A number of recent district court decisions have examined whether U.S. securities laws apply to foreign companies’ ADRs purchased and sold in the U.S. In Stoyas v. Toshiba Corp.,10 investors who purchased unsponsored ADRs in Toshiba traded on the OTC market in the U.S. alleged that the company and certain of its D&Os violated U.S. securities laws as well as Japan’s Financial Instruments & Exchange Act. The defendant argued that under Morrison, §§10(b) and 20(a) of the Exchange Act did not apply because Toshiba had not listed the ADRs on a U.S. exchange or sold the securities in the U.S.
The district court found that the first prong of Morrison did not apply because the OTC market is not a domestic exchange. The plaintiffs also could not satisfy the second prong of Morrison because they had not alleged any affirmative act by Toshiba related to the purchase and sale of securities in the U.S. Although the ADRs were based on Toshiba common stock traded on a foreign exchange, they were sold by U.S. depository banks without the participation of Toshiba. There were no allegations that Toshiba sponsored, solicited or committed any other affirmative act with respect to the ADRs. The court reasoned that holding companies like Toshiba liable in the U.S. for secondary securities they had not approved would “create essentially limitless reach” for U.S. securities laws.
Other courts have determined that U.S. securities laws may apply where the defendant company sponsored the ADRs at issue. In In re Volkswagen “Clean Diesel” Marketing, Sales Practices, and Product Liability Litigation, 11 the Northern District of California found that under Morrison, Volkswagen and certain of its D&Os could be liable under U.S. securities laws with respect to ADRs sponsored by the company and traded in the U.S. Investors in Volkswagen ADRs filed a alleged that the defendants misled investors by failing to disclose that the company had utilized a “defeat device” in its diesel cars that allowed the cars to temporarily reduce emissions during testing. The defendants filed a motion to dismiss arguing that under Morrison the U.S. securities laws did not apply to the ADR transactions.
As the ADRs traded on the OTC market and were not listed on a U.S. exchange, Morrison’s first prong did not apply. The defendants, citing Parkcentral, argued that Morrison’s second prong also did not apply because the ADR transactions were predominately foreign.
Unlike the swap agreements in Parkcentral, however, the defendant company had taken affirmative steps to make its sponsored ADRs available to investors in the U.S. The court also noted that the ADRs had numerous connections to the U.S., including that they were traded in the U.S. pursuant to an agreement subject to New York law and a Form F-6 Registration Statement submitted to the SEC. As a result, the ADRs were not predominately foreign and were sufficiently domestic to satisfy the “domestic transactions” requirement under Morrison.
Most recently, in Vancouver Alumni Asset Holdings Inc., et al. v. Daimler AG, et al., 12 another district court in California held that U.S. securities laws apply to OTC transactions in Daimler A.G.’s sponsored ADRs. As in Volkswagen, the ADR shareholders alleged damages from misrepresentations and omissions pertaining to emission control systems in certain of the defendant company’s diesel vehicles. The defendants also cited Parkcentral and argued that the plaintiffs could not satisfy either prong of Morrison because the ADRs were “predominantly foreign in nature.” The court disagreed, noting that the Parkcentral test was not binding on its determination and the plaintiffs in that case had not alleged that the defendant company was a party to the relevant swap agreements or participated in the market for the swaps. In contrast, the ADRs were not independent from Daimler foreign securities or from Daimler itself, and the company sponsored and was directly involved in the domestic offering of the ADRs. Further, Daimler took affirmative steps to make its securities available to investors in the U.S., and all broker-dealers, settling agents and clearing houses associated with the transactions were U.S. institutions. Therefore, the court determined that the plaintiffs alleged a sufficient connection between the ADR transactions and the U.S. as required under Morrison’s second prong.
As plaintiffs continue to target foreign companies and their D&Os in U.S. securities actions, it is important that they understand whether they could be subject to claims under U.S. securities laws. The cases discussed above have provided greater certainty regarding the exterritorial reach of U.S. securities laws. As the Second Circuit noted in Parkcentral, however, application of Morrison’s “transactional test” is often not a straightforward exercise, and U.S. courts will likely continue to update and refine the extraterritorial reach of U.S. securities laws to increasingly complex fact patterns and securities transactions. Therefore, global companies and their insurers should closely monitor developments in this area.