Supreme Court Closes Door on Disgruntled Foreign Investors
August, 2010
In Morrison v. National Australia Bank Ltd., an important securities fraud case decided June 24, 2010, the U.S. Supreme Court dealt a significant blow to international investors by holding that the anti-fraud provisions of U.S. securities laws apply only to securities transactions that take place within U.S. borders or involve U.S. listed securities. Morrison overturned long-standing U.S. law that previously allowed international investors to seek protection in U.S. courts if an investment involved wrongful conduct within the U.S. or had a significant impact on U.S. citizens. Now, regardless of a securities transaction's effect on U.S. citizens or where the wrongful conduct occurs, an international investor may only recover in a U.S. court if the transaction (i) occurs in the U.S. or (ii) involves a security listed on a U.S. exchange.
U.S. securities laws have always been favored by international investors for, among other things, the broad protections traditionally afforded to foreign investors. The Morrison decision clearly limits the scope of foreign investor protection available under U.S. securities laws. Accordingly, it is unclear how foreign issuers and the international securities market will react. For example, there is currently a growing trend of Chinese companies accessing U.S. capital markets by undergoing alternative public offerings. In light of Morrison, it will be interesting to see if this trend continues as the Supreme Court has now provided a road map for foreign companies to avoid the reach of the U.S. anti-fraud statutes by deliberately structuring securities transactions offshore. Chinese companies may now find other capital markets to be more attractive than the U.S. and choose to list their securities on the Hong Kong Exchange, for instance, rather than on a U.S. exchange.
It is important to note that while Morrison has now clearly limited the scope of U.S. jurisdiction over securities fraud related cases, several issues remain unsettled. For example, the Supreme Court did not account for the fact that the securities issuer in question (National Australia Bank) was a reporting company under the Securities Exchange Act of 1934. In addition, the Supreme Court did not address the distinction between stock issued on a foreign exchange and American Depository Receipts (ADRs) listed on the New York Stock Exchange. Perhaps most importantly, the Supreme Court has left to the lower courts to decide and determine when a securities transaction actually occurs in the U.S.
For more information about the Morrison case, or other corporate finance or securities matters, please contact John Yung or Kamyar Daneshvar.