While it is good short-term news for plaintiffs, a Ninth Circuit appeals court ruling in favor of a more relaxed standard of proof in merger-related securities lawsuits also has created a circuit split that could lead to a showdown at the Supreme Court, a decidedly less friendly venue for plaintiffs.
The decision comes amid a record increase in the number of shareholder class actions asserting violations of Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) arising out of alleged false and misleading statements made relating to a proposed merger or other strategic transaction. Most Section 14 cases have been filed in the Ninth Circuit, and in April the appeals court held in the tender offer case Varjabedian v. Emulex Corp., No. 16-55088 (9th Cir. Apr. 20, 2018) (“Emulex”) that Section 14(e) requires a showing of mere negligence, not proof of “scienter,” i.e., an intent to mislead shareholders.