Recent Trends In US Securities Class Actions Against Non-US Companies

The volume of US securities class action litigation targeting companies outside the US has recently reached record levels, despite a 2010 decision by the US Supreme Court, in Morrison v. National Australia Bank, which substantially restricted the extraterritorial reach of many such cases. This increase is attributable in large part to a wave of suits filed against Chinese companies listed on US stock markets. Even excluding Chinesecompany litigation, however, the pace of US securities class actions against non-US companies has not fallen below the levels observed prior to the Morrison decision.

On the other hand, Morrison may have had some effect on settlement sizes. In the past several years, there have been few very large settlements in US securities class actions against non-US companies, a development that, as discussed below, may be attributable in part to the decision.

This article surveys recent trends in filings of US securities class actions against non-US company defendants, drawing upon data up to mid-2012. It also discusses trends in settlements, and concludes by reviewing the outlook for such litigation going forward.

Trends in Filings against Non-US Company Defendants

The number of US federal securities class actions against companies outside the US reached a peak in 2011, with 60 filings that named a foreign company as the primary defendant, as shown in Figure 1. Such suits amounted to more than a quarter of total US securities class action filings in 2011.1 While the rate of filings against non-US companies slowed in the first half of 2012, it remained higher than prior to 2011. There were 20 filings in the first half of 2012, or an annualised rate of 40 filings per year, which exceeds the rate of filing observed in each year from 2008 to 2010 (and also the average of approximately 18 filings per year over the period from 2000 to 2007).2

Figure 1 also breaks down annual filings into those against companies in Europe, Canada, Asia, and elsewhere. It shows that, in 2010, 2011, and 2012, companies based in Asia were sued most frequently. This contrasts with 2008 and 2009, when European companies were most frequently targeted (European companies were also sued most often from 2000 to 2007, when they accounted for about 45 per cent of all filings against non-US issuers). As is discussed below, many of the recent filings against Asian companies targeted Chinese companies whose securities trade on US markets.

Figure 2 shows the percentage of all US securities class actions that targeted foreign companies in each year from 2008 to 2012. The pattern over time is similar to that depicted in Figure 1. In the first half of 2012, the fraction of filings that were against non-US issuers fell to 19.8 per cent from a high of 28.1 per cent in the previous year, but remained well above the levels observed in 2008, 2009, and 2010.3

In 2011 and in the first half of 2012, as Figure 2 shows, the proportion of US class actions that were against non-US companies exceeded the proportion of companies listed on US stock markets that were foreign. Thus, in 2011 and 2012, non-US companies listed on US markets were more likely to be sued than US companies. This reversed the trend observed in the three previous years, when foreign companies listed on US markets were less likely to be sued than their US counterparts.

Somewhat ironically, the recent peak in filings against non-US companies followed a US Supreme Court decision scaling back the extraterritorial reach of Section 10(b) of the Securities Act of 1934, the statute under which most US securities class actions are filed. As a consequence of Morrison v. National Australia Bank, decided in June 2010, investors can no longer assert claims under Section 10(b) in connection with securities transactions made outside the US.4

Prior to the decision, investors were able to claim in connection with transactions outside the US, provided the investors were US residents. Even claims by non-US investors, in connection with transactions outside the US, could be made if enough of the alleged fraudulent conduct giving rise to the claim was judged to have taken place in the US. The latter types of claims have been referred to as "foreign-cubed" (or "F-cubed") claims, in reference to the fact that the plaintiffs, the primary defendant, and the transaction giving rise to the claim would all be located outside the US.

By setting out a transactional test that had the effect of eliminating not only F-cubed claims but any other claims stemming from foreign trades—including by US residents—the Morrison decision "set the stage for what many thought would be the slow death of multi-national securities class actions in the US", as one commentator put it.5

The Rise of Chinese-Company Filings

Why, instead, have filings against non-US companies substantially increased since Morrison? A review of the data indicates that this is mainly driven by the recent wave of Chinese-company filings. Figure 3 shows US securities class actions against Chinese companies annually from 2008 to 2012. While there were only a few such cases in 2008 and 2009, by 2010 there were 15 actions filed against companies domiciled in China or with principal executive offices in China.6 In 2011, the number had risen to 38 filings, comprising 17 per cent of the 224 total US federal securities class actions filed in that year, and nearly two thirds of the 60 suits against non-US companies.

Most of the Chinese companies recently targeted by US securities class actions were listed on US stock markets via a "reverse merger".7 In a reverse merger, a private firm arranges to be acquired by a publicly traded "shell" company with little or no operations, thus giving the private firm a US listing with...