Gary Varjabedian v. Emulex Corp.

                FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT


GARY VARJABEDIAN,                        No. 16-55088
              Plaintiff-Appellant,
                                           D.C. No.
                 v.                     8:15-cv-00554-
                                           CJC-JCG
EMULEX CORPORATION; BRUCE C.
EDWARDS; JEFFREY W. BENCK;
GREGORY S. CLARK; GARY J.                  OPINION
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.



      Appeal from the United States District Court
         for the Central District of California
      Cormac J. Carney, District Judge, Presiding

        Argued and Submitted October 5, 2017
                Pasadena, California

                 Filed April 20, 2018

      Before: Susan P. Graber, Mary H. Murguia,
         and Morgan Christen, Circuit Judges.
2                  VARJABEDIAN V. EMULEX

                 Opinion by Judge Murguia;
                Concurrence by Judge Christen


                          SUMMARY *


                            Securities

    The panel affirmed in part and reversed in part the
district court’s dismissal of a putative securities class action
complaint arising from a corporate merger.

    Reversing in part, and disagreeing with five other
circuits, the panel held that intervening guidance from the
Supreme Court compelled the conclusion that claims under
Section 14(e) of the Securities Exchange Act of 1934, 15
U.S.C. § 78n(e), require a showing of negligence, rather than
scienter.

    The panel affirmed the district court’s (1) conclusion that
Section 14(d)(4) of the Exchange Act does not create a
private right of action for shareholders confronted with a
tender offer and (2) dismissal of the complaint as to one
defendant because it was not a proper defendant.

    Because plaintiff’s Section 14(e) claim survived, his
claim under Section 20(a) of the Exchange Act also
remained. The panel remanded for the district court to
reconsider defendants’ motion to dismiss under a negligence
standard.

    *
      This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
                 VARJABEDIAN V. EMULEX                     3

    Concurring, Judge Christen wrote that she fully
concurred in the panel’s decision. She wrote separately to
explain why the Supreme Court’s holdings in Ernst & Ersnt
v. Hochfelder, 425 U.S. 185 (1976), and Aaron v. Sec. &
Exchange Comm’n, 446 U.S. 680 (1980), persuaded her to
depart from other circuits’ interpretation of Section 14(e).


                        COUNSEL

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.
4                    VARJABEDIAN V. EMULEX

                               OPINION

MURGUIA, Circuit Judge:

    Plaintiff-Appellant Jerry Mutza 1 (“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

    1
       Although Gary Varjabedian filed the initial complaint and the
notice of appeal, the district court appointed Jerry Mutza as Lead
Plaintiff in this case. Indeed, both Plaintiff-Appellant’s opening brief and
the answering brief identify Jerry Mutza as the court-appointed Lead
Plaintiff in this action. The case caption, however, reflects Varjabedian
as Plaintiff. There is no material difference between Mutza and
Varjabedian for purposes of this appeal, as they both represent the same
class of Emulex shareholders and are represented by the same counsel.
                 VARJABEDIAN V. EMULEX                       5

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 (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
6                VARJABEDIAN V. EMULEX

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
                 VARJABEDIAN V. EMULEX                    7

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
8                    VARJABEDIAN V. EMULEX

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

    2
       Claims under Section 20(a) necessarily rise and fall with the other
securities claims. To prevail on a Section 20(a) claim, “a plaintiff must
first prove a primary violation of underlying federal securities laws, such
as Section [14(e)], and then show that the defendant exercised actual
power over the primary violator.” In re NVIDIA Corp. Sec. Litig.,
768 F.3d 1046, 1052 (9th Cir. 2014).
                  VARJABEDIAN V. EMULEX                       9

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 purpose and scope. “The general purpose of the
Securities Act [of 1933] is to regulate the initial distribution
of securities by issuers to public investors. . . . The Exchange
Act [of 1934] provides for the regulation of the securities
exchange markets and the operations of the corporations
listed on the various national securities exchanges.”
Elisabeth Keller & Gregory A. Gehlmann, Introductory
Comment: A Historical Introduction to the Securities Act of
1933 and the Securities Exchange Act of 1934, 49 Ohio St.
L.J. 329, 330 (1988). In other words, the Securities Act of
1933 governs initial public offerings (“IPOs”) while the
Exchange Act, at issue here, regulates all subsequent
securities transactions (e.g., sales on the open market, proxy
solicitations, tender offers).

