Varjabedian v. Emulex Corp.

• Citation: 888 F.3d 399
• Decision Date: 20 April 2018
• Docket Number: No. 16-55088,16-55088
• Parties: Gary VARJABEDIAN, Plaintiff–Appellant, v. EMULEX CORPORATION; Bruce C. Edwards; Jeffrey W. Benck; Gregory S. Clark; Gary J. Daichendt; Paul F. Folino; Beatriz V. Infante; John A. Kelley; Rahul N. Merchant; Nersi Nazari; Dean A. Yoost; Avago Technologies Wireless (USA) Manufacturing, Inc.; Emerald Merger Sub, Inc., Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

888 F.3d 399

Gary VARJABEDIAN, Plaintiff–Appellant,

v.EMULEX CORPORATION; Bruce C. Edwards; Jeffrey W. Benck; Gregory S. Clark; Gary J. Daichendt; Paul F. Folino; Beatriz V. Infante; John A. Kelley; Rahul N. Merchant; Nersi Nazari; Dean A. Yoost; Avago Technologies Wireless (USA) Manufacturing, Inc.; Emerald Merger Sub, Inc., Defendants–Appellees.

No. 16-55088

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 5, 2017, Pasadena, California

Filed April 20, 2018

Juan E. Monteverde (argued), Monteverde & Associates PC, New York, New York; Barbara A. Rohr, Faruqi & Faruqi LLP, Los Angeles, California; for Plaintiff–Appellant.

Eric N. Landau (argued), and Travis Biffar, Jones Day, Irvine, California; Erica L. Reilley, Jones Day, Los Angeles, California; for Defendants–Appellees Emulex Corporation, Bruce C. Edwards, Jeffrey W. Benck, Gregory S. Clark, Gary J. Daichendt, Paul F. Folino, Beatriz V. Infante, John A. Kelley, Rahul N. Merchant, Nersi Nazari, and Dean A. Yoost.

Matthew Rawlinson (argued) and Hilary Mattis, Latham & Watkins LLP, Menlo Park, California; for Defendants–Appellees Avago Technologies Wireless (USA) Manufacturing, Inc.; Emerald Merger Sub, Inc.

Before: Susan P. Graber, Mary H. Murguia, and Morgan Christen, Circuit Judges.

Concurrence by Judge Christen

Plaintiff–Appellant Jerry Mutza¹ ("Plaintiff") appeals the district court's dismissal of his putative securities class action complaint, brought on behalf of former Emulex Corporation shareholders. The district court dismissed Plaintiff's complaint because he failed to plead a strong inference of scienter for Defendants' alleged violations of Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) ("Exchange Act"). In so concluding, the district court followed out-of-circuit authorities holding that Section 14(e) claims require proof of scienter. The district court noted, however, that the Ninth Circuit had yet to decide whether Section 14(e) claims require plaintiffs to plead that defendants acted with scienter. We now hold that Section 14(e) of the Exchange Act requires a showing of negligence, not scienter. Accordingly, we reverse the dismissal of the complaint and remand the case to the district court for it to reconsider Defendants' motion to dismiss under a negligence standard.

Moreover, because Plaintiff's Section 14(e) claim survives, his claim under Section 20(a) of the Exchange Act also remains. Further, for the reasons detailed below, we affirm the district court's (1) conclusion that Section 14(d)(4) of the Exchange Act does not create a private right of action and (2) dismissal of the complaint as to Emerald Merger Sub, Inc. because it is not a proper defendant.

I. BACKGROUND

This case centers on the merger between Emulex Corp. ("Emulex") and Avago Technologies Wireless Manufacturing, Inc. ("Avago"). Emulex was a Delaware-incorporated technology company that sold storage adapters, network interface cards, and other products. On February 25, 2015, Emulex and Avago issued a joint press release announcing that they had entered into a merger agreement, with Avago offering to pay $8.00 for every share of outstanding Emulex stock. The $8.00 price reflected a premium of 26.4% on Emulex's stock price the day before the merger was announced.

Pursuant to the terms of the announced merger agreement, a subsidiary of Avago, Emerald Merger Sub, Inc. ("Merger Sub"), initiated a tender offer for Emulex's outstanding stock on April 7, 2015. A tender offer is a technique whereby the offeror, Avago, seeks to obtain control of a target corporation, here Emulex, by publicly offering to purchase a specified amount of the target company's stock. See Arthur Fleisher, Jr. & Robert H. Mundheim, Corporate Acquisition by Tender Offer , 115 U. Pa. L. Rev. 317, 317 (1967). The offeror requests the stockholders of the target corporation "tender" their shares, at a fixed price, customarily in excess of the current market value, in order to gain control of the target company. Id. ; see also Piper v. Chris–Craft Indus., Inc. , 430 U.S. 1, 22, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977). When a tender offer is made, the target company often issues a statement to its shareholders recommending that they either accept or reject the tender offer. Emulex decided to issue such a statement but, before doing so, hired Goldman Sachs to determine whether the proposed merger agreement would be fair to shareholders. Goldman Sachs determined that the agreement would be fair to shareholders and provided Emulex with financial analyses supporting Goldman Sachs's position. Based in part on Goldman Sachs's opinion, Emulex filed a 48–page Recommendation Statement with the Securities and Exchange Commission ("SEC") pursuant to 17 C.F.R. § 240.14d-101 Schedule 14D-9.

