On Thursday, the Supreme Court issued its decision in
Morrison v. National Australia Bank, Ltd., a case with
important implications for foreign public companies and any company
with shares trading on foreign securities exchanges. In a majority
decision authored by Justice Scalia, the Court ruled that section
10(b) of the Securities Exchange Act of 1934 applies only to
securities listed on exchanges in the United States and
transactions in other securities if they occurred in the US. The
Court's "transactional test" focuses on whether the
purchase or sale is made in the US, or involves a security listed
on a domestic exchange.
The practical implications of the Morrison rule are
significant. Previous lower court decisions examining the
extraterritorial reach of federal securities laws focused on the
location of the injured investors, where the alleged fraud
occurred, and the conduct's affect on US markets. These
decisions did not provide a clear and uniform rule. The Supreme
Court decision strongly suggests that foreign issuers will not be
subject to Rule 10b-5 securities class action lawsuits unless their
securities are listed on US exchanges or are purchased or sold
within the US. As a result, the Supreme Court's decision might
be a factor for foreign companies deciding where to offer and list
their securities. The decision also will affect pending securities
litigation against companies with shares listed outside the
US.
The majority's decision focused on the text of the federal
statute. Because Congress did not clearly state that section 10(b)
of the Securities Exchange Act applied to securities that were not
exchanged or listed in the US, the Court ruled that foreign
investors had not overcome the general presumption against
international application of domestic laws. The decision did not
focus on the public policy and economic justifications for
extraterritorial application of federal securities laws that
previously had been relied on by lower courts. The ruling leaves
open the question of whether future legislative enactments by
Congress will extend the reach of federal securities laws.
Because Morrison significantly affects the securities
class action exposure for companies with securities listed outside
the US, it should also affect those companies' assessment of
their insurance coverage needs and the anticipated costs of
defending and settling securities litigation. Issuers, directors,
and officers should, in the coming months and years, pay attention
to:
- Congressional enactments and possible changes in federal securities statutes;
- Interpretation and application of the Morrison rule by lower courts, particularly in cases where the purchases or sales could be viewed as having occurred in the US; and
- Shifts in tactics by the plaintiffs' bar to minimize the significance of the Morrison decision, including retesting other federal and state law theories of liability.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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