   Section 14(e) was not part of the original Exchange Act
enacted in 1934. Rather, Congress added Section 14(e) as an
amendment to the Securities Exchange Act as part of the
10                VARJABEDIAN V. EMULEX

Williams Act. Schreiber v. Burlington N., Inc., 472 U.S. 1, 8
(1985). The purpose of Section 14(e) is to regulate the
conduct of a broad range of people who could influence the
outcome of a tender offer. Piper, 430 U.S. at 24. To that end,
Section 14(e) “was expressly directed at the conduct of a
broad range of persons, including those engaged in making
or opposing tender offers or otherwise seeking to influence
the decision of investors or the outcome of the tender offer.”
Id.

       2. Whether Section 14(e) requires Plaintiff to
          show Defendants knew their actions were
          wrong or only that they were negligent.

    The main question here is whether Section 14(e) requires
proof of scienter, as the district court held, or mere
negligence. “Statutory interpretation begins with the plain
language of the statute.” United States v. Johnson, 680 F.3d
1140, 1144 (9th Cir. 2012) (internal quotation marks
omitted). A plain reading of Section 14(e) readily divides the
section into two clauses, each proscribing different conduct:

       It shall be unlawful for any person [1] to
       make any untrue statement of a material fact
       or omit to state any material fact necessary in
       order to make the statements made, in the
       light of the circumstances under which they
       are made, not misleading, or [2] to engage in
       any fraudulent, deceptive, or manipulative
       acts or practices, in connection with any
       tender offer . . . .

15 U.S.C. § 78n(e) (emphasis added). The use of the word
“or” separating the two clauses in Section 14(e) shows that
there are two different offenses that the statute proscribes; to
construe the statute otherwise would render it “hopelessly
                     VARJABEDIAN V. EMULEX                              11

redundant” and would mean “one or the other phrase is
surplusage.” Hart v. McLucas, 535 F.2d 516, 519 (9th Cir.
1976).

    In concluding that claims under Section 14(e) require
allegations of scienter, the district court stated: “Considering
the wealth of persuasive case law to the contrary, the Court
concludes that the better view is that the similarities between
Rule 10b-5 and § 14(e) require a plaintiff bringing a cause
of action under § 14(e) to allege scienter.” 3 The district court
relied on decisions from five other circuits holding that
Section 14(e) claims require alleging scienter. See, e.g.,
Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU
Corp., 565 F.3d 200, 207 (5th Cir. 2009); In re Digital Island
Sec. Litig., 357 F.3d 322, 328 (3d Cir. 2004); SEC v.
Ginsburg, 362 F.3d 1292, 1297 (11th Cir. 2004); Conn. Nat’l
Bank v. Fluor Corp., 808 F.2d 957, 961 (2d Cir. 1987);
Adams v. Standard Knitting Mills, Inc., 623 F.2d 422, 431
(6th Cir. 1980). However, we are persuaded that the rationale
underpinning those decisions does not apply to Section 14(e)
of the Exchange Act. At their core, the decisions from these
five circuits rest on the shared text found in both Rule 10b-5
and Section 14(e). Yet important distinctions exist between
Rule 10b-5 and Section 14(e)—distinctions that strongly
militate against importing the scienter requirement from the
context of Rule 10b-5 to Section 14(e).



    3
       Rule 10b-5 is an SEC regulation promulgated under Section 10(b)
of the Exchange Act. See Zucco Partners, LLC v. Digimarc Corp.,
552 F.3d 981, 889–990 (9th Cir. 2009). The rule provides that “‘[i]t shall
be unlawful for any person . . . [t]o engage in any act, practice, or course
of business which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any security.’” Id.
(citing 17 C.F.R. § 240.10b-5(c)).
12               VARJABEDIAN V. EMULEX

    The first of the other circuits’ decisions came in 1973, a
few years after Section 14(e) was enacted, when the Second
Circuit held that Section 14(e) requires a showing of
scienter: “[W]e shall follow the principles developed under
Rule 10b-5 regarding the elements of [Section 14(e)]
violations.” Chris-Craft Indus. Inc., v. Piper Aircraft Corp.,
480 F.2d 341, 362 (2d Cir. 1973).

    One year after Chris-Craft, the Fifth Circuit followed
suit and held, “[w]e are in accord with the Second Circuit
that the same elements must be proved to establish a
violation of either [Section 14(e)] or [Rule 10b-5].”
Smallwood v. Pearl Brewing Co., 489 F.2d 579, 605 (5th Cir.
1974) (citing Chris-Craft, 480 F.2d at 362). Those two
circuits arrived at the conclusion that Rule 10b-5 required a
showing of scienter.