The Recommendation Statement supported the tender offer and recommended that shareholders tender their shares. It listed nine reasons for the recommendation: (1) the value shareholders would receive in the merger "was greater than could be reasonably expected" in the future if they continued to hold Emulex stock; (2) other available alternatives and transactions were less favorable; (3) Emulex shareholders would receive a premium on their stock; (4) Goldman Sachs found that the merger was fair; (5) the cash consideration shareholders would receive was certain; (6) the agreement provided that Emulex could back out if it received a better offer before closing; (7) the agreement permitted Emulex to modify its recommendation; (8) a termination fee built into the merger agreement would not preclude subsequent third-party offers for Emulex; and (9) closing conditions were appropriate.

The Recommendation Statement in support of the tender offer also included a summary of Goldman Sachs's fairness opinion. The summary describes in some detail the processes Goldman Sachs followed when rendering its opinion. The Recommendation Statement also highlights four particular financial analyses—the Historical Stock Trading Analysis, the Selected Companies Analysis, the Illustrative Present Value of Future Share Price Analysis, and the Illustrative Discounted Cash Flow Analysis—that supported Goldman Sachs's fairness opinion. These analyses looked at different metrics of Emulex's past, present, and expected financial performance to help Goldman Sachs develop its fairness opinion.

Goldman Sachs also produced a one-page chart titled "Selected Semiconductor Transactions," alternatively referred to as the "Premium Analysis." The Premium Analysis selected certain transactions in the industry that Goldman Sachs deemed most similar to the proposed merger between Avago and Emulex, and reviewed the respective premiums stockholders received in those transactions. Altogether, the Premium Analysis collected seventeen transactions involving a semiconductor company between 2010 and 2014. Emulex's 26.4% premium fell within the normal range of semiconductor merger premiums listed in the Premium Analysis, but it was below average. Goldman Sachs opined that the merger was fair despite a below-average premium, and Emulex elected not to summarize the one-page Premium Analysis in the Recommendation Statement. Enough Emulex shareholders ultimately accepted the tender offer to consummate the merger. On May 5, 2015, Merger Sub merged into Emulex, with Emulex surviving as a wholly-owned subsidiary of Avago.

Not all the shareholders, however, were happy with the merger's terms. Some believed the $8.00-per-share price offered was inadequate given Emulex's significant growth leading up to the tender offer and the company's prospects for future growth. This class of shareholders, who claimed they were misled by Emulex, Avago, Merger Sub, and the Emulex Board of Directors (collectively, "Defendants") into believing that the merger was better than it actually was, brought a lawsuit against Defendants. The district court eventually named Mutza Lead Plaintiff. Plaintiff alleges that Defendants violated federal securities laws, specifically Section 14(e) of the Exchange Act, by failing to summarize the Premium Analysis in the Recommendation Statement, which would have disclosed that the 26.4% premium was below average compared to similar mergers. Plaintiff also sought to hold the directors of Emulex vicariously liable as "controlling persons" under Section 20(a) of the Exchange Act.

The district court dismissed the complaint with prejudice. In deciding to do so, the district court concluded that Section 14(e) requires a showing of scienter and that Plaintiff failed to plead scienter. Next, the district court rejected Plaintiff's separate claim under Section 14(d), concluding that Section 14(d)(4) does not establish a private right of action for shareholders confronted with a tender offer. Finally, the court dismissed the Section 20(a) claim because Plaintiff did not adequately plead a claim under Section 14(d) or (e).² Plaintiff timely appeals.

II. STANDARD OF REVIEW

We review de novo a district court's decision to grant a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Knievel v. ESPN , 393 F.3d 1068, 1072 (9th Cir. 2005). We also review de novo questions of statutory interpretation. Millard v. United Student Aid Funds, Inc. , 66 F.3d 252, 253 (9th Cir. 1995). Because Plaintiff argues that Section 14(e) of the Exchange Act requires Plaintiff to show Defendants were negligent by not including the Premium Analysis in the Recommendation Statement—not that Defendants intentionally excluded the Premium Analysis to mislead shareholders—this case requires us to interpret Section 14(e).

III. DISCUSSION

A. Section 14(e) Claim

1. Federal Securities Law Background

The Exchange Act of 1934, codified at 15 U.S.C. §§ 78a – 78qq, is one of two major federal securities statutes Congress enacted in the wake of the Great Depression. The other statute is the Securities Act of 1933, 15 U.S.C. §§ 77a – 77aa. The Exchange Act and the Securities Act of 1933 differ in...