More lawsuits against directors and officers are likely to result if the U.S. Supreme Court upholds a 9th U.S. Circuit Court of Appeals decision on the standard to be used in filing litigation over tender offers, experts warn.

But there is no certainty the court will agree with the 9th Circuit in Gary Varjabedian v. Emulex Corp. et al., which has been the lone federal appeals court to rule that plaintiffs need only claim defendants had acted negligently.

At least five other circuits have disagreed, holding plaintiffs must establish that defendants had acted with an intent to defraud.

A tender offer is a conditional offer to buy a large number of shares at a price that is typically higher than the stock’s current price. Experts say they account for a relatively small percentage of deals when compared with mergers where the companies’ boards of directors reach an agreement.

The Supreme Court accepted certiorari in the case earlier this month. It involves Fort Collins, Colorado-based Avago Technologies Wireless Manufacturing Inc., which made a tender offer for the outstanding shares of Costa Mesa, California-based Emulex Corp., a technology company.

In February 2015, the two companies issued a joint press release stating they had entered into a merger agreement, with Avago offering to pay $8 a share for Emulex’s stock, which reflected a 26.4% premium on Emulex’s stock price the day before the merger was announced. Investment banking firm Goldman Sachs Group Inc. in New York issued a recommendation stating the offer was fair to shareholders.

The merger was completed in May 2015, but unhappy shareholders filed suit in U.S. District Court in Pasadena, California, stating the recommendation statement had failed to summarize a premium analysis that would have disclosed the 26.4% premium was below average compared with similar mergers.

The court dismissed the case in part on the basis the plaintiffs had failed to allege the defendants had acted with “scienter,” or an intent to defraud, as required under Section 14(e) of the Securities and Exchange Act of 1934

A unanimous three-judge panel of the San Francisco-based 9th Circuit overturned that decision, citing a 1980 decision by the U.S. Supreme Court in Aaron v. SEC, which said a similarly worded section of the Securities Act of 1933 indicated the law did not require a showing of intent.

The court acknowledged it disagreed with five other circuits’ rulings on the issue, including the 2nd, 3rd, 5th, 6th and 11th, based in New York, Philadelphia, New Orleans, Cincinnati and Atlanta, respectively

D&O insurers are concerned about how the court will rule “because the last thing insurers would want is for the standard of liability to be lower,” said Joseph P. Monteleone, a partner with Weber Gallagher Simpson Stapleton Fires & Newby LLP in Bedminster, New Jersey.

“If there’s a negligence standard as opposed to recklessness, that’s a much easier bar for the plaintiffs to clear” and, if upheld by the Supreme Court, such a ruling would likely result in fewer cases being dismissed, he said.

“The impact of that is, once you successfully survive a motion to dismiss, as a practical matter the case probably has some settlement value.”

Mr. Monteleone said there is also a concern that if the Supreme Court upholds the 9th Circuit, the negligence standard would expand into other areas of securities law.

The 9th Circuit ruling creates an incentive for plaintiffs to file suits because they do not need to allege intentional misconduct, said Priya Huskins, San Francisco-based senior vice president, D&O, for Woodruff Sawyer.

It also puts pressure on the insurance market, she said.

Insurers respond when directors and officers are sued in mergers and acquisition cases, so “anything that would tend to increase the frequency of this kind of litigation would be very bad for the insurance market. We’re already in a time when the market is very stressed,” she said.

Experts say it is difficult to predict how the Supreme Court will rule. 

If forced to do so, “my guess would be that the court would side” with the other appeals courts when it rules in the case, said Bruce A. Ericson, a partner with Pillsbury Winthrop Shaw Pittman LLP in San Francisco.

William F. Sullivan, a partner with Paul Hastings LLP in San Francisco, said his sense is that the Supreme Court will follow the other courts, “but on the other hand, the court could have left it alone and left it to percolate.”

John P. Stigi III, a partner with Sheppard, Mullin, Richter & Hampton LLP in Century City, California, also said the outcome is uncertain. “There’s not enough experience in my view” to determine how newly appointed justices Neil Gorsuch and Brett Kavanaugh “might go on these sorts of issues, to be able to game it out.”

“A lot will depend on the quality of the arguments in the briefs and the oral arguments as presented to the court,” said David A. Priebe, a partner with DLA Piper LLP in East Palo Alto, California. “I think they will look very closely at the text of the statute. I don’t think there are clear-cut lines, here.”

And regardless of its decision, the ruling will provide more guidance and standards, he said.

Mr. Priebe added that, unlike other areas, there is “less ideological disagreement than you might think” over securities-related litigation among Supreme Court justices, with many of its rulings either unanimous “or close to unanimous.”

He pointed to the March 2018 ruling in Cyan Inc. et al. v. Beaver County Employees Retirement Fund et al. where the court unanimously held that amendments to the federal Securities Act of 1933 do not give federal courts exclusive jurisdiction over securities.