      Then, in 1976, the Supreme Court in Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 (1976), held that claims under
Section 10(b) of the Exchange Act and Rule 10b-5 must
allege scienter. Importantly, as it relates to this case, the
Supreme Court’s reasoning in reaching that decision casts
doubt on the rationale of Chris-Craft and Smallwood. The
Court in Ernst & Ernst began with the text of Rule 10b-5(b),
which states: “It shall be unlawful . . . [t]o make any untrue
statement of a material fact or omit to state any material fact
. . . .” Ernst & Ernst, 425 U.S. at 195–96. Addressing that
phrase, the Court noted, “[v]iewed in isolation the language
of [Rule 10b-5(b)] . . . could be read as proscribing,
respectively, any type of material misstatement or omission
. . . whether the wrongdoing was intentional or not.” Ernst
& Ernst, 425 U.S. at 212 (emphases added). In other words,
the Court acknowledged that the wording of Rule 10b-5(b)
could reasonably be read as imposing a scienter or a
negligence standard. This means that Rule 10b-5(b)’s text,
                 VARJABEDIAN V. EMULEX                     13

and by extension the identical phrasing in the first clause of
Section 14(e), did not necessarily compel finding a scienter
requirement. Compare 17 C.F.R. § 240.10b-5(b), with
15 U.S.C. § 78n(e).

    The Court in Ernst & Ernst nevertheless went on to
conclude that Rule 10b-5(b) requires a showing of scienter
because of the relationship between Rule 10b-5 and its
authorizing legislation, Section 10(b) of the Exchange Act.
Significantly, the Court’s conclusion that scienter is an
element of Rule 10b-5(b) had nothing to do with the text of
Rule 10b-5. As the Court explained:

       Rule 10b-5 was adopted pursuant to authority
       grand [sic] the [SEC] under § 10(b) . . . . [The
       scope of Rule 10b-5] cannot exceed the
       power granted the [SEC] by Congress under
       § 10(b). . . . [W]e think the [SEC’s] original
       interpretation of Rule 10b-5 was compelled
       by the language and history of § 10(b) . . . .
       When a statute speaks so specifically in terms
       of manipulation and deception, and of
       implementing devices and contrivances—the
       commonly understood terminology of
       intentional wrongdoing—and when its
       history reflects no more expansive intent, we
       are quite unwilling to extend the scope of the
       statute to negligent conduct.

Ernst & Ernst, 425 U.S. at 212–14 (emphasis added). Put
simply, Rule 10b-5 requires a showing of scienter because it
is a regulation promulgated under Section 10(b) of the
Exchange Act, which allows the SEC to regulate only
“manipulative or deceptive device[s].” 15 U.S.C. § 78j(b).
14                  VARJABEDIAN V. EMULEX

This rationale regarding Rule 10b-5 does not apply to
Section 14(e), which is a statute, not an SEC Rule.

    Later in 1980, the Supreme Court provided useful
guidance for interpreting the first clause of Section 14(e) of
the Exchange Act in Aaron v. SEC, 446 U.S. 680 (1980). The
securities provision at issue in Aaron—Section 17(a)(2) of
the Securities Act of 1933—and the first clause of Section
14(e), contain nearly identical wording. Both sections
prohibit “any untrue statement of a material fact or any
omission to state a material fact necessary in order to make
the statements made . . . not misleading.” 4 Compare
15 U.S.C. § 77q(a)(2), with 15 U.S.C. § 78n(e). Importantly,
the Court in Aaron held that Section 17(a)(2) does not
require a showing of scienter. Aaron, 446 U.S. at 696–97.

    Although Section 17(a)(2) appears in the Securities Act
of 1933, while Section 14(e) appears in the Exchange Act,
“statutes dealing with similar subjects should be interpreted
harmoniously.” Jonah R. v. Carmona, 446 F.3d 1000, 1007
(9th Cir. 2006) (quoting Jett v. Dallas Indep. Sch. Dist., 491
U.S. 701, 738–39 (1989) (Scalia, J., concurring)). Beyond
their nearly identical text, Section 14(e) and Section 17(a)
serve similar purposes. Both provisions govern disclosures
and statements made in connection with an offer of
securities, albeit in different contexts: Section 17(a) applies

