UK: Investors’ Claims After Morrison V National Australia Bank – New World Or Old?

Extra-territorial securities claims in the US courts have been dealt a serious blow by NAB v Morrison. In this article, which we are pleased to co-author with Dutch law firm, Van Doorne, we discuss the claimant lawyers' response and how the Netherlands may present an alternative jurisdiction to the US.

The US Supreme Court's ruling in National Australia Bank v Morrison seriously curtailed claims in US courts by foreign claimant shareholders of a foreign defendant corporation whose shares are traded on a foreign exchange (the so-called "f-cubed" claims). Ten months on, the response of claimant lawyers is now materialising.

In the Morrison case the defendant bank, National Australia Bank (NAB), was incorporated in Australia with American Depositary Receipts (ADRs) traded on the New York Stock Exchange. In 2001, NAB wrote down the value of its US subsidiary HomeSide's assets causing the value of NAB shares and ADRs to drop, allegedly because HomeSide senior executives in the US had manipulated HomeSide's financial models. Class actions were commenced against NAB in the US courts for breach of US securities laws and regulations, including Australian purchasers of NAB shares on the Australian exchange as plaintiffs. The claims were dismissed with respect to these Australian investors for lack of subject matter jurisdiction.

The US Supreme Court ruled that section 10(b) of the Securities Exchange Act and Rule 10b-5 of the SEC Rules do not have extraterritorial application. It declined to endorse long-established case law from lower courts that the application of section 10(b) depends on the "effects" test (whether the wrongful conduct had a substantial effect on the US or upon US citizens) and the "conduct" test (whether the wrongful conduct occurred in the US). Instead it limited the application of section 10(b) to "transactions in securities listed on domestic exchanges, and domestic transactions in other securities".

In Morrison's wake, several decisions from the District Court in the Southern District of New York have extended the USSC finding, precluding claims by US investors who have purchased securities of foreign issuers on foreign exchanges. Attempts by claimants' lawyers to get round the new test by arguing that claimants made their decisions to purchase and initiated or placed their purchase orders for the foreign shares in the US have failed at first instance (Cornwell v Credit Suisse, Re Alstrom Securities Litigation and Plumbers Union Local No 12 Pension Fund v Swiss Re). Most recently, District Judge Batts, hearing an action against the Royal Bank of Scotland arising from write-downs that occurred due to RBS's substantial holdings in subprime assets, rejected the plaintiffs' arguments that section 10(b) applies whenever a security is listed on a US exchange, regardless of whether the security is purchased in the US or through the American exchange1. The District Court of Northern California followed a similar line in dismissing claims against Infineon by investors who purchased shares on the Frankfurt Stock Exchange2.

The scope of the Morrison case is expanding. In a ruling in the class action against Société Générale arising from the revelations of the Kerviel trading losses, the Exchange Act was held to be inapplicable to "over the counter" transactions in American Depository Receipts traded in the US on the basis that ADRs are predominantly foreign securities transactions3. The Morrison decision has also been extended to preclude extraterritorial claims under the Securities Act 1933 (in the RBS case) and the Racketeer Influenced and Corrupt Organization Act (in Norex Petroleum Ltd v Access Industries Inc)4.

What now for non-US securities claimants?

Morrison has certainly cast a chill on claims by or on behalf of non-US investors, at least in the US. As a result, claimant lawyers are looking to alternative jurisdictions with favourable collective regimes in which to bring lawsuits for international investors.

One illustration is the continued growth of securities transactions in Canada, where the Ontario court has recently certified a "global" class of plaintiffs in the Imax litigation5.

In Europe, such alternative venues do not include the UK, which has no equivalent to a US-style class action despite some recent initiatives to the contrary. Provisions to introduce collective redress for investors in relation to claims against any firm authorised by the FSA were amputated from the Financial Services Bill in the "wash up" period before the change of government to allow the rest of the Bill to pass. Nevertheless, it is possible that there will be further attempts to introduce collective actions in this sector, or more generally, in the UK in the future.

The Netherlands

By contrast, the Netherlands, is quickly becoming the leading alternative jurisdiction in Europe for collective securities claims.

The Wet Collectieve Afwikkeling Massaschade (Class Action Financial Settlement Act "the Act") has since 2005 allowed the Amsterdam Court of Appeal to declare a settlement agreement of a large number of similar damages claims binding on the entire group of creditors. The agreement is concluded between an organisation representing the interests of creditors and the parties that make a financial contribution to that settlement. The creditors then become entitled to damages in accordance with the agreement and are precluded from bringing an individual action for damages.

It is therefore no surprise that the Act has already attracted the attention of US lawyers seeking an alternative means for the resolution of mass investor disputes.

Until recently, the leading example of the Act's application in securities claims was the Amsterdam Court of Appeal's ruling on the Royal Dutch Shell settlement of investor class actions in the US arising from its restatement of its oil and gas reserves in early 2004. Before the US courts had issued a final ruling, Shell reached a collective settlement with non-US investors and applied to the Dutch court to have it declared binding on all non-US investors. The Amsterdam court held that it had jurisdiction to hear the case and to issue a decision which also bound non-US claimants not resident in the Netherlands, in order to prevent contradictory rulings. In November 2007, the US court declared itself not competent to hear the claims of non-US shareholders, in part taking into account that an arrangement for the non-US investors was in place under the Act.

