Supreme Court Rules That Key Securities Law Does Not Cover Foreign Transactions

June 24, 2010


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.