    4
      Section 17(a)(2) contains additional language that is missing from
the first clause of Section 14(e). Specifically, the phrase “to obtain
money or property by means of,” appears in Section 17(a)(2) but not in
Section 14(e). This phrase did not factor into the Supreme Court’s
analysis, and there is no meaningful discussion of the significance of
these words in Aaron. Instead, the words that were outcome
determinative are the same words appearing in both provisions: “by
means of any untrue statement of a material fact or any omission to state
a material fact.” Aaron, 446 U.S at 696.
                    VARJABEDIAN V. EMULEX                            15

to initial public offerings while Section 14(e) applies to
tender offers. Chris-Craft, 480 F.2d at 359 (“The Williams
Act of 1968, of which § 14(e) is a part, was enacted to . . .
require tender offer disclosures similar to those required for
issuance of new securities.” (emphasis added)).

    Accordingly, both Ernst & Ernst and Aaron cast doubt
on the underlying rationale of Chris-Craft and Smallwood.
Ernst & Ernst provides that the scienter requirement is
rooted not in the text of Rule 10b-5, but rather in the
relationship between Rule 10b-5 and its authorizing
legislation. Ernst & Ernst, 425 U.S. at 212–14. Aaron took
a further step by holding that the plain language of Section
17(a)(2), which is largely identical to the first clause of
Section 14(e), requires a showing of negligence, not scienter.
Aaron, 446 U.S. at 696–97. In so doing, Aaron rejected the
Second Circuit’s rationale for holding that a negligence
standard does not apply to claims under Section 17(a). 5

    Despite the Supreme Court’s decisions in Ernst & Ernst
and Aaron, circuit courts have continued to adopt the
reasoning in Chris-Craft and Smallwood. For instance, in
1987, the Second Circuit cited Chris-Craft, holding that “[i]t
is well settled in this Circuit that scienter is a necessary
element of a claim for damages under § 14(e) of the
Williams Act.” Conn. Nat’l Bank, 808 F.2d at 961. Likewise,
as recently as 2009, the Fifth Circuit cited Smallwood for the
proposition that “[t]he elements of a claim under Section
14(e), which applies to tender offers, are identical to the

    5
      In Chris-Craft, the Second Circuit rejected the argument that
Section 17(a) imposes a mere negligence standard. 480 F.2d at 363 (“We
have indicated, however, that mere negligent conduct is not sufficient to
permit plaintiffs to recover damages in a private action under § 17(a) or
§ 10(b).” (internal quotation marks omitted)).
16                VARJABEDIAN V. EMULEX

Section 10(b)/Rule 10b-5 elements.” Flaherty, 565 F.3d at
207. Similarly, in 2004, the Third Circuit cited Smallwood
and held, “[w]e therefore join those circuits that hold that
scienter is an element of a Section 14(e) claim.” Digital
Island, 357 F.3d at 328.

    The two other circuits to reach this conclusion also do
not account for the distinction between Rule 10b-5 and
Section 14(e). The Sixth Circuit, for instance, concluded that
Section 14(e) requires scienter because “Congress used the
words ‘fraudulent,’ ‘deceptive,’ and ‘manipulative.’”
Adams, 623 F.2d at 431. The Sixth Circuit does not appear
to have considered that the first clause of Section 14(e) does
not contain any of those words. In fact, the Adams decision
predated the Aaron decision by a month, so the Sixth Circuit
did not have the benefit of the Supreme Court’s decision in
Aaron holding that the language of Section 17(a)(2), and by
extension the language of the first clause of Section 14(e),
requires only a showing of negligence.

     Lastly, the Eleventh Circuit appears to have concluded,
for the first time in 2004, that Section 14(e) requires scienter,
but it seems to have relied on the common wording in Rule
10b-5 and Section 14(e). See Ginsburg, 362 F.3d. at 1297–
98. Although the court cited to SEC v. Adler, 137 F.3d 1325,
1340 (11th Cir. 1998), to support the proposition that Section
14(e) claims require a showing of scienter, Adler does not
analyze or discuss Section 14(e). Accordingly, it seems that
Ginsburg too relied on the common wording of Rule 10b-5
and Section 14(e) for its holding that Section 14(e) claims
require scienter. With the benefit of Ernst & Ernst and
Aaron, the most compelling argument is that the first clause
of Section 14(e) requires a showing of negligence, not
scienter.
                  VARJABEDIAN V. EMULEX                      17

