In view of the high potential exposure in U.S. litigation, it is important that global companies and their insurers understand the extraterritorial reach of U.S. laws. Despite the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank limiting the application of U.S. securities laws to foreign transactions, shareholders continue to file record numbers of U.S. securities class actions against companies based outside of the U.S. We discuss below some of the recent court decisions applying Morrison in different factual scenarios and clarifying further the exterritorial reach of U.S. securities laws under the second prong of its transactional test.
The Morrison decision limited the ability of investors who purchased shares in a company based outside of the U.S. to file securities actions against the company and its directors and officers (“D&Os”) in U.S. courts. Morrison rejected the prior “conduct and effects test,” which considered whether the alleged conduct occurred in the U.S. or whether conduct occurring overseas had a substantial effect in the U.S. Instead, the Court created a two-part “transactional test” intended to provide more certainty and consistency regarding the extraterritorial reach of U.S. securities laws. Specifically, Morrison held that §10(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”) only applies to (i) “transactions in securities listed on domestic exchanges” and (ii) “domestic transactions in other securities.” With respect to securities not listed on a domestic exchange, the Court found that the exclusive focus should be on domestic purchases and sales.
While Morrison was generally viewed as favorable for defendants, it did not end U.S. securities lawsuits against foreign companies and likely contributed to an increase in litigation in other countries. By limiting access to U.S. courts, Morrison encouraged investors to develop and pursue class or collective actions in new jurisdictions. At the same time, in the years after Morrison, purchasers of American Depository Receipts (“ADRs”) of companies based outside of the U.S. have filed high numbers of U.S. securities class actions. In 2016, shareholders filed 42 new securities class actions against foreign issuers, which is wellabove the annual average number of such lawsuits prior to Morrison.
Morrison also did not limit the rising number of U.S. regulatory investigations and actions against foreign companies and their D&Os. Within a month after the Supreme Court issued its decision in Morrison, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”). Pursuant to Section 929P of Dodd Frank, the broad conduct and effects test determines jurisdiction in actions brought by the Securities and Exchange Commission (the “SEC”) or the Department of Justice (the “DOJ”) under the antifraud provisions of the Exchange Act, the Securities Act of 1933 (the “Securities Act”) and the Investment Advisers Act. Accordingly, the SEC and DOJ have asserted that Dodd Frank essentially overruled Morrison with respect to their regulatory and criminal actions, and they continue to aggressively pursue investigations and actions against foreign companies and their D&Os around the world.1
Since Morrison, appellate and district courts have provided further guidance regarding when shareholders may bring securities fraud claims against foreign companies and their D&Os in the U.S. Pursuant to the first prong of the Morrison test, U.S. courts consistently allow shareholder claims against foreign companies that listed securities on one of the U.S. registered securities exchanges. Determining whether U.S. securities laws apply to transactions in securities that are not listed on a U.S. exchange has been more challenging. A consensus has emerged, however, that under Morrison’s second prong, the U.S. securities laws apply to foreign companies where irrevocable liability was incurred or title was transferred in the U.S. for the relevant securities transaction. Further, a number of recent decisions have found that U.S. securities laws apply with respect to transactions in sponsored ADRs, but not unsponsored ADRs.2