Out of the US Supreme Court comes a positive development for
Canadian issuers of securities who have business operations in the
United States: the US Supreme Court held, on June 24, 2010, that
the principal statutory provisions used by security-holders to
bring class actions in the US — s.10(b) of the
Securities and Exchange Act of 1934 and SEC Rule 10b-5
(which is promulgated under s. 10(b)) — have no
application to trades in securities that are not traded on a US
exchange and that do not take place in the US.
In Morrison v. National Australia Bank
(08-1191), three Australian investors held ordinary shares in the
National Australia Bank that were not traded on any exchange. They
attempted, however, to bring fraud claims in the US against the
Bank under s. 10(b) and Rule 10b-5 because, they alleged, a Florida
subsidiary of the Bank was the source of the Bank's fraud on
the market (in that it had allegedly miscalculated the interest
rates on the mortgages it services and provided fraudulent
financial information to the Bank, leading to a write-down of
millions of dollars by the Bank). The investors alleged that their
shares fell when the fraud was revealed.
The court ruled that the Australian investors' case could
not proceed. Justice Antonin Scalia, in the court's majority
opinion, held that because s. 10(b) and Rule 10b-5 contain no
indication as to whether they are intended to apply
extraterritorially, they must be interpreted as applying only
within the confines of the US. Justice Scalia further opined that
s. 10(b) and Rule 10b-5 focus on the purchase and sale of
securities in the US, not on the place where the alleged fraud
The court's reasoning that these provisions cannot be relied
upon to start a US case even if there were allegedly significant
fraudulent conduct in the US, or if there were some effect on US
markets or investors, strongly criticized a significant body of
lower court decisions that employed this "conduct and
effects" test. In other words, Morrison stands for
the proposition that the provisions cover only
transactions in securities listed on US exchanges and transactions
in securities that are not listed on a US exchange, but take place
in the US.
Accordingly, the court's decision bars so-called
"foreign-cubed" claims; that is, claims brought in the US
by foreign investors who purchased, on foreign exchanges,
securities of a foreign issuer. The court's decision also goes
further: it appears to bar claims in the US by resident investors
who claim in respect of securities not listed on a US exchange and
who cannot prove that the transaction occurred in the US. Future US
decisions will certainly have to grapple with the issue of when a
transaction occurs in the US such that it is under the scope of s.
10(b) and Rule 10b-5.
Morrison has a number of positive implications for
Canadian and other foreign issuers of securities who have
operations in the US, but do not trade on US exchanges or transact
in securities in the US. Claims brought by investors are more
likely to be brought in the jurisdiction where their securities are
transacted or traded on an exchange; for Canadian issuers of
securities, this will likely be Canada.
In addition, the court's ruling may, indirectly, limit the
scope of the SEC's power to extraterritorially investigate and
bring proceedings against foreign issuers of securities in
situations where there is significant fraudulent conduct in the US.
However, the SEC is currently lobbying for financial regulation
reform that would authorize it to have this power
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The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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