     Moreover, Section 14(e) differs fundamentally from
Section 10(b) because, under Section 14(e), the SEC is
authorized to regulate a broader array of conduct than under
Section 10(b). “[U]nder § 14(e), the [SEC] may prohibit acts
not themselves fraudulent under the common law or § 10(b),
if the prohibition is ‘reasonably designed to prevent . . . acts
and practices [that] are fraudulent.’” United States v.
O’Hagan, 521 U.S. 642, 673 (1997) (alterations in original)
(quoting 15 U.S.C. § 78n(e)). “This authority derives from
the prophylactic rule-making power granted to the SEC by
Section 14(e), a power that has no parallel in Section 10(b).”
Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1005 (9th
Cir. 2002) (emphasis added). If the SEC can prohibit “acts
themselves not fraudulent” under Section 14(e), then it
would be somewhat inconsistent to conclude that Section
14(e) itself reaches only fraudulent conduct requiring
scienter.

     The conclusion that Section 14(e) requires a showing of
negligence, as opposed to scienter, also finds some support
in the legislative history and purpose of the Williams Act.
The Senate Report that accompanied Section 14(e) states:
“This provision would affirm the fact that persons engaged
in making or opposing tender offers or otherwise seeking to
influence the decision of investors or the outcome of the
tender offer are under an obligation to make full disclosure
of material information to those with whom they deal.” S.
Rep. No. 510, 90th Cong., 2d Sess. (1968). Moreover, the
Supreme Court has noted, “[t]he purpose of the Williams Act
is to insure that public shareholders who are confronted by a
cash tender offer for their stock will not be required to
respond without adequate information.” Rondeau v. Mosinee
Paper Corp., 422 U.S. 49, 58 (1975). The legislative history
suggests that the Williams Act places more emphasis on the
quality of information shareholders receive in a tender offer
18               VARJABEDIAN V. EMULEX

than on the state of mind harbored by those issuing a tender
offer. Such a purpose supports a negligence standard.

   Ultimately, because the text of the first clause of Section
14(e) is devoid of any suggestion that scienter is required,
we conclude that the first clause of Section 14(e) requires a
showing of only negligence, not scienter.

     B. Omission of a material fact

    The district court did not reach the question whether
omitting the Premium Analysis—a one-page chart
containing seventeen transactions involving semiconductor
companies—from         the     Recommendation        Statement
constitutes omission of a material fact in the context of the
entire transaction, and we will not reach the question.
Although it is difficult to show that this omitted information
was indeed material, we remand for the district court to
consider the question in the first instance. See Zucco
Partners, 552 F.3d at 991 (“[T]he plaintiff must plead a
highly unreasonable omission, involving not merely simple,
or even inexcusable negligence, but an extreme departure
from the standards of ordinary care, and which presents a
danger of misleading buyers or sellers that is either known
to the defendant or is so obvious that the actor must have
been aware of it.” (internal quotation marks omitted)).

     C. Section 14(d)(4) claim

    The parties contest whether Section 14(d)(4) of the
Exchange Act provides an implied right of action. The
statute provides that “[a]ny solicitation or recommendation
to the holders of . . . a security to accept or reject a tender
offer . . . shall be made in accordance with [SEC] rules and
regulations.” 15 U.S.C. § 78n(d)(4). One such regulation,
Rule 14d-9, states that a recommendation statement must
                 VARJABEDIAN V. EMULEX                     19

include “information required by Items 1 through 8 of
Schedule 14D-9 or a fair and adequate summary thereof.”
17 C.F.R. § 240.14d-9(d). In addition, Item 8 on Schedule
14D-9 requires a company’s directors to furnish
“information, if any, as may be necessary to make the
required statements, in light of the circumstances under
which they are made, not materially misleading.” 17 C.F.R.
§ 240.14d-101; 17 C.F.R. § 229.1011(c). Simply put,
Section 14(d)(4) imposes an obligation on a company’s
directors to provide material information if such information
is necessary to ensure that other required disclosures are not
materially misleading.

    The test for determining whether a federal statute creates
an implied right of action was set forth in Cort v. Ash and
entails four questions:

       First, is the plaintiff one of the class for
       whose especial benefit the statute was
       enacted—that is, does the statute create a
       federal right in favor of the plaintiff? Second,
       is there any indication of legislative intent,
       explicit or implicit, either to create such a
       remedy or to deny one? Third, is it consistent
       with the underlying purposes of the
       legislative scheme to imply such a remedy for
       the plaintiff? And finally, is the cause of
       action one traditionally relegated to state law
       ...?

