THERECORDER
134rd Year no. 201
www.therecorder.com
Monday, AUGUST 9, 2010
Theoretical impact and practical
effect of ‘Morrison’
Despite the Supreme Court’s recent decision, litigating against
a foreign issuer in U.S. courts remains an option
tional Australia Bank Ltd., 10 C.D.O.S.
Thad Davis and Michelle Behrens
Corporate & Business Law — Securities
Ropes & Gray LLP
Securities litigation in United States
courts involving foreign issuers is becoming more common and is expected to continue to grow given trends in capital markets and interconnections between U.S.
investors and foreign markets, and foreign
investors in U.S. markets.
Focus on Asia is expected to grow as
United States investments in Asia and access of Asian companies to United States
markets continue to expand. While increased access to foreign markets presents numerous opportunities, the growth
in foreign investments poses challenges
for investors pursing claims against foreign issuers. Asian issuers have faced difficulties in U.S. courts and U.S. investors
have faced various challenges in Asian
courts stemming from cultural differences, procedural variations and the inability
to collect judgments. Generally, foreign
investors pursuing Asian issuers in U.S.
courts fare better than those pursuing
redress in Asian legal systems, making
U.S. courts attractive venues for securities claims.
Many speculate that the Supreme
Court’s June 24 decision, Morrison v. NaThad Davis is a partner and Michelle Behrens
is a summer associate in Ropes & Gray LLP’s
San Francisco office.
7918, will severely limit foreign investors’ access to U.S. courts or U.S. investors’ ability to bring actions against foreign issuers within the United States. It
will be up to lower courts to determine the
reach of this decision; early indications in
some courts are that Morrison may be read
to even bar so-called “f-squared” actions
(i.e., brought by American investors who
bought foreign issuer shares on foreign exchanges). However, creative litigators will
still attempt to find opportunities to bring
cases in the United States, as U.S. courts
are generally preferable to Asian courts.
Further, the true “f-cubed” case involving
a foreign investor, issuer and exchange
is relatively rare, and while the Morrison
decision has replaced the “conducts and
effects test” with a “transactional test,”
the new test may leave room to bring a
range of lawsuits against foreign issuers
in the United States. Thus, while the first
impression of Morrison is that of sweeping change, upon closer examination, this
case does not necessarily leave investors
in foreign markets without legal redress.
The ‘Morrison’ Decision
Morrison addressed the circumstances
under which §10(b) of the Securities Exchange Act of 1934 might have extraterritorial application. While this issue had
been analyzed extensively in circuit courts,
the Supreme Court had not yet tackled the
topic. Judge Friendly of the Second Circuit is thought to be the pioneer of the
“conducts and effects test,” which permits
10(b) suits to be brought in United States
courts if wrongful conduct occurred in the
United States or had a substantial effect in
the United States.
The Morrison case presented a fact pat-
tern not often seen in U.S. courts: the true
“f-cubed case.” Morrison dealt with foreign
investors who purchased shares from a foreign issuer on a foreign exchange. Before
the Morrison decision, lower courts occasionally permitted such cases to be heard in
the United States, provided they passed the
“conducts and effects test.”
The majority opinion put a definitive
end to permitting such “f-cubed” cases in
American courts, but the court’s opinion
has greater consequences, as it substitutes
the newly developed “transactional test”
for the “conducts and effects test. Justice
Scalia, writing for the majority, justified
his opinion through the constitutional
canon of the presumption against extraterritorial application of United States law.
The newly developed “transactional test”
permits 10(b) claims to be brought in U.S.
courts only if a) securities were purchased
or sold on an American stock exchange
or b) securities were bought or sold in
the United States. While the test attempts
to create a bright-line rule, it may in fact
leave the door open for numerous claims
against foreign issuers to be brought in
United States courts.
Pre-’Morrison’ Trends in
Asian courts
In the past decade, United States courts
have seen an increase in claims brought by
foreign issuers. A Cornerstone Research
study found that while the percentage
of shares of foreign companies listed on
United States exchanges has decreased,
the number of class actions filed against
them in United States courts has increased.
United States securities law has many attractive features, as it permits private
rights of action and class actions, allows
for extensive discovery, and is grounded
in a lengthy common law and legislative
history.
