Sidestepping ‘Morrison’ through foreign law claims and litigation

December 2020  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

December 2020 Issue

The US Supreme Court’s decision in Morrison v. National Australia Bank Ltd (2010) sought to curtail the ability of private litigants to use the US securities laws on behalf of those “allegedly cheated in foreign securities markets”. In so doing, Morrison generated broad speculation about where and how foreign issuers could be subject to claims for alleged fraud. In the 10 years since Morrison was decided, shareholder plaintiffs have tried a number of approaches for sidestepping the territorial limitations of US securities laws as articulated in Morrison. This article examines two of those approaches and the ways they have played out in different jurisdictions.

Foreign law claims in the US

In response to Morrison’s holding that US securities laws do not apply to transactions on foreign exchanges, some plaintiffs have attempted to assert foreign law claims – including from jurisdictions that have no US-style class action mechanism – in US securities fraud class actions on the basis of supplemental jurisdiction. While US courts have not uniformly agreed to exercise jurisdiction over these foreign law claims (and there are strong reasons why such courts should decline jurisdiction), to the extent such claims are, or even may be, adjudicated in US courts, this tactic may ultimately impact foreign issuers in precisely the way that Morrison sought to foreclose.

For example, in Stoyas v. Toshiba, one district court recently permitted Toshiba investors to bring a putative class action under both US law (with respect to Toshiba’s unsponsored American depositary receipts (ADRs)) and Japanese law (with respect to Toshiba’s underlying common stock), even though Japan does not provide a comparable class action mechanism. Other district courts around the country have reached similar results.

US district courts are far from uniform in their approach, however, and several have rejected foreign law claims brought as add-ons to US securities claims regardless of whether the foreign jurisdiction provides for a comparable class action mechanism. For example, in In re Mylan N.V. Sec. Litig (2018), the district court declined to exercise supplemental jurisdiction over the plaintiffs’ Israeli law claims. Mylan was a US-Israeli dual-listed company and Israel permits class actions (and indeed, at the time, two separate class actions were pending in Israeli courts brought by purchasers of Mylan stock). Israeli courts have also applied US law to Israeli securities claims.

But the Mylan court explained that exercising jurisdiction over the foreign claims would require it to decide a then “novel question of Israeli law” concerning whether US or Israeli securities law applies to a dual-listed company, and that “[i]n the interests of international comity, this Court hesitates to impinge on Israeli courts’ ability to adjudicate the claims of their own citizens under their own securities laws – even if Israel has chosen, as a matter of Israeli law, to apply U.S. securities law”.

In sum, the growing trend of plaintiffs bringing foreign transactions into US securities class actions by asserting foreign law claims presents an increasing risk to foreign issuers. This creates tension with the aims of Morrison and may require further involvement by the US Supreme Court should disagreement among the lower courts continue.

Foreign forums for securities fraud claims

The Morrison decision has also led plaintiffs to seek to adjudicate US-style securities claims elsewhere around the globe, whether or not the foreign jurisdictions have the same mechanisms in place that attract plaintiffs to the US, such as opt-out class actions, substantial pretrial discovery, contingency fees for attorneys, punitive damages, the ‘fraud on the market’ presumption of reliance, jury trials and the absence of a ‘loser pays’ rule. The ultimate procedures for these types of lawsuits vary depending on the jurisdiction in which they are brought. This article touches on three jurisdictions which have relatively robust procedures for handling such class actions.

The Netherlands. For years, the Dutch Act on Collective Settlement of Mass Claims (Wet Collectieve Afwikkeling Massaschade (WCAM)) has been used by shareholders to settle claims on a class-wide basis. The statute, however, does not provide the ability to prosecute a class action for monetary damages in the same way US law does. Instead, the statute permits parties to obtain damages after a declaratory judgment had been entered either by pursuing individual damages claims or by initiating litigation through a special purpose vehicle or foundation. Some significant actions utilising this statute include a $382m settlement of a securities class action against Royal Dutch Shell in which the company settled with the US plaintiffs in a US action and with all other plaintiffs in the Netherlands; a settlement in 2012 involving former Converium Holding AG and its parent, in which the defendants were Swiss entities and only a small fraction of the plaintiffs were Dutch; and a 2018 $1.5bn global settlement of claims against Fortis (now Ageas).

