The U.S. Court of Appeals for the Second Circuit issued a lengthy opinion today in the long-running In re Vivendi, S.A. Securities Litigation, affirming the jury’s verdict on liability and addressing issues about loss causation and expert-witness testimony. But the tail on the proverbial dog also dealt with another set of issues that this blog has frequently discussed: the extent to which the U.S. securities laws apply to foreign purchasers and foreign purchases.
The Second Circuit held that the District Court had not abused its discretion in excluding certain foreign shareholders from the certified class because of a concern that courts in some foreign countries might not give preclusive effect to a U.S. class-action judgment. In addition, the Second Circuit affirmed the District Court’s dismissal of claims by U.S. purchasers who had obtained Vivendi’s non-U.S. ordinary shares through a three-way merger between Vivendi and two other companies.
The court’s ruling on the first point reaffirms prior precedent that the “superiority” analysis conducted as part of the class-certification inquiry may properly consider whether foreign class members would or would not be bound by a U.S. class-action judgment if they were to sue in their home courts. The court’s ruling on the second point continues the Second Circuit’s effort to explicate the Supreme Court’s standard for determining whether the U.S. securities laws apply to transactions with transnational elements.
The securities litigation against Vivendi – a French company – began in 2003 as a putative worldwide class action on behalf of all purchasers of Vivendi stock. At that time, decades’ worth of precedent in the Second Circuit had established that the federal securities laws’ applicability to securities transactions with transnational elements depended on the so-called “conduct or effects” test: whether U.S.-based conduct had a sufficiently significant impact on non-U.S. shareholders, or whether non-U.S. conduct had a sufficiently significant effect on U.S. investors. The Vivendi litigation proceeded under that familiar standard for the first seven years of its life.
In 2010, the Supreme Court threw out the “conduct or effects” test. The Court’s ruling in Morrison v. National Australia Bank announced a transactional test for determining the federal securities laws’ reach and held that those laws apply only to alleged misstatements or omissions made “in connection with the purchase or sale of [i] a security listed on an American stock exchange, and [ii] the purchase or sale of any other security in the United States.”
Morrison caused the District Court to revise its views about the extent to which the putative worldwide class of Vivendi purchasers could sue under the federal securities laws. The court had originally applied the “conduct or effects” test and had held that Vivendi had engaged in sufficient U.S.-based conduct to allow the entire putative class to sue. After Morrison, however, the court limited the case only to U.S. purchasers: those who had bought Vivendi’s U.S.-listed American Depositary Receipts, and anyone else who had purchased non-U.S.-listed Vivendi shares in U.S. transactions. The court also rejected the contention that American purchasers of Vivendi’s French ordinary shares – and particularly those persons and entities who had acquired their ordinary shares through the three-way merger of Vivendi and two other companies – could participate in the case, because the court did not deem the merger to be a U.S. transaction.
Along the way, the District Court also held that class members from certain countries could not participate in the U.S. litigation because of concerns about whether their home courts would recognize and grant preclusive effect to a judgment entered in a U.S. class action.
The case went to trial, and the jury found against Vivendi. When Vivendi appealed the jury verdict, the plaintiffs cross-appealed the District Court’s rulings on class membership. The Second Circuit affirmed the District Court’s rulings on the cross-appeal.
Second Circuit’s Decision
Judgment Recognition as a Permissible Consideration for Class Certification
The Second Circuit first held that the District Court had not abused its discretion in viewing judgment recognition as a relevant consideration under the rules governing class certification. Federal Rule of Civil Procedure 23(b)(3) requires a court to consider various factors when deciding whether to certify a putative class, including whether a class action would be “superior to other available methods for fairly and efficiently adjudicating the controversy.”
The Second Circuit ruled that “[c]oncerns about foreign recognition of our judgments are reasonably related to superiority” because, if a foreign court would not grant preclusive effect to the judgment, the parties and the court would waste their time and resources litigating and adjudicating the claim. In so holding, the Second Circuit reinforced its 1975 decision on the same point and repeated that, “if defendants prevail against a class[,] they are entitled to a victory no less broad than a defeat would have been.” (The same logic applies to a class-action settlement.)
But the Second Circuit declined to “opine on how likely it must be that a foreign court will recognize a class judgment in order for Rule 23’s superiority requirement to be met” (emphasis added). The court saw no need to reach that issue because the plaintiffs – who bore the burden of satisfying Rule 23 – had “not identif[ied] any evidence that they presented to the district court which suggested that foreign courts in the countries at issue would grant preclusive effect to a class judgment.” The requisite level of proof of recognition (or lack thereof) thus appears to remain an open issue.
Stock Mergers as Non-U.S. Transactions
The Second Circuit also affirmed the District Court’s ruling excluding from the class those Americans who had obtained Vivendi’s non-U.S. shares through Vivendi’s stock merger with two other companies. Those shareholders did not fall within Morrison’s first prong, because they had not obtained U.S.-listed securities. And they did not come within Morrison’s second prong, because they had not obtained their unlisted foreign shares through a U.S. transaction.
In earlier post-Morrison decisions, the Second Circuit had held that plaintiffs can satisfy Morrison’s second prong by showing either that they incurred irrevocable liability in the United States for their securities transactions or that title passed in the United States. The court had propounded a nonexclusive list of factors to assess whether an off-exchange transaction was a domestic transaction under Morrison: where the contract was formed; where the purchase order was placed; where title passed; and where money was exchanged.
In Vivendi, the Second Circuit held that the shareholders at issue had not incurred irrevocable liability for or obtained title to the French ordinary shares in the United States. The binding contract through which the shareholders had obtained their Vivendi shares was the merger agreement, but the class members were not parties to the merger agreement, and the merger contract had not been made in the United States. Moreover, the District Court had found that the ordinary shares had been maintained in book-entry form in France and that title to those shares had passed in France.
The Second Circuit’s ruling on judgment recognition might breathe new life into an issue that has received somewhat less attention since the Supreme Court’s Morrison decision. The Vivendi case confirms that, in applying Rule 23’s superiority element, district courts are entitled to require foreign plaintiffs to show that their home courts would recognize a U.S. class-action judgment. Such a showing might trigger a battle of experts on foreign law (as occurred in the Vivendi case), but the class representative should bear the burden of proof on the issue. If the class cannot meet its burden, the court may exclude the foreign shareholders – on a country-by-country basis – from the class.