March 12, 2019

Tender Offers: U.S. Argues No Private Actions Under 14(e)

We’ve previously blogged about Emulex  v. Varjabedian – one of this term’s most watched SCOTUS securities cases. The case was prompted by a split among the circuits as to whether negligence or scienter was required to impose liability under Section 14(e) of the 1934 Act.  That’s the Williams Act’s general antifraud provision, and it prohibits misstatements or omissions in connection with tender offers.

Shortly after cert was granted, the U.S. Chamber of Commerce upped the ante by filing an amicus brief arguing that the Court should hold that no private right of action exists under Section 14(e). Recently, the Solicitor General weighed in with an amicus brief on behalf of the U.S. government, which endorsed the conclusion that there is no private right of action under Section 14(e).

The Solicitor General’s brief acknowledged that the SEC argued in favor of an implied right of action in Piper v. Chris-Craft Industries – the last case in which the SCOTUS considered implied rights of action under 14(e). But it noted that Court’s approach to implied rights of action since then has changed, and that its “current approach to private rights of action forecloses inferring such a right under Section 14(e).” Here’s an excerpt from the brief:

Beginning with Piper, however, where this Court rejected an implied private right of action for unsuccessful tender offerors, 430 U.S. at 24-42 & n.28, the Court has substantially altered its approach. It has declined to infer new causes of action unless the statute at issue demonstrates an intent to create both a right and a remedy. For example, the Court refused to infer a private right of action under Section 17(a) of the Exchange Act, 15 U.S.C. 78q(a), because the statute “does not, by its terms, purport to create a private cause of action in favor of anyone.” Touche Ross & Co. v. Redington, 442 U.S. 560, 568-570 (1979). The Court likewise refused to infer a private right of action under Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. 80b-6, because that statute does not “mention an intended private action.” Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 19-24 (1979) (citation omitted).

In a variety of contexts, the Court has since treated the absence of affirmative textual support as a bar to inferring new private rights of action. See Johnson v. Interstate Mgmt. Co., 849 F.3d 1093, 1097 (D.C. Cir.2017) (Kavanaugh, J.) (collecting cases). And in 2001, the Court acknowledged that it had “abandoned” its previous approach. Sandoval, 532 U.S. at 286-289. The Court now requires that, “[l]ike substantive federal law itself, private rights of action to enforce federal law must be created by Congress.” Id. at 286. In the absence of apparent “[s]tatutory intent” to create a cause of action, “courts may not create one, no matter how desirable that might be as a policy matter, or how compatible with the statute.” Id. at 286-287.

The absence of an implied private right of action under Section 14(e) would leave the government as the only party that could enforce the statute. Since that’s the case, it’s not surprising that the Solicitor General argues that negligence, not scienter, should be the standard for imposing liability under it.  Check out this Alison Frankel blog for more details on this and other briefs filed in the case.

A decision by the Court that there’s no private right of action under 14(e) won’t necessarily leave investors without a federal remedy to address tender offer shenanigans.  As the Solicitor General’s brief notes, investors still could potentially recover damages in private suits under Section 10(b) and Rule 10b-5, and Section 11 and other 1933 Act remedies would be available in the event of an exchange offer involving the issuance of securities as consideration.

John Jenkins