As various blue-ribbon committees have struggled with the competitiveness of the U.S. securities exchanges in the global financial marketplace (about which refer here and here), one issue on which they have focused is the aversion overseas companies may have for the U.S. litigation system. But while overseas companies may seek to avoid U.S.-style litigation, overseas investors seem eager to join in the fray. The most recent example involved the securities class action lawsuit against U.K.-based GlaxoSmithKline, in which on October 5, 2007, the court appointed (here) a U.K. pension fund to act as lead plaintiff.
Avon Pension Fund, the institutional investor selected as lead plaintiff in that case, was only one of several European-based investors that petitioned to serve as lead plaintiff. A German pension fund in fact had the largest financial interest, but the court rejected the German fund’s petition because of uncertainty over whether German courts would enforce a U.S. class action judgment. The court also rejected the petition of another U.K.-based pension fund. Press coverage of the court’s lead plaintiff determination can be found here and here.
These overseas investors’ interest is serving as lead plaintiffs in a U.S. class action lawsuit represents merely the latest example of a phenomenon well-documented in a May 2007 study by Institutional Investor Services, which showed that at that time, on 182 occasions overseas institutional investors had sought to serve as lead plaintiffs in 98 different U.S securities class action cases.
The selection of a U.K. pension fund as lead plaintiff in a case against a U.K. based company does raise certain questions – such as, at what point does a case like this no longer belong in a U.S. court? The fact that GlaxoSmithKline’s American Depositary Receipts (ADR) trade on the New York Stock Exchange might provide some explanation for the presence of the case in the U.S., but that alone does not answer the question.
Indeed, in a September 26, 2007 decision involving Rhodia, S.A., a U.S. district court held (here) that it lacked subject matter jurisdiction in a securities lawsuit brought in U.S. court by two overseas investment funds against a foreign company whose shares trade on a foreign exchange but whose ADRs trade on the NYSE. As discussed at greater length in a October 8, 2007 Paul Weiss legal memorandum (here), courts are declining to exercise subject matter jurisdiction over claims brought by foreign investors against foreign companies, where the conduct at issue took place outside the United States. The mere fact that the company’s ADRs traded on the NYSE alone was not enough to provide jurisdiction.
These jurisdictional issues are perhaps most compelling in the so-called "f-cubed" cases, which involve foreign companies and foreign investors who acquired their shares on a foreign exchange. To the extent the alleged misconduct took place outside the U.S. the court may, like the Rhodia court, decline to exercise jurisdiction. A good overview of the jurisdictional issues, particularly of the questions involving the "f-cubed" cases, can be found in the June 14, 2007 Law.com article by Columbia Law Professor John Coffee entitled "Foreign Issuers Fear Global Class Actions" (here).
And even where the courts are exercising jurisdiction, they increasingly are willing to engineer the composition of the class to take account of disparate overseas components. For example, in certifying the class in the Vivendi securities litigation in March 2007, the court included within the class investors from France, the U.K, and Netherlands, but excluded from the class investors from Germany and Austria, on the theory that the courts in those countries may not recognize a U.S. class action judgment or settlement and the defendants could face duplicate litigation in those countries. (Refer here for a detailed discussion of the class certification decision in Vivendi.)
Clearly, overseas investors appear interested in pursuing redress in U.S. courts. Even if they face potential obstacles through jurisdictional challenges or class composition issues, these investors appear eager to pursue remedies under the U.S securities laws. Cynics might well assert that these investors are merely evincing the same jackpot justice mentality that has driven the U.S. litigation system for years. There may well be some truth to this view, as the massive settlements in the Royal Ahold and Nortel Networks cases undoubtedly provide a substantial incentive for foreign investors to consider the U.S. litigation alternatives. At the same time, it also appears to be the case that foreign investors are becoming more accustomed to the idea that aggrieved shareholders are entitled to hold company management accountable.
There may be no going back on this development, and indeed legislative changes in a variety of countries seem to represent a greater recognition of the rights of shareholders to pursue claims. No country has gone all the way to a U.S. style litigation system, and none seem likely to do so in the near future. But as overseas investors become comfortable with the U.S. system, they may become increasingly willing to use it and even to become reliant on it. (Indeed, the press coverage of the GlaxoSmithKline lead plaintiff selection suggests that the U.K. pension fund’s selection in that case may encourage other U.K. funds to become more involved in U.S. class litigation.)
As overseas investors’ become more comfortable with this type of litigation, they may become more likely to agitate for similar remedies in their own countries. In any event, one side effect from the increasing globalization of the financial marketplace is that overseas investors may become an increasingly important part of U.S class action litigation.
Special thanks to a loyal reader for the link to the news articles regarding the GlaxoSmithKline lead plaintiff selection.
UPDATE: As discussed in this subsequent post (here), a case pending in the Second Circuit involving the National Australia Bank squarely presents the jurisdictional issues involved in the "f-cubed" cases.
FURTHER UPDATE: The With Vigour and Zeal blog has some further additional insight (here)into the involvment of the U.K. institutional investor in the GSK action, as well as some interesting commentary on the perspective of the U.K. institutional investment community on U.S. style class action litigation.
Another Options Backdating Class Action Settlement: According to an October 15, 2007 press release from plaintiffs’ counsel (refer here), the Mercury Interactive options backdating securities class action lawsuit has settled for $117.5 million, which the law firm claims is "the largest in any stock options backdating case to date."
My own tracking of the options backdating class action settlements confirms the plaintiffs’ assertion, as the next largest options backdating related settlement of which I am aware is the Rambus case, which settled for $18 million (about which refer here). The only other options backdating class action settlements I have identified are: Newpark Resources, which settled for $9.5 million (about which refer here), and Vitesse Semiconductor, which settled for $10.2 million (about which refer here).
While the Mercury Interactive settlement amount is impressive, it is unlikely to serve as any kind of a guide for many other options backdating securities class action lawsuits. The Mercury Interactive case was relatively unusual in that its share price dropped significantly in reaction to the media reports about options backdating at the company. The share prices of most other companies with options backdating woes did not react significantly to the news. However, the Mercury Interactive settlement may be relevant to the handful of cases where there was a significant stock price drop, and there are other cases that are cast in a different light given the Mercury Interactive settlement.
I have been unable to find any disclosures revealing the contribution, if any, of D & O insurance to the Mercury Interactive settlement. Any readers who have information on this point and are willing to share are invited to let me know. Up to this point, most D & O carriers have taken the position that the options backdating cases will not be a significant collective event for the D & O industry. But if carriers are compelled to contribute to a group of settlements on the order of magnitude of the Mercury Interactive settlement, options backdating might turn out to have a significant impact on the D & O industry after all.