In Varjabedian v. Emulex Corp., No. SACV 15-00554-CJC(JCGx), 2016 BL 21999 (C.D. Cal. Jan 13, 2016), the United States District Court for the Central District of California granted a motion to dismiss filed by Emulex Corporation (“Emulex”), Emerald Merger Sub, Inc. (“Merger Sub”), Avago Technologies Wireless Manufacturing, Inc. (“Avago”), and ten members of Emulex’s board and management (the “Individual Defendants”) (collectively, “Defendants”) against Gary Varjabedian’s (“Plaintiff”) complaint.

According to the allegations, Avago acquired Emulex in 2015 after the two companies reached a merger agreement, under which Merger Sub was to initiate a tender offer for Emulex’s outstanding stock. Emulex solicited a fairness opinion from its financial advisor, which found the merger, which produced a 26.4% premium over Emulex’s current stock price, was fair. Accordingly, Emulex issued a Recommendation Statement summarizing the findings and recommending shareholders tender their shares and support the acquisition. The Recommendation Statement, however, did not include a one-page Premium Analysis from the financial advisor’s fairness opinion indicating the Emulex premium was below-average. Plaintiff filed suit alleging Defendants intended to mislead Emulex shareholders into believing the proposed merger was a better deal than it actually was. Among other claims, Plaintiff contended Emulex violated Sections 14(e) and 14(d)(4) of the Exchange Act.

Section 14(e) makes it unlawful to make any untrue statement of a material fact or omit any material fact necessary to make the statements made not misleading. 15 U.S.C. 78n(e). Plaintiff asserted that a claim under the Section did not require allegations of scienter. Assuming scienter was required, the Plaintiff attempted to meet the requirement in three ways: (1) the Defendants made misleading statements regarding Emulex premiums despite having access to contradictory information; (2) the Defendants knew of the Premium Analysis, and that withholding the information would mislead investors; and (3) the Individual Defendants had a motive to commit fraud because they feared for their jobs if Emulex did not sell quickly.

The court first addressed whether Section 14(e) even required allegations of scienter. Relying on case law, statutory interpretation, and analysis from other jurisdictions, the court concluded a plaintiff bringing a claim under Section 14(e) is required to allege scienter. To determine whether a plaintiff sufficiently pleaded a strong inference of scienter, the court utilizes a “dual inquiry.” The court must determine whether the following are sufficient to create a strong inference of scienter: (1) any of the plaintiff’s allegations, when standing alone; and (2) any insufficient individual allegations, when combined.

The court found the Plaintiff failed to allege a strong inference of scienter. First, the court found the Premium Analysis suggested the Emulex premium was below the industry average, but within a range of reasonable outcomes. Because the Defendants never represented the premium as above industry average, the court reasoned these statements were not contradictory. Second, the court held Defendants were under no obligation to include every piece of information regarding the merger in the Recommendation Analysis, so it was not unreasonable to omit the Premium Analysis. Finally, the court noted the Individual Defendants rejected multiple offers for Emulex, and as shareholders, the Individual Defendants had no motive to sell the company at an unacceptably low price.

Examining the complaint in its entirety, the court found the Plaintiff failed to allege scienter under the second prong of the “dual inquiry”. The court reasoned it was likely the Defendants legitimately believed the premium to be fair to shareholders, and the Premium Analysis did not explicitly indicate otherwise.

The Plaintiff also alleged violation of Section 14(d)(4) and Rule 14d-9. Section 14(d)(4), however, does not expressly create a private right of action. Thus, the Plaintiff argued the court should recognize an implied right of action. The court refused to do so, holding the statute did not create a federal right in favor of the plaintiff, and the legislative intent and underlying purpose of Section 14(d)(4) was not to create a private right of action, but to reserve enforcement for the Securities and Exchange Commission.

Accordingly, the court granted the Defendants’ motion to dismiss the Plaintiff’s complaint.

The primary materials for this case can be found on the DU Corporate Governance website.