right to sue for damages, but Section 14(e) on cash tender offers never expressly conferred that right.

Legal scholars’ amicus brief. The legal scholars’ amicus brief acknowledged that the Ninth Circuit was never one to grant a private right of action for tender offer shareholders under Section 14(e) of the Williams Act but argued that, nevertheless, Congress intended for there to be an implied right of action for harmed tender offer shareholders when it enacted Section 14(e). The scholars understood the Ninth Circuit’s historical reluctance to extend a right it did not read into Congress’s statutory text but reiterated their support for this court’s recent ruling that a private right was implied in Section 14(e) and declaring to other courts in the appellate opinion that because the right is implied, re-deciding whether there is a private right in Section 14(e) is a waste of a court’s time.

The scholars then emphasized that implied private rights of action were always a part of securities regulation, remarking that while Exchange Act Section 10(b) does not create an express private cause of action, the courts have long recognized an implied private cause of action to enforce this provision. The petitioners, however, claimed that Section 14(e) is not entitled to the same treatment because this court of appeals has never recognized a cause of action under Section 14(e). But the scholars proclaimed that while this court has not previously recognized a private right of action, it was able to make its ruling by relying on a consensus of lower court decisions that did recognize this private right which was informed by Congress’s understanding of the text it was enacting.

NASAA’s amicus brief. While the legal scholars in their amicus brief asked the U.S. Supreme Court to simply affirm the court of appeals decision finding an implied private right of action for aggrieved tender offer shareholders in Section 14(e) of the Williams Act, NASAA implored the court to dismiss the cert petition and not decide the private right of action unless it felt inclined to do so, in which case it should affirm the Ninth Circuit’s decision. NASAA’s brief primarily argued that the main finding was not whether there was an implied private right of action in Section 14(e) but that Section 14(e) confers the same right on tender offer shareholders that Section 14(a) confers on proxy solicitation shareholders because Congress created both sections with the same intent.

The petitioners, however, contended that Congress did not intend for Section’s 14(a) private right to apply to Section 14(e) because 14(a) allows a cause of action for negligence while 14(e) is an intentional fraud statute requiring proof of scienter. But NASAA pointed out that Section 14(e) actually contains two separate clauses and that while the second one is for intentional fraud that Congress later permitted the SEC to adopt rulemaking on, the first clause is, in fact, a negligence statute that was never altered from its enactment.

NASAA’s ultimate argument, though, for the Supreme Court to recognize the Ninth Circuit’s private right of action for aggrieved tender offer shareholders is that a private litigation suit would allow a tender offer shareholder to recover all of the proceeds lost to them on a corporation’s negligent investment. Without the private right, they would have to rely on the result from a lawsuit filed by a federal or state securities regulator that could recover only disgorgement from the negligent entity, not full damages.

The case is No. 18-459.