422 U.S. 66, 78 (1975) (citations and internal quotation
marks omitted). The fourth factor—the relationship with
state law—is not relevant here. After analyzing this claim
under the Cort factors, the district court concluded that
20                VARJABEDIAN V. EMULEX

Section 14(d)(4) does not create a private right of action and
dismissed this claim.

    After reviewing the factors outlined in Cort, we agree
with the district court. The first factor weighs against finding
an implied right of action because the statute’s focus is on
the person regulated, those who issue “[a]ny solicitation or
recommendation to . . . accept or reject a tender offer.”
15 U.S.C. § 78n(d)(4); Alexander v. Sandoval, 532 U.S. 275,
289 (2001) (“Statutes that focus on the person regulated
rather than the individuals protected create no implication of
an intent to confer rights on a particular class of persons.”
(internal quotation marks omitted)).

    Next, considering the second factor, there is no
indication of any legislative intent to provide for a private
right of action. Section 14(d)(4) is a generic statute simply
requiring that recommendation statements abide by the
SEC’s rules.

       Finally, turning to the third factor, it would
       be inconsistent with the legislative scheme of
       the Williams Act to imply a remedy under
       Section 14(d)(4). It is undisputed that Section
       14(e) provides for a private right of action to
       challenge alleged misrepresentations or
       omissions in connection with a tender offer.
       The question, then, is whether Congress
       intended to imply a private right of action
       under Section 14(d)(4) as an alternative to
       Section 14(e). However, holding that Section
       14(d)(4) provides an implied right of action
       would be redundant and potentially cause
       tension with Section 14(e).
                 VARJABEDIAN V. EMULEX                    21

Accordingly, we affirm the district court’s conclusion that
Section 14(d)(4) does not create an implied right of action.

   D. Section 20(a) claim

    As stated above, claims under Section 20(a) of the
Exchange Act necessarily depend on Plaintiff’s Section
14(d)(4) and (e) claims. In re NVIDIA Corp. Sec. Litig.,
768 F.3d 1046, 1052 (9th Cir. 2014). Because Plaintiff’s
Section 14(d)(4) claim fails, but Plaintiff’s Section 14(e)
claim remains, the Section 20(a) claim also survives for the
district court to consider on remand.

   E. Merger Sub Defendant

    Finally, we affirm the district court’s dismissal of
Merger Sub as a Defendant in this case. The Federal Rules
of Civil Procedure are clear that a corporation’s capacity to
be sued is determined “by the law under which it was
organized.” Fed. R. Civ. P. 17(b)(2). As a Delaware
corporation, Merger Sub Corporation ceased to exist after
the merger was consummated, and its rights and liabilities
now belong to the surviving corporation, Emulex. See 8 Del.
C. § 259.

                   IV. CONCLUSION

    We are aware that our holding today parts ways from our
colleagues in five other circuits. However, for the reasons
discussed above, we are persuaded that intervening guidance
from the Supreme Court compels the conclusion that Section
14(e) of the Exchange Act imposes a negligence standard.
Accordingly, we REVERSE the district court’s decision as
to the Section 14(e) claim because the district court
employed a scienter standard in analyzing the Section 14(e)
claim. We also REMAND for the district court to reconsider
22               VARJABEDIAN V. EMULEX

Defendant’s motion to dismiss under a negligence standard.
On remand, the district court shall also consider whether the
Premium Analysis was material, an argument that
Defendants raised but that the district court did not reach. In
addition, the district court shall consider Plaintiff’s Section
20(a) claim since the Section 14(e) claim survives. We also
AFFIRM the district court’s conclusion that Section
14(d)(4) does not create an implied right of action. Finally,
we AFFIRM the district court’s dismissal of Merger Sub
because it is not a proper Defendant.

   AFFIRMED in part, REVERSED in part, and
REMANDED. The parties shall bear their own costs on
appeal.



CHRISTEN, Circuit Judge, concurring:

    I fully concur in today’s decision and write separately
only to explain why Supreme Court case law persuades me
to depart from the interpretations of § 14(e) announced by
several other circuits. By my read, in considering what
degree of culpability § 14(e) requires, these courts have not
addressed the ramifications of the Supreme Court’s holdings
in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), and
Aaron v. Securities & Exchange Commission, 446 U.S. 680
(1980). I conclude that the decision we reach today is a
faithful application of these Supreme Court cases.

