A Negligence Approach to Section 14(e) Violations

By Pekins, Jessica | Emory Law Journal, January 1, 2019 | Go to article overview

A Negligence Approach to Section 14(e) Violations


Pekins, Jessica, Emory Law Journal


Introduction

Imagine you own 1,000 shares of Time Warner Inc. at $40 per share for a market valuation of $40,000. One day, you are notified that AT&T has made a formal tender offer to buy your shares at $55 per share but that the deal will only close if 80% of the outstanding stock is tendered to AT&T by Time Warner's stockholders as part of the transaction. You have a couple of weeks to decide whether you will tender your shares. If you decide to accept and enough shares are tendered, the transaction is completed, and you'll see the 1,000 shares of Time Warner taken out of your account and a deposit of $55,000 cash put into it. If the tender offer fails because less than 80% of the shares were tendered to AT&T, the offer disappears and you don't sell your stock. You're left with your original 1,000 shares of Time Warner in your brokerage account.

The transaction just described is known as a tender offer. A tender offer is a broad solicitation by a third party to purchase a substantial percentage of a company's shares for a limited period of time.1 The offer is typically at a fixed price above the current market price and is contingent on shareholders tendering a fixed number of their shares.2 In the 1960s, the tender offer became a common method used by third parties to gain control of corporations. To this day, the tender offer remains a topic of contention as courts have tried to navigate the elements of a claim made by stockholders regarding the possible mishandling of a tender offer by company executives. Congress added provisions to the Securities Exchange Act of 1934 (Exchange Act) by way of the Williams Act of 1968 in response to the growing popularity of tender offers.3 The Williams Act regulates tender offers by requiring the offeror to disclose all material information relating to the tender offer and by ensuring that current shareholders have adequate time to consider the information provided before accepting or rejecting the tender offer.4

Section 14(e) of the Exchange Act was part of the Williams Act.5 The purpose of Section 14(e) is to regulate the conduct of the broad range of people who could influence the decision of company investors or the outcome of a tender offer.6 Thus, Section 14(e) is a broad anti-fraud provision requiring persons engaged in making or opposing tender offers to accurately disclose all material information in connection with the tender offer to the target company's shareholders.7

Section 14(e) generally prohibits two forms of conduct.8 First, the statute prohibits the making of any false statements of a material fact and the omission of any material fact necessary to make the statements made not misleading.9 Second, the statute prohibits "any fraudulent, deceptive, or manipulative acts or practices."10

Until 2018, when faced with the question of the correct burden of proof for Section 14(e) claims, five federal circuits had ruled that plaintiffs asserting a Section 14(e) claim were required to prove that the defendant acted with sufficient culpability, as opposed to mere negligence.11 The concept of culpability is often referred to as scienter, which functions as a way of limiting the imposition of liability to persons whose conduct has been sufficiently culpable to justify the liability.12 Each of these circuits pointed to the similar language in Rule 10b-5, which the Supreme Court ruled requires proof of scienter,13 in support of its holding that Section 14(e) requires scienter as well.14 A scienter standard requires a showing of intent or knowledge of the nature of one's act or omission.15 In contrast, a mere negligence standard does not require a plaintiff to prove the defendant's intentional wrongdoing.16 Thus, a scienter requirement puts a heavier burden of proof on a plaintiff than does a negligence standard.

On April 20, 2018, the Ninth Circuit created a circuit split regarding whether claims asserting violations of Section 14(e) require a showing of negligence or scienter. …

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