“Among other things, a uniform scienter standard for both Section 14(a) and Section 14(e) claims would avoid the inherent unfairness of subjecting companies to different liability risks simply based on whether they chose to pursue a transaction through a proxy solicitation or a tender offer.”
—Cory Andrews, WLF Senior Litigation Counsel
(Washington, DC)—Washington Legal Foundation (WLF) today asked the U.S. Supreme Court to reverse a Ninth Circuit decision that, alone among federal appeals courts, holds that a stockholder need plead only negligence to state a claim under Section 14(e) of the Securities Exchange Act of 1934.
In its amicus brief in Emulex Corp. v. Varjabedian, WLF argues that Congress intended that a uniform scienter standard apply to all private actions under Section 14 of the Exchange Act. The Ninth Circuit’s negligence standard creates liability for conduct even if the violator does not intend to violate the law. In contrast, to properly plead scienter, a plaintiff must allege an actual intent to manipulate, defraud, or deceive. That higher mental standard, WLF contends, should apply to all alleged misstatements or omissions, whether the suit arises from tender offers under Section 14(e) or proxy solicitations under Section 14(a).
Despite the over 30-year gap between the passage of Section 14(a) and Section 14(e), WLF’s brief shows that the two provisions are closely related. Both sections provide a means of accomplishing the same end—a change in corporate control. While neither provision contains an express mental-state requirement, the legislative history confirms that a private action brought under either provision should be subject to the same intent threshold.
As WLF explains, a uniform approach to Section 14 is the only one consistent with the Supreme Court’s decision in Ernst & Ernst v. Hochfelder, which confirms that any reasonable statutory interpretation must also examine the overall purpose, framework, and function of Section 14 as a whole, including the closely related Section 14(a). As WLF shows, a coherent interpretation of both sections will obviate the existing lower-court divisions and disparate standards that brought this case to the Court.
Lyle Roberts, George Anhang, and Daniel Sachs of Shearman & Sterling LLP provided WLF with substantial pro bono assistance in preparing its amicus curiae brief.
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