   The Second Circuit was among the first to consider the
showing required to establish a § 14(e) violation. In Chris-
Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341
(2d Cir. 1973), the court observed that the language of
                     VARJABEDIAN V. EMULEX                               23

§ 14(e) is virtually identical to that of Rule 10b-5. 1 Id. at
362. The court reasoned that § 14(e) must therefore require
scienter, the same degree of culpability required by Rule
10b-5, citing its earlier decision in Securities and Exchange
Commission v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d
Cir. 1968). In that case, the Second Circuit reviewed other
sections of the Securities Exchange Act of 1934, but not
Rule 10b-5’s enabling statute. Id. at 854–55. A year later,
the Fifth Circuit agreed with the Second Circuit’s Chris-
Craft decision, that “the same elements must be proved to
establish a violation of either Section [14(e)] or . . . Rule
[10b-5].” Smallwood v. Pearl Brewing Co., 489 F.2d 579,
605 (5th Cir. 1974) (citing Chris-Craft Indust., Inc.,
480 F.2d at 362).

    In 1976, the Supreme Court also agreed that Rule 10b-5
requires a showing of scienter, but it reached this conclusion
for a different reason. Ernst & Ernst v. Hochfelder, 425 U.S.
185 (1976). Ernst & Ernst observed that Rule 10b-5’s
authorizing statute, § 10(b), prohibited “any manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the [Securities and Exchange
Commission] may prescribe.”            425 U.S. at 187–88
(emphasis added). Because this statutory language “strongly
suggest[s]” that Congress intended § 10(b) to prohibit only
knowing or intentional misconduct, id. at 197, the Court
concluded that the scope of Rule 10b-5 cannot exceed the
threshold Congress established when it adopted § 10(b). Id.

    1
      Both § 14(e) and Rule 10b-5 prohibit “mak[ing] any untrue
statement of a material fact [or omitting to state a material fact] necessary
in order to make the statements . . ., in the light of the circumstances
under which they [were] made, not misleading.” Both § 14(e) and Rule
10b-5 also prohibit fraudulent or intentionally deceptive acts. See
15 U.S.C. § 78n(e); 17 C.F.R. § 240.10b-5(a).
24               VARJABEDIAN V. EMULEX

at 214. Importantly, Ernst & Ernst expressly recognized that
the language of Rule 10b-5, in isolation, “could be read as
proscribing . . . any type of material misstatement or
omission . . . that has the effect of defrauding investors,
whether the wrongdoing was intentional or not.” Id. at 212
(emphasis added). Nevertheless, the Court determined that
the specific language of the authorizing statute necessarily
cabins the sweep of the rule, so that a showing of scienter is
required to establish a violation of Rule 10b-5. Id. at 212–
14.

    In 1980 the Supreme Court explained that Congress
sometimes required different levels of culpability within a
single securities statute. Aaron v. Securities & Exchange
Commission addressed the level of culpability required by
§ 17(a) of the Securities Act of 1933, a statutory provision
containing language nearly identical to the statute at issue in
this case, § 14(e). 446 U.S. 680, 682 (1980). Aaron
examined the text of § 17(a) and noted that only § 17(a)(1)
includes the terms “device,” “scheme,” and “artifice”:

       It shall be unlawful for any person in the offer
       or sale of any securities . . . by the use of any
       means or instruments of transportation or
       communication in interstate commerce or by
       use of the mails, directly or indirectly

           (1) to employ any device, scheme, or
           artifice to defraud, or

           (2) to obtain money or property by means
           of any untrue statement of a material fact
           or any omission to state a material fact
           necessary in order to make the statements
           . . ., in light of the circumstances under
                 VARJABEDIAN V. EMULEX                     25

           which they were made, not misleading
           ....

15 U.S.C. § 77q(a)(1)–(2) (emphasis added). Citing Ernst &
Ernst, the Aaron Court explained that “device,” “scheme,”
and “artifice” “all connote knowing or intentional practices,”
in sharp contrast to the language of § 17(a)(2), “which
prohibits any person from obtaining money or property ‘by
means of any untrue statement [or omission] of a material
fact.’” Aaron, 446 U.S. at 696. Because § 17(a)(2) is
“devoid of any suggestion whatsoever of a scienter
requirement,” id., the Court held that § 17(a)(1) requires
scienter, and that § 17(a)(2) does not. Id. at 697.

