Foreign companies and their executives have rejoiced since the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd., which told us that § 10(b) of the Securities Exchange Act of 1934 only applies to “transactions in securities listed on domestic exchanges… and domestic transactions in other securities”– sharply limiting their exposure to securities class actions in the U.S.
They are likely to be equally interested in a recent decision by the U.S. Court of Appeals for the Second Circuit seeking to clarify Morrison, on what constitutes a domestic transaction.
But What is a “Domestic” Purchase?
There is a lot at stake here, for while Morrison tells that §10(b) can be applied to domestic purchases or sales, it does little to define domestic purchase or sale. In Absolute Activist Value Master Fund Ltd. v. Ficeto, the court defined the issue before it this way:
[t]his case requires us to determine whether foreign funds’ purchases and sales of securities issued by U.S. companies brokered through a U.S. broker-dealer constitute “domestic transactions” pursuant to Morrison v. National Australia Bank Ltd.
Irrevocable Liability Now the Standard
The Second Circuit now says that a good place to start is the moment at which the parties are bound in a securities transaction and incur “irrevocable liability”:
Given that the point at which the parties become irrevocably bound is used to determine the timing of a purchase and sale, we similarly hold that the point of irrevocable liability can be used to determine the locus of a securities purchase or sale.
Irrevocable liability is not the the Second Circuit’s only test because “a sale of securities can also be understood to take place at the location in which title is transferred.” Citing to an earlier decision by the Eleventh Circuit, the Second Circuit agreed that it is sufficient under Morrision to allege that title to shares was transferred in the U.S.
The plaintiffs were nine Cayman Islands hedge funds, and the case was an appeal from a judgment of the U.S. District Court for the Southern District of New York, which had already dismissed the complaint with prejudice. The Appeals Court gave the plaintiffs a second bite at the apple, holding that while the complaint did not sufficiently allege the existence of domestic securities transactions, the plaintiffs should be given leave to amend the complaint to assert additional facts suggesting that the transactions at issue were domestic. The court then went on to specifically hold that to sufficiently allege the existence of a “domestic transaction in other securities,” plaintiffs must allege facts indicating that irrevocable liability was incurred or that title was transferred within the United States. We will have to wait and see if this will serve to weaken Morrison or just represents a needed clarification.
As there has been ambiguity, post-Morrison, as to what constitutes a “domestic transaction in other securities,” the plaintiffs were given the opportunity to set out additional facts leading to the plausible inference that either irrevocable liability was incurred or that title passed in the United States.
…we agree that the current version of the complaint fails to state claims under § 10(b) of the Securities Exchange Act of 1934 because it does not sufficiently allege the existence of domestic securities transactions. We hold that to sufficiently allege the existence of a “domestic transaction in other securities,” plaintiffs must allege facts suggesting that either irrevocable liability was incurred or title transferred within the United States. We further hold that plaintiffs should be given leave to amend the complaint so they can assert additional facts to suggest that irrevocable liability was incurred or title passed in the United States and thus that the securities transactions at issue took place in the United States.
Companies and corporate executives do not want to find themselves in a U.S. courthouse and, for those outside the U.S., Morrison was a dream come true. As this case suggests, however, the plaintiffs’ bar can be expected to continue to test its boundaries.
If you found this of interest, you may want to read our Alert on the Morrison decision when it was announced.
The observations, comments and suggestions made in this publication are advisory and are not intended nor should they be taken as legal advice. Please contact your own legal adviser for an analysis of your specific facts and circumstances.