In June the Supreme Court in Morrison v. National Australia Bank held that federal securities fraud laws do not apply to "transactions in securities listed on domestic exchanges, and domestic transaction in other securities." In the months that followed that decision class action plaintiffs have had a very hard time surviving motions to dismiss where they purchased or sold securities on non-U.S. exchanges (discussed at length here). This was proven true yet again in two recent high profile cases against Porsche and RBS. In the Porsche case the Southern District of New York, applying Morrison, dismissed hedge fund claims of fraud in connection with their purchase of security swap agreements. The case was dismissed even though the swaps did not trade on any exchanges and all of the steps necessary to transact the swap agreements were allegedly carried out in the U.S. (See ruling here). In the RBS case, Judge Batts, also of the Southern District of New York, dismissed both '33 and '34 Act claims by plaintiffs who purchase RBS shares on a non-U.S. exchange. See here for a detailed review of this case by the D&O Diary.
The application of the Morrison decision to bar plaintiffs who trade on non-U.S. exchanges from suit in the U.S. raises many questions. One such question is the impact that the rule will have on the proliferation of securities class actions in non-U.S. countries. Will we start to see more securities class actions in non-U.S. countries? Will a non-U.S. forum that entertains large multi-national class action litigation emerge? In a recent post by Kevin M. LaCroix of the D&O Diary (here), LaCroix speculates that investors who cannot sue in the U.S. will begin to seek redress in non-U.S. jurisdictions and may also lobby for legislative and judicial reforms that will allow for similar suits in non-U.S. countries. As a case in point, LaCroix explores the recent filing of a securities class action against Ageas NV/BV (Fortis). He notes from the press release here that the action, estimated in the tens of billions of euros in collective losses, was filed by more than 140 institutional investors and over 2,000 individual claimants. In true global class action fashion, the claimants reportedly hail from Europe, the Middle East, Australia and the U.S. LaCroix also notes another example of multi-national litigation in a non-U.S. court, the Imax securities class action where an Ontario court certified a global class.
In the future, Canada and the Netherlands could be poised to replace the U.S. as the most frequent forums for large multi-national securities class actions. An interim ruling entered by the Amsterdam Court of Appeals on November 12, 2010 in the Dutch securities class action against Coverium Holding AG exemplifies this possibility. According to this press release, the Dutch ruling declared "an international collective settlement binding in a case where none of the potentially liable parties and only some of the potential claimants are domiciled in the Netherlands." In its ruling the Dutch court, citing the Morrison case (emphasis added), "indicated its awareness of the need for global resolutions of international securities class actions..." Applying the Brussels I Regulation and the Lugano Convention, the Dutch Court of Appeal found jurisdiction over the claimants claims through the location of the settlement agreement (i.e. the Netherlands).
The idea that a country like the Netherlands could be the next global forum for multi-national class action litigation is not so far-fetched. After all, the Netherlands is one of four opt-out securities class action countries worldwide (the U.S., Canada, South Korea, and the Netherlands). However, there are some issues that may prove problematic for the Netherlands. Such actions may be less numerous in the Netherlands because of the particularities of the legal system. Large collective actions became available to investors in 2005 with the passage of the Collective Settlement of Mass Damage Claims (known as the WCAM). However, pursuant to the WCAM, only court approved representative organizations can pursue a securities class action on behalf of investors. Furthermore, such organizations cannot seek damages in court. The Dutch court may only certify the class and decide whether to approve an out-of-court settlement between the parties. This "representative action" system, therefore, could limit the number of successful settlements in the Netherlands simply because potential plaintiffs may have less leverage to achieve an out-of-court settlement. In other words, it could be that only the largest cases, such as the Aegis/Fortis case or the Royal Dutch case, would have enough leverage to force the issuer into a mass settlement.
Barring changes to European Union (EU) regulations, enforcing Dutch settlements outside of the Netherlands may prove problematic as well. For example, if the non-Dutch court is a court of an EU Member State, a solid argument can be made that the decision to declare a settlement binding is a "judgment" as referred to in article 32 Brussels I Regulation. In this case, the judgment must be recognized by the courts of other Member States, unless one of the grounds to refuse recognition in article 34 and article 35 apply. A principle ground to refuse recognition of the judgment is public policy. Since most other EU Member States are of the opt-in class action variety, they may have a good public policy argument for rejecting the Amsterdam settlement. Many of them, in fact most of them, seem to have a very strong public policy in favor of the individual's right to be heard. The opt-out approach in the Netherlands makes the settlement binding on all eligible claimants regardless of whether they file a claim. This could be viewed to contradict the spirit of opt-in systems, and therefore grounds for rejecting the Dutch settlement. For related information see here.
In addition to public policy concerns, enforcement of Dutch settlements can result in a race to the bottom that determines the settlement rights of the parties. For example, in the Agea/Fortis case a sister mass action was also pursued in Belgium. Under current EU regulation, mass settlement of the Belgium claims could render the Netherlands action moot or visa versa for some or all claimants.
Despite the complications that collective actions abroad may present, it does seem that the number of countries entertaining such remedies is growing. SCAS counts at least 15 countries that now provide some form of securities collective action remedy. Of these SCAS has found that all but two have had some form of securities collective action activity in the past. Many more, such as France, the U.K., Japan, and Thailand (here) have considered and/or are considering such legislation. Vietnam's recent prosecution of its first securities fraud case is also worthy of note (here).
It is still early to determine the true long term impact of the Morrison transactional test on non-U.S. securities class actions. However, the framework for a noteworthy shift to increased international securities class action activity appears to exist. Barring legislative action to limit the impact of Morrison on private parties, It is hard to imagine that agrieved investors will not seek redress outside the U.S. in the years to come.