One of the practical effects of the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank is that, as a result of the decision, it is more difficult to bring a class action in a U.S. court under the U.S. securities laws against a company based outside the U.S. The Court rejected earlier standards allowing U.S. courts to consider securities suits against non-U.S. companies if conduct relating to or effects of an alleged fraud took place in the U.S. Instead, the Court said that U.S. securities laws apply only to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”
At the time of the Morrison decision, the expectation was that the number of U.S. securities class action lawsuits filed against non-U.S. companies would decline. As it has turned out however, the number of securities lawsuits filed against non-U.S. companies in each of the years since Morrison has been greater than the number filed in the years prior to the decision. Indeed, for the past several years, non-U.S. companies have been likelier to get hit with a securities class action lawsuit than domestic companies.
One explanation for the continued number of suits against non-U.S. companies notwithstanding Morrison is that the non-U.S. companies getting hit with the lawsuits have securities that trade in the U.S. Which is not to say that there are not still post-Morrison questions in connection with a number of these lawsuits involving non-U.S. companies. Indeed, as detailed in a September 23, 2016 Law 360 article by Matthew Solum of the Kirkland & Ellis law firm entitled “Extraterritorial Reach of the U.S. Securities Laws Post-Morrison” (here, subscription required), there were a number of issues that the lower courts had to sorted out in the wake of the U.S. Supreme Court’s Morrison decision, and some of those issues have yet to be entirely sorted out.
Among the other post-Morrison issues that courts continue to try to sort out is the question of the application of the U.S. securities laws to transactions involving American Depository Receipts (ADRs). At least one district court has held that the U.S. securities laws do not apply to ADRs purchased over-the-counter in the U.S. As discussed here, in September 2010, Southern District of New York Judge Richard Berman ruled in a case involving Société Générale that because “a trade in ADRs is considered to be a predominantly foreign securities transaction,” the securities fraud provisions of the Exchange Act are “inapplicable.” He dismissed the plaintiffs’ case not only as to SocGen shareholders that had purchased their shares outside the U.S., but even as to ADR holders that purchased their securities on U.S. exchanges.
The question of the applicability of the U.S. securities laws to ADR transactions has continued to percolate. These issues were involved in the U.S. securities lawsuit filed in the Southern District of New York involving U.K. grocer Tesco. As discussed in detail here, the parties fully briefed the threshold question of whether or not the U.S. securities laws apply to over-the-counter transactions in the U.S. in ADRs. The case settled before the court ruled on the issue.
The question of the applicability of the U.S. securities laws came up again in the U.S. securities lawsuit filed in the Central District of California against Toshiba. As discussed here, Judge Dean Pregerson held under Morrison that the U.S. securities laws do not apply to unsponsored OTC transactions in Toshiba’s American Depositary Shares. Among other things, it was critical to Judge Pregerson’s ruling that Toshiba itself had no involvement in the availability of the unsponsored ADSs for trading over the counter in the U.S. Judge Pregerson said that “nowhere in Morrison did the Court state that U.S. securities laws could be applied to a foreign company … whose stocks are purchased by an American depositary bank on a foreign exchange and then resold as a different kind of security (an ADR) in the United States.”
A number of the recent high profile securities class action lawsuits filed in the U.S. against foreign companies raise many of these same issues. For example, the investor lawsuits filed in the U.S. by holders of unlisted Volkswagen ADRs raise this very issue. Indeed, as discussed here, the defendants in the U.S. securities suit against Volkswagen have moved to dismiss the case in reliance on Morrison, arguing that the U.S. securities laws do not apply to transactions in the U.S. involving VW’s unlisted ADRs. VWs ADRs are Level 1 ADRs; VW argues that its Level 1 ADRs do not require to file separate periodic reports with the SEC, but rather only to file English language translations of its German filings. In its motion to dismiss, a copy of which can be found here, VW argued that the U.S. securities laws do not apply to its disclosures made in Germany under German law. The plaintiffs’ opposition to the defendants’ motion to dismiss is due to be filed in October.
As these examples show, even though it has been six years since the U.S. Supreme Court issued its decision in Morrison, critical issues continue to bubble on and are yet to be resolved by the Courts. As I noted at the outset, investors continue to file U.S. securities class action lawsuits against non-U.S. companies, in part based on the theory that many of these companies have securities that trade in the U.S., either on the U.S. exchanges or over the counter in the U.S. In many instances, these securities are ADRs. The cases above show that there are a number of questions that could affect the ability of claimants to proceed in U.S. courts with these cases. These questions may be particularly important where the claimants are holders of ADRs that whose U.S. trading was not sponsored by the defendant company, or where the ADRs trade over the counter in the U.S.