Since the financial crisis of 2008, shareholders in several companies including RBS, Northern Rock, Lloyds, BP and Porsche have pursued the possibility of suing for fraud in the American courts, where class actions are far easier. But a recent Supreme Court decision could scupper these plans.
The verdict in Morrison v National Australian Bank puts an end to a longstanding set of rules that often allowed foreign investors who purchased shares of a foreign company on a foreign exchange – so called F-cubed investors – to pursue claims of securities fraud under US law in the American courts. Indeed, F-cubed investors have frequently participated as class members in securities fraud claims filed in the United States.
The High Court created a bright-line test, rather than diving into the particulars of the defendant’s conduct or the nationality of the parties, holding that Section 10(b) of the 1934 Securities Exchange Act does not give rise to a private cause of action for securities that are traded outside of the United States. The Court stated: “[T]hose purchase-and-sale transactions are the objects of the statute’s solicitude... And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies.”
The Morrison decision drastically reins in the extraterritorial reach of US securities laws. Indeed, in barring so called F-cubed investors from pursuing claims under US law, it also bars these investors from taking advantage of the US class action litigation mechanism.
This decision could also have a material impact on foreign investors currently seeking redress in the US courts. For instance in January 2010 a jury verdict was entered against Vivendi, finding the company and several of its officers and directors guilty of misleading shareholders. If French investors, or any Vivendi investors outside the US, purchased their shares on exchanges located outside the United States, then under Morrison those investors are barred from pursuing claims in the US courts. Up to two-thirds of Vivendi’s investors live in France.
As well as the cases mentioned above, a number of securities fraud claims pending against foreign companies in American courts, including claims against Porsche, EADS, Alstom, BP, and Toyota are now unlikely to proceed. Of course, all this is good news for non-American companies facing potential investor fraud class action claims as the pool of potential class members, and thus the size of any potential claim for damages, is reduced by the application of Morrison.
Under Morrison companies located outside of the US can seemingly avoid the US securities laws and the risk of facing expensive class action litigation there altogether by simply not selling their shares on American exchanges. But it is unclear whether the decision will survive financial reform and political pressure which has generally favoured extending the reach of the US securities laws beyond American shores.
Indeed, it is possible that Morrison will be overruled or eroded in the near future. The ruling was explicitly based on the absence of language in Section 10(b) extending its reach to foreign investors and stock exchanges. Accordingly, a congressional amendment to the statute would render the court's opinion moot. And the financial reform bill winding its way through Congress now contains a proposal to extend the extraterritorial reach of the Securities and Exchange Commission and the Department of Justice. This could erode the Court's new transactional rule significantly by giving regulators the power to enforce US securities law against foreign companies. Other recently proposed legislation, such as that providing for aiding and abetting liability in securities fraud suits, or language adopting the conduct and effects test that Morrison overruled, could also extend the reach of the statutory fraud remedy beyond US shores.
For now, Morrison reduces the litigation risk and expense for non-American companies associated with being a publicly traded company – particularly if the company does not sell shares on the US exchanges. Whether the decision spurs EU countries to adopt parts of the American-style class action system remains to be seen.