If Morrison limits access to U.S. courts,
questions arise as to how claims might be
litigated abroad, particularly in the rapidly
growing markets of multiple Asian countries. While each country has a unique
history and legal system, in analyzing
securities regulations in Hong Kong,
Malaysia, Singapore, Japan, Korea and
China, some trends and stark distinctions
emerge. Securities regulations in Hong
Kong, Malaysia and Singapore have roots
in the English legal tradition. As a whole,
these countries tend to have extensive disclosure requirements, host entities with
robust investigative powers and have high
levels of public enforcement of securities
regulations. However, even with relatively well-developed securities regulations,
certain shortcomings make litigation less
attractive. Hong Kong, for example, is
considering, but does not currently permit, the use of class actions in securities
claims.
Japan and Korea have securities laws
with German legal origins, which tend to
have slightly less extensive disclosure requirements, investigative powers and relatively low public enforcement of securities
regulations. In recent years, Japan has seen
a growth in securities litigation; however,
the Japanese legal system still lacks certain attractive features of United States
courts, such as the use of class actions and
the overall number of attorneys. Recently,
Korea adopted the Securities Class Action
Act, which has opened the possibilities for
securities litigation there; however, as any
procedural addition, the Act requires time
to evolve.
China presents the greatest challenge to
foreign investors seeking legal redress, as its
regulatory systems and judiciary are heavily
controlled by a centralized, opaque govern-
The PTo advised its patent
examiners to continue to
assume that most patent
applications that meet the
machine-or-transformation
test are patent eligible as
long as they are not
directed to abstract ideas.
ment. A private right of action for securities
claims is extremely weak, if not entirely absent, in the current Chinese legal regime.
Opportunities to bring securities claims
exist in multiple countries in Asia with
thriving markets; however, these remedies
have not been as extensively developed as
in United States courts, making the U.S.
courts a more receptive environment for
securities litigation.
eXPeCTATionS PoST ‘MoRRiSon’
Some commentators claim the Morrison decision marks a “sweeping victory”
for foreign issuers. This victory might not
be so “sweeping,” as “f-cubed” cases are
rarely brought in the United States. The
“transactional test” leaves much room for
interpretation, and other claims of fraudulent behavior were not explicitly addressed
by the Supreme Court.
The first and more limited prong of the
“transactional test” permits 10(b) claims to
be brought in U.S. courts only if securities
are traded on an American stock exchange.
Thus, foreign issuers who offer securities
on United States exchanges can still be litigated against in U.S. courts. Further, the
court did not discuss what would occur if a
foreign issuer lists on multiple exchanges
or how the sale of American Depositary
Receipts will be treated.
For the second and more ambiguous
prong of the “transactional test,” the court
did not specify what exactly constitutes
buying and selling securities within the
United States. Lower courts will need to
determine how to treat Internet transactions
or address the use of U.S. brokerage firms.
With the numerous advantages of bringing
securities suits in U.S. courts, litigators
have room to develop creative arguments,
and lower courts have the opportunity to
flesh out the court’s ruling.
Further, the Supreme Court only discussed
10(b) claims. While the presumption against
extraterritoriality might extend to claims
brought on other grounds, lower courts
could arguably permit claims to be brought
through state actions or other federal statutes
such as the Racketeer Influenced and Corrupt Organizations Act. Further, the recently
passed Dodd-Frank Wall Street Reform and
Consumer Protection Act limits the Morrison holding to private rights of action. Section 929P(b) of the Dodd-Frank Act allows
the U.S. Securities and Exchange Commission and the Department of Justice to bring
claims based on a more lenient standard than
the Supreme Court’s “transactional test.” This
legislatively created standard more closely
resembles the Second Circuit’s “conduct and
effects test” and gives more flexibility to government entities seeking redress from foreign
issuers.
ConCLuSion
The future of the foreign issuer suit remains unclear, but the ramifications of the
Morrison decision have likely been overstated. With the increase in foreign trade,
ambiguity in the court’s decision and other
means of litigating fraud claims, the impact of the Morrison decision may prove to
be more theoretical than real.
Reprinted with permission from the August 9, 2010 edition of The Recorder. © Copyright 2010. ALM Media Properties, LLC. All rights reserved.
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