The Ahold case is another illustration of the courts in the Netherlands considering the impact of a US class action settlement. In that matter a class action settlement was reached in the US and approved by the US court by which it became binding on all class members worldwide. However, a group of Dutch Ahold shareholders brought a claim before the Dutch court. These Dutch claimants fell within the definitions of the settlement class in the US litigation. However, they were not (actively) involved in the US class action settlement. They did not make timely use of the opt-out facility nor did they apply for the compensation to which they may have been entitled under the settlement agreement, which had been advertised in the Netherlands. In a landmark decision of 23 June 2010, the Amsterdam District Court ruled that the US class action settlement was to be recognised as binding on the Dutch class members. Appeals from the Amsterdam District Court's decision, however, remain possible.

Both Shell and Ahold, however, were decided before Morrison. Both were predicated on the existence of an effective remedy for non-US investors in the US. That situation has now changed, as the Converium case demonstrates.

Converium and its sole shareholder at the relevant time, ZFS, were defendants in a US class action arising from allegations of insufficient reserves and violations of US securities laws on disclosure of the alleged inadequacy of its reserves during its IPO. A US class action settlement was agreed; however following Morrison the US District Court for the Southern District of New York decided it only had jurisdiction to declare the class action settlement binding on shareholders resident in the US and those who bought the securities in the US. Converium, ZFS and two Dutch foundations agreed on a settlement that was to provide for payment to those shareholders who were not part of the US class action settlement. They also agreed to petition the Amsterdam Court of Appeal to declare this settlement binding on this class of non-US shareholders under the Act. The petitioners estimate that the class includes approximately 12,000 shareholders, of whom only a small fraction appear to be residents of the Netherlands6. The other class members are resident in the EU, states that are a party to the Lugano Convention, or in other states.

In a provisional ruling in November 2010, the Amsterdam Court of Appeal considered that the Dutch settlement complemented the US class action settlement and that only the Netherlands offered the possibility of having a settlement agreement declared binding on a whole class within the EU. The Court then concluded that it had jurisdiction to declare the Dutch settlement binding on all other class members excluded from the US class action and not resident in the Netherlands. In doing so, the Court relied on its finding that the characteristic obligation of the settlement agreement is the obligation to pay out the settlement amount. As this is an obligation of the Dutch foundations, who will pay out in/from the Netherlands, jurisdiction was established based on Article 5 of Regulation 44/201 (and the relevant provision of the Lugano Convention).

The Court further considered that by accepting jurisdiction and deciding the claims of all of the shareholders, the risk of conflicting judgments in different states could be averted. The provisional decision to accept jurisdiction in respect of shareholders resident in non-EU and Lugano states is based on the rule of Dutch civil procedure that a Dutch court has jurisdiction to hear cases that start with a petition (as opposed to a case that starts with the issuance of a writ of summons) if one or more petitioners are resident in the Netherlands. Since the Dutch foundations are based in the Netherlands, the Court has jurisdiction to hear the matter. The Court has explicitly qualified its decision as provisional, as the class members have not had a chance yet to put forward their views on the Court's competence to declare the settlement binding to the class pursuant to the Act. It is as yet unclear when a further hearing will take place.

But whether the Amsterdam Court of Appeal can become a venue of first instance for claims by European investors may be questionable. There are crucial differences to US procedure. Although the manner of settlement is similar to that in US class actions, the Act only takes affect if the parties reach an agreement on settlement terms. The Dutch legal system does not provide for a class action in the US style for bringing claims leading to collective monetary relief as it presupposes that actions for damages require individual assessment of claims. This is a significant obstacle to the development of a whole scale collective action practice in the Netherlands. Although the Court can endorse a collective settlement, which is binding on non-represented claimants, the procedure for a collective claim, addressing common issues of breach, causation, and loss, is less developed. The Netherlands also does not possess other important features of the well-oiled US class action machinery contingency fees, jury trials, and punitive damages.

A crucial question is whether other European courts will recognise a decision of the Amsterdam courts declaring a settlement binding on non-Dutch claimants, especially when those jurisdictions do not have class action settlement mechanisms themselves. Although the Brussels Regulation and the Lugano Convention require Member States to give recognition to judgments given in other Member States, it might be argued that such a decision violates principles of public order of the Member State in question.

Another possibility under Dutch law is a request for declaratory relief on the basis of article 3:305a of the Dutch Civil Act. Dutch law allows interested organisations to petition a court for a declaration at law, including a declaratory judgment on liability for certain damages (although as the requesting party is an interested organisation, it is not possible under this article to ask the court to estimate individual damages). Collective action on behalf of investors in Fortis has recently been commenced in respect of alleged fraud and misrepresentation in connection with the 13 billion rights issue in 2007, the value of which was lost in the credit crunch and collapse of Fortis in 2008. Notably, the claimant investor association (or "Stichting") is being advised by well-known US plaintiff law firm Grant & Eisenhofer, who have characterised this claim as representing a "new paradigm" for global securities claims.

In the event that the court declares the defendants liable, the individual claimant has to claim its individual damages separately. It is also possible that after the declaratory judgment the case will be settled between the defendants and the interested/ representing organisation and the Amsterdam Court of Appeal will be requested to approve that settlement according to the Act.


The Morrison case has affected the dynamics of investors' claims for international companies with non-US investors. No doubt, their interest groups will bring what influence they can to bear on the SEC and the report that it is preparing for congress as to whether Morrison should be reversed by legislation. In the interim, they will seek to expand the scope for using collective action proceedings such as the Dutch Act not only for enforcing settlements, but also as a vehicle for bringing claims on behalf of investors in the first place. We may also see coordinated proceedings in various European jurisdictions develop to the extent that European states are reluctant to recognise decisions of the Amsterdam Court of Appeal under the Act. All in all, there will be much to watch over the coming months/


1. 11 January 2011

2. 17 March 2011

3. 29 September 2010

4. 28 September 2010

5. 14 February 2011

6. 200 of 2,000 shareholders whose contact details are known.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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