    Ernst & Ernst and Aaron are both critical to the decision
we issue today. Ernst & Ernst explains that where Congress
prohibited “fraudulent” or “deceptive” practices—as in the
second clause of § 14(e)—a heightened showing of
culpability is required. Where Congress used language
banning untrue statements of material fact (or the omission
of a material fact necessary to make a statement not
misleading), a lesser showing of culpability will suffice.
With the holding of Ernst & Ernst in mind, the words
Congress used in § 14(e) are illuminating:

       It shall be unlawful for any person to make
       any untrue statement of a material fact or
       omit to state any material fact necessary in
       order to make the statements made, in the
       light of the circumstances under which they
       are made, not misleading, or to engage in any
       fraudulent, deceptive, or manipulative acts or
       practices, in connection with any tender offer
       or request or invitation for tenders, or any
       solicitation of security holders in opposition
26                   VARJABEDIAN V. EMULEX

         to or in favor of any such offer, request, or
         invitation.

15 U.S.C. § 78n(e) (emphasis added). Only the second
clause of § 14(e) contemplates a scienter requirement;
Congress did not use the words signaling a heightened
standard of culpability in the first clause of the statute. 2

    Aaron is important to today’s decision because it
reminds us that when Congress uses a disjunctive, a single
statutory provision can call for more than one level of
scienter. The similarities between the statute discussed in
Aaron, § 17(a), and the statute at issue here, § 14(e), are
striking: both statutes include distinct clauses separated by a
disjunctive “or,” with one clause containing terms that
plainly proscribe more culpable conduct by using terms like
“fraudulent,” “deceptive,” “device,” or “artifice.” And both
statutes have a separate clause more expansively prohibiting
“untrue statement[s] of a material fact.” See 15 U.S.C.
§§ 77q(a), 78n(3). Because Aaron held that § 17(a)’s two
clauses require different degrees of culpability, it strongly
suggests the same is true of the two very different clauses in
§ 14(e).


     2
       This reading of § 14(e) is consistent with the Supreme Court’s
separate instruction that the scope of conduct that may be regulated under
§ 14(e) is broader than that under § 10(b). See United States v. O’Hagan,
521 U.S. 642 (1997) (holding that under § 14(e), the SEC may prohibit
“acts not themselves fraudulent under the common law or § 10(b), if the
prohibition is reasonably designed to prevent acts and practices that are
fraudulent” (internal quotation marks and alteration omitted)). Our
court, too, has recognized that § 14(e) authorizes the SEC to promulgate
rules “that prohibit acts not themselves fraudulent,” which is “a power
that has no parallel in Section 10(b).” Brody v. Transitional Hospitals
Corp., 280 F.3d 997, 1005 (9th Cir. 2002).
                     VARJABEDIAN V. EMULEX                             27

    Some circuits continue to rule that § 14(e) requires
scienter in the wake of Ernst & Ernst and Aaron, but in
doing so they have maintained their reliance on pre-Ernst &
Ernst and pre-Aaron circuit case law. See Conn. Nat’l Bank
v. Fluor Corp., 808 F.2d 957, 961 (2d Cir. 1987) (citing
Chris-Craft for the proposition that “[i]t is well settled in this
Circuit that scienter is a necessary element of a claim for
damages under § 14(e) of the Williams Act”); In re Digital
Island Sec. Litig., 357 F.3d 322, 328 (3d Cir. 2004) (citing
Connecticut National Bank and Smallwood to hold “[w]e . . .
join those circuits that hold that scienter is an element of a
Section 14(e) claim”); Flaherty & Crumrine Preferred
Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir.
2009) (citing Smallwood for the proposition that “[t]he
elements of a claim under Section 14(e), which applies to
tender offers, are identical to the Section 10(b)/Rule 10b-5
elements”).

    We cannot be sure how other circuits would rule were
they to revisit § 14(e) in light of Ernst & Ernst and Aaron,
but I question the continuing viability of the foundation for
Chris-Craft and the cases that followed it. 3 I am persuaded
that the decision we issue today is most consistent with the
Supreme Court’s decisions in Ernst & Ernst and Aaron.




    3
      Chris-Craft held that § 14(e) requires scienter because the identical
language in Rule 10b-5 requires scienter. Chris-Craft Indust., Inc.,
480 F.2d at 362. But the earlier case that Chris-Craft cited for the
proposition that Rule 10b-5 requires more than negligence concluded
that Rule 10b-5 regulates “a standard of conduct that encompasses
negligence as well as active fraud.” Sec. and Exchange Comm’n v. Tex.
Gulf Sulphur Co., 401 F.2d 833, 855 (2d Cir. 1968) (emphasis added).