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Article: December 2020: Federal Securities Class Actions Against Non-U.S. Companies Listed on U.S. Exchanges on Track for Record High

December 29, 2020

The number of securities class actions filed against non-U.S. companies in the first half of 2020 outpaced the number of such filings in prior years.  According to a recent AIG report, of the 111 total core filings commenced in the first half of 2020, 35 were against non-U.S. companies, constituting a filing rate of 31.5%, which is significantly higher than the rate of filings in the first half of 2019.  AIG, US Securities Class Actions: International US-Listed Companies, H1 2020, at 1 (June 26, 2020),  In fact, these are the highest rates “observed since the wave of filings related to reverse mergers in 2011,” Cornerstone Research, Securities Class Action Filings: 2020 Midyear Assessment, at 1 (2020), and are significantly higher than “the five-year average annual foreign filer litigation rate of 16%,” Kevin LaCroix, First Half of 2020 Securities Suits Against Foreign Issuers Outpaced Overall Filing Levels, The D&O Diary (Sept. 13, 2020),  Notably, the majority of these filings were asserted against companies located in Asia, particularly in China.  AIG, at 1. 

As a consequence, total class action securities filings against non-U.S. companies are on track to become the highest in recorded history.  The impact is even more striking when put into context.  Non-U.S. companies represent only 16% of all companies listed on U.S. exchanges.  That securities suits filed against non-U.S. companies, which represent a small fraction of companies listed on U.S. exchanges, make up 31.5% of the total filings suggests that non-U.S. companies are more likely to be sued under U.S. securities laws than domestic companies.  In fact, core filings against S&P 500 firms appear to be slowing.  See Cornerstone, at 2 (such filings “occurred at an annualized rate of 4.8%, the lowest since 2015”).

Legal Backdrop

Section 10(b) of the Exchange Act, the most litigated provision of the U.S. securities laws, makes it “unlawful for any person, directly or indirectly … [t]o use or employ … any manipulative or deceptive device or contrivance in contravention” of Securities and Exchange Commission rules and regulations “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.”  15 USC. § 78j(b).  In Morrison v. National Australia Bank, Ltd., the Supreme Court considered the scope of the Exchange Act as foreign companies and held that “there is no affirmative indication in the Exchange Act that § 10(b) applies extraterritorially, and … therefore conclude[d] that it does not.”  561 US 247, 265 (2010).  The Court thus affirmatively limited the scope of the Exchange Act to “only deceptive conduct ‘in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.’”  Id. at 266.  

In light of Morrison, publicly-traded non-U.S. companies avoided selling their securities on U.S. exchanges to limit exposure to liability under the Exchange Act.  Instead, many would only trade their securities as American Depository Receipts (“ADRs”) on U.S. over-the-counter markets, believing this would insulate them from liability under U.S. securities laws.  This understanding has been turned on its head due to the Ninth Circuit’s 2018 decision in Stoyas v. Toshia Corp., 896 F.3d 933 (9th Cir. 2018), cert. denied 139 S.Ct. 2766 (2019).  

In Stoyas, the Ninth Circuit considered whether Toshiba’s ADR transactions on the over-the-counter market, “as opposed to direct purchases of Toshiba common stock” traded on the Tokyo Stock Exchange, were subject to the Exchange Act.  Id. at 939.  In determining that they were, the Ninth  Circuit held that ADRs are securities for purposes of the Exchange Act, id. at 943, and that Morrison prescribed a “transaction test,” which details the two categories of transactions subject to the Exchange Act:  those that (1) “involve[] a security listed on a domestic exchange”; or (2) “take[] place in the United States.”  Id. at 944.  As to the first category of transactions, the Ninth Circuit held that although the Exchange Act regulates over-the-counter markets, the OTC Link (the market at issue) could not be considered an “exchange” under the Exchange Act.  Turning to the second category, noting that the Supreme Court did not articulate a test to determine whether a transaction was “domestic,” the Ninth Circuit adopted an “irrevocable liability” test from the Second Circuit’s decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), which dictates that “a securities transaction occurs when the parties incur irrevocable liability,” which would determine both the timing and location of the transaction.  Id. at 948 (quoting Activist Value, 677 F.3d at 67).  The test requires a plaintiff to plausibly allege “that the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security,” to be considered a domestic transaction for purposes of MorrisonId.  Thus, the Ninth Circuit held that, if properly pled, the sale of the ADRs at issue could fall into the second category of transactions subject to the Exchange Act under MorrisonId. at 949.  

Causes and Implications of The Trend

Although the implication of Morrison is that non-U.S. companies’ securities transactions on U.S. exchanges are subject to the Exchange Act, that holding does not appear to account for the steady rise in such claims since.  Some commentators have argued that the impact of cases like Stoyas may have a role to play in the global trend of increased litigation against all non-U.S. companies because such cases are expanding the scope of claims against non-U.S. companies, even when they are not listed on U.S. exchanges.  

Though the statistics demonstrate that non-U.S. companies listed on U.S. exchanges are more likely than domestic companies to be sued for U.S. securities violations, some have argued that the increase has little to do with the companies’ locations, and more to do with the industries in which they operate.  For example, many conduct business in high litigation risk industries, such as pharmaceuticals and technology.  Nevertheless, because U.S.-listed Chinese and other Asian companies continue to be sued more frequently than other foreign companies, U.S.-listed Asian companies may constitute their own category of litigation risk.  

Aside from the implications of increased litigation, i.e. greater exposure to financial liability to settle or otherwise dispose of such claims, the trend has also resulted in significant changes in insurance pricing.  Until recently, insurance carriers provided insurance to directors and officers (“D&O insurance”) of non-U.S. companies at a significant discount to their domestic counterparts. However, to account for the increased frequency and severity of securities litigation against non-U.S. companies, insurance carriers are now charging steeper premiums for D&O insurance to non-U.S. companies.  


The trend of increased securities class actions filed against non-U.S. companies shows no indications of slowing.  Such companies should continue to monitor U.S. securities litigation against other non-U.S. companies, assess their D&O insurance options, and understand that certain industries are generally subject to greater litigation risk than others.