Cross-Border Shareholder Class Actions Before And After 'Morrison'

Article by Elaine Buckberg and Max Gulker*

ABSTRACT

We conduct an empirical inquiry into the effect of the Supreme Court's 2010 Morrison decision, which limited the reach of US securities laws to trades occurring on US markets, on the competitiveness of US markets as a venue for listings by foreign issuers and trading in cross-listed stocks. In the wake of the Morrison decision, the Dodd-Frank Act requires that the SEC inform Congress about the merits of creating a new extraterritorial right of action. We provide input into the debate by using data on 329 shareholder class actions filed against foreign-domiciled companies and discussing the effects of such a right on the competitiveness of U.S. capital markets. We conclude that, following Morrison, foreign companies' expected litigation costs should fall, because investors who purchased their shares on overseas exchanges will be excluded from classes. By reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makers the US a more competitive venue for cross-listings, as well as for the volume in cross-listed stocks.

1. INTRODUCTION

   Congress will soon consider whether to legislate an extraterritorial private right of action under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") that US courts had recognized for decades. In June 2010, the Supreme Court ruled in Morrison v. National Australia Bank that only trades on US markets are covered under the Exchange Act.1 For decades, US courts had heard securities cases under Section 10(b) against foreign issuers, beginning with Schoenbaum v. Firstbrook in 1968.2 Courts had defined tests to determine which purchases would be covered based on whether the investors were American, whether they bought their shares on US markets, and whether and which fraudulent acts had occurred in the US. The Supreme Court nullified these tests on grounds that no US law applies outside the US borders unless the law gives a clear indication that it is intended to apply extraterritorially.3 In the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), Congress took two actions partially reversing the impact of the Morrison decision via legislation. Congress immediately restored the ability of the government and the Securities and Exchange Commission ("SEC") to bring cases under Section 10(b) involving transnational securities fraud. In addition, Congress directed the SEC to study the merits of creating a new extraterritorial private right of action.

   This paper provides input into the debate on the merits of creating a new private right of action by reviewing the 329 shareholder class actions filed against foreign-domiciled companies and discussing the effects of such a right on the competitiveness of US capital markets. We focus on Rule 10b-5 shareholder class actions against foreign issuers, which we define to involve suits against a foreign issuer whose stock trades on US markets, on behalf of a plaintiff class that includes both investors who purchased their securities on US markets and investors who purchased their securities overseas.4,5 We conclude that, following Morrison, foreign companies' expected litigation costs should fall, because investors who purchased their shares on overseas exchanges will be excluded from classes, driving down damages and settlements. By reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makes the US a more competitive venue for cross-listings, as well as for the volume in cross-listed stocks.

2. FILINGS AGAINST NON-US COMPANIES IN US COURTS

   US courts have been an attractive venue for plaintiffs to file shareholder class actions, even against companies domiciled in foreign countries. Although other countries have recently created a legal framework for class action litigation, including Australia, Canada and Italy, long standing and well-defined class action rules in the US make it a uniquely well-suited venue for this type of litigation.6 Participating in a class action is essentially a free call option to plaintiffs, removing any downside financial risk as well as the need for plaintiffs to...