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E-MailThis paper comes to us from Alexander Hellgardt, Senior Research Fellow at the Max Planck Institute and Lecturer in Law at Ludwig Maximilians University, and Wolf-Georg Ringe, Lecturer in Law at the University of Oxford and Visiting Professor of Law at Columbia Law School.
In the upcoming decision Morrison v. National Australia Bank, the U.S. Supreme Court will decide on a ‘foreign-cubed’ securities class action for the first time. The case involves only foreign plaintiffs, who bought their shares on a foreign (Australian) exchange, and sued an Australian issuer. Because the Securities Exchange Act of 1934 and Rule 10b-5 so far [1] are silent as to their international application, the extraterritorial reach of U.S. securities liability is still unclear. The success of securities claims, however, crucially depends on the place where the plaintiffs can bring their case. The U.S. legal system contains some features, namely opt-out class actions and the fraud-on-the-market theory, which make U.S. courts the preferred venue in international securities fraud actions. As a consequence, the discussion so far has tried to strike the balance between restricting the access of ‘foreign-cubed’ cases to the U.S. courts, while allowing such cases to be litigated in which the U.S. has an own interest, e.g. because the fraud was committed here or has produced substantial effects in the U.S. Yet, there is another dimension to international jurisdiction in securities litigation that has not garnered a lot of attention so far: Securities liability is a major corporate governance enforcement mechanism. Hence, the question of the applicable law in securities claims has important implications for corporate governance and should be viewed in the broader context of the rules governing the applicable corporate governance regime. Against this background, the conflict-of-law rules for securities fraud have been the object of major discussions in Europe, where the question is of particular significance if an integrated European financial market is to co-exist with national securities laws.
In our recent working paper, we analyze the principles governing the law applicable to securities fraud actions in the U.S. as well as in major European jurisdictions (UK, Germany, and Switzerland). Last year the European Union has adopted the so-called ‘Rome II Regulation’ and thereby for the first time harmonized the European conflict-of-laws regimes for non-contractual liability. We show that the new regime was however not tailored to the specific needs of capital markets and is not geared towards securities liability. We propose a global approach to the problem that departs from the role securities litigation plays for corporate governance. We show that, even though there are important differences between U.S. and European corporate governance, securities litigation in both systems fulfills the crucial function of ensuring that capital markets can exercise a control over corporate management by pricing and thereby judging the economic expediency of business decisions. Securities liability can be seen as only one facet of the larger regulatory context of corporate governance. From this starting point, we propose a holistic approach according to which the law governing securities fraud actions should be determined in the bigger context of the corporate governance regime applicable to a given issuer. The liability rules of a country should only be attached to such issuers that are subject to its disclosure duties in the first place because liability is only the mechanism to enforce the primary corporate governance (i.e. disclosure) rules. The consequence of this proposed ‘bundling’ between disclosure duties and liability would be that U.S. securities liability is only triggered where an issuer is subject to U.S. securities law because it is registered with the SEC or intends to target a sufficient number of U.S. investors. By contrast, issuers who offer their shares in the U.S. according to Regulation S, or whose shares are only traded by third parties, do not bind themselves to the standards of U.S. law and hence should not be subjected to U.S. liability rules.
The full paper is available for download here.
Endnotes
[1] Congressman Barney Frank recently introduced the Financial Stability Improvement Act, which would regulate the international reach of U.S. securities liability for the first time.
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