Lots has been written, even on The D&O Diary (most recently here), about the way the world is adjusting to investors’ growing desire to hold management accountable. At the same time, U.S. courts have proven increasingly reluctant to project the remedies available under its securities laws into situations where there is an insufficient connection to the U.S. (as discussed here).
But the lawsuit filed on June 12, 2008 against the European Aeronautic Defence & Space Co. (EADS) in the United States District Court for the Southern District of New York takes all of that and puts in into a truly interesting and potentially combustible mix – the plaintiffs are U.S. citizens, but they exclusively bought their shares in this foreign-domiciled company outside the U.S. The company’s shares do not trade on any U.S. exchange.
The company and the individual defendants, all current and former directors and officers of EADS, are domiciled outside the U.S. EADS is a Netherlands company with its principle place of business in The Netherlands. This is a company that is foreign to the U.S. in every sense of the word and only the investor plaintiffs themselves have any connection to the U.S.
If there were ever a case to test the outer limits for the availability of U.S. courts for remedies under the U.S. securities laws, this case would appear to be the one.
As described in the press release, the complaint alleges that
EADS falsely assured the investing public that it would overcome the technical problems in the production of the Company’s Airbus A380 commercial jets (“A380”) and it would be able to meet its year-end delivery deadlines. Moreover, the Company issued numerous positive statements which described the Company’s increasing financial performance. According to the complaint, these statements were materially false and misleading because they failed to disclose and misrepresented the following adverse facts, among others: (i) that the Company was experiencing insurmountable delays in the manufacture of the A380 commercial jet; (ii) that the Company would be required to compensate its customers for these delays through discounts and certain customers would likely be canceling their entire orders; and (iii) that, as a result of the foregoing, the Company’s ability to receive new contract awards from commercial airliners and its ability to reap future revenues at the levels that it was projecting would be in serious doubt.
On June 13, 2006, the Company announced that its Airbus subsidiary was having production problems with the A380 commercial jet, which would cause a significant delay in delivery to its customers. The Company also issued a profit warning beyond 2006 which was attributable to these delays and announced that it anticipated annual shortfalls of €500 million, without taking into account possible contract terminations from existing customers.
What makes this case interesting is not the specific factual allegations, which, at least by U.S. standards, are not all that remarkable. What makes this case interesting is the putative class on whose behalf the claim is brought. According to the press release, the lawsuit is brought on behalf of “U.S. citizens who purchased the publicly traded stock of European Aeronautic Defence & Space Co. (“EADS” or the “Company”) on the Frankfurt (Frankfurt: EAD.F), Madrid (Mercado Continuo: EAD.MC) and/or Paris (Paris: EAD.PA) stock exchanges between January 17, 2005 and June 13, 2006, inclusive.”
There are several noteworthy points about this class description. First and foremost, the plaintiffs’ lawyers do not purport to represent foreign investors who brought their shares abroad, so they are consciously avoiding the so-called f-cubed litigant problem (foreign domiciled investors who bought their shares in a foreign domiciled company on a foreign exchange). But the class description underscores the fact that this company’s shares were not traded on a U.S. exchange. They were only traded on foreign exchanges.
This class description raises, in a fairly dramatic way, the ultimate question of how broadly the remedies available under the U.S. securities laws should reach. Do they reach even to a foreign company whose shares do not trade at all in the U.S?
The traditional standards, looking to whether there was (or were) fraudulent conduct or the effects of fraudulent conduct in the U.S., might post significant hurdles for the court to exercise jurisdiction in this case, except that those standards were developed to aid court to determine whether or not to exercise jurisdiction on behalf of investors domiciled outside the U.S. Courts have generally not hesitated to exercise jurisdiction, even against foreign domiciled companies, on behalf of U.S. citizens. But will the court be willing to exercise jurisdiction against a foreign-domiciled company whose shares do not trade in the U.S.?
There may well be prior cases that raise this particular set of issues, and if so I hope readers will let me know. To my knowledge this is a new angle on the perennial set of jurisdictional questions surrounding securities claims against foreign domiciled companies. If the U.S. court were to exercise subject matter jurisdiction here, it would in effect represent a projection of U.S court jurisdiction and U.S. style securities litigation to any company anywhere, as long as there is a U.S.-based investor. Maybe a court here will go for that, but it seems like a stretch to me.
Is there any company anywhere in the world that does not have U.S.-based investors? Should the mere presence of those investors in the U.S. courts allow U.S courts to exercise jurisdiction over all those companies, no matter where they are located and where their shares trade?
Finally, there is also the issue of personal jurisdiction over the individual defendants, and perhaps even over the corporate defendant. Have the defendants purposely availed themselves of the jurisdiction or otherwise established minimum contact with the forum such that the exercise of jurisdiction over them comports with traditional notions of substantial justice and due process?
There probably are also some very interesting questions here about the basic merits of the claim. But those questions may or may not ever matter. The first innings of this game are going to be the ones to watch. Make sure you have your beer and your hot dog and that you are in your seat for the national anthem, because this game is going to rock and roll from the very first pitch.
UPDATE: On June 13, 2008, a different plaintiffs' firm apparently initiated a separate lawsuit against EADS on behalf of a different plaintiffs' class. According to the firm's press release (refer here), this newest lawsuit "seeks to recover damages on behalf of all U.S. and non-U.S. purchasers of the publicly traded securities of EADS during the Class Period." The new lawsuit also names as defendants Lagardere and Daimler AG, EADS's largest shareholders. This second lawsuit presents faces even more significant jurisdictional barriers, since it purports to represent the so-called f-cubed claimants. Clearly these complaints are testing outer jurisdictional boundaries on the availability of remedies under the U.S. seecurities laws.