On 1 January 2020, the Dutch Act on the Resolution of Mass Claims in Collective Action (Wet afwikkeling massachade in collectieve actie (WAMCA)) took effect and now provides the ability, in newly commenced actions, for shareholders to seek damages in Dutch courts on a class-wide basis if certain requirements are met. While the effects of WAMCA are yet to be seen, it may very well result in an increase in monetary claims against class action defendants.

Canada. In the wake of Morrison, Canadian courts have continued to adjudicate securities fraud claims in Canadian courts so long as the jurisdictional nexus to Canada is sufficiently robust. For example, in Silver v. IMAX Corp (2013), a group of investors in IMAX, which was listed on both the NASDAQ and Toronto exchange (TSX), brought suit both in Canada and the US. The class action in Canada asserted claims under Ontario’s Securities Act as well as common law causes of action. The Canadian court certified a class that included almost exclusively those who purchased IMAX stock on the Canadian exchange.

When the litigants in the US class action reached a settlement, however, both the US court and the Canadian court agreed that the parallel Canadian proceeding had to amend the class definition to remove any members who were part of the US settlement, ultimately resulting in a significant reduction in the size of the Canadian class. While the number of securities actions in Canada ebbed between 2015-2018, filings in 2019 are at a near all-time high since Morrison was decided, and many of these class actions implicate Canadian-based cannabis companies and their directors and executives. Defendants in these actions include Cronos Group, Namaste Technologies, Inc., Liberty Health Services and Wayland Group Corp.

Israel. Similarly, plaintiffs in Israel routinely file US-style class actions against Israeli public companies. In the case of dual-listed companies, it is common for Israeli courts to stay the Israeli actions pending the outcome of parallel foreign proceeding, and there is precedent for Israeli courts recognising a US judgment in a settlement or on the merits. For example, in a pair of recent cases involving companies listed on both the NASDAQ and the Tel Aviv Stock Exchange (TASE), the Israeli courts concluded that Israel was a proper forum and that US law should apply for private enforcement of breaches of reporting obligations.

In Cohen v. Tower Semiconductor, Ltd (2018), although technically a non-precedential opinion, Israel’s Supreme Court suggested that claims relating to breaches of reporting obligations in the secondary market by dual-listed companies will be governed by the law of the foreign jurisdiction (there, the US), even where the class includes only holders of securities issued in Israel.

Other jurisdictions. Like Canada, other jurisdictions around the globe have seen a recent spike in securities class or collective actions. Most notably, the UK has seen a rise in collective securities actions, due at least in part to legislative and other changes that have made the system more open to US-style class actions. Examples of UK cases include a 2012 action against Royal Bank of Scotland and a 2016 action against Tesco (with parallel proceedings in the US). In Germany, where there is no US-style class action mechanism, plaintiffs have still asserted major securities claims collectively, including in the well-known actions against Volkswagen. Australia, a notoriously plaintiff-friendly jurisdiction, witnessed the first judgment in a shareholder class action just last year in TPT Patrol Pty Limited as Trustee for Amies Superannuation Fund v. Myer Holdings Limited, which will likely help shape the course for future securities cases.

Conclusion

As the foregoing demonstrates, plaintiffs have responded to the Morrison decision both by appending foreign law claims to securities class actions in the US and by attempting to pursue those claims in countries across the globe. Thus, Morrison has had the unintended consequence of breeding duplicative and competing litigation in multiple jurisdictions, which often apply different procedural regimes. In defending against these claims, companies should therefore consider not only the substantive requirements applicable to each claim, but also how the procedures in each jurisdiction may impact any related actions pursued elsewhere.

 

Roger A. Cooper and Jared Gerber are partners and Anna Connolly is an associate at Cleary Gottlieb Steen & Hamilton LLP. Mr Cooper can be contacted on +1 (212) 225 2283 or by email: racooper@cgsh.com. Mr Gerber can be contacted on +1 (212) 225 2507 or by email: jgerber@cgsh.com. Ms Connolly can be contacted on +1 (212) 225 2108 or by email: aconnolly@cgsh.com.

© Financier Worldwide

BY

Roger A. Cooper, Jared Gerber and Anna Connolly

Cleary Gottlieb Steen & Hamilton LLP

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