Judgment will substantially reduce the exposure of non-US companies to high value damages awards, says RPC

A US Supreme Court judgment will limit the ability of foreign investors to use the US legal system to sue companies and their directors, according to City law firm Reynolds Porter Chamberlain LLP (RPC).

Simon Goldring, Partner at RPC, commented on the June 24 ruling in Morrison v National Australia Bank: “Investors who buy shares on non-US stock exchanges will no longer be able to exploit the favourable US securities legislation and class action procedures, substantially reducing the exposure of non US companies and their directors to vexatious US class actions.

“This judgment will substantially reduce the exposure of non-US companies to high value damages awards.”

RPC says that the judgment has a number of major ramifications, including:

• Companies that do not have a US listing will no longer face US securities law class actions. Up until now, about 15% of US securities class actions have been filed against non US issuers (companies).

• International competitiveness of the US share listings could be hampered as companies are discouraged from listing on US stock exchanges, depending on the availability of capital in non US markets

• Large institutional investors could decide to buy on US exchanges if a company is listed on more than one stock exchange so that they retain the option to participate in possible class action law suits

According to RPC there are typically about 200 new securities class actions claims made each year in the US. In 2009, there were 103 settlements in securities class actions with a combined settlement value of $3.83bn.

Goldring commented: “The securities class actions machine is a big business in the US.

“US class action lawyers have been active recently in recruiting European investors to swell the size of the class and to increase the size of the settlements or awards being made. This development has been stopped in its tracks by the Supreme Court, who feared that the US would become the ‘Shangri-La’ for class action lawyers.

“It remains to be seen whether companies now look to de-list from the US in an attempt to extinguish the risk of securities class actions.”

RPC says that Vivendi, the French conglomerate, are now even more likely to press on with the appeal against an award for securities fraud handed down in January 2010, with an estimated value of $9bn. The effect of this Supreme Court decision could reduce this award by two thirds, and in all likelihood more because the majority of the investors in the class had purchased their shares on non-US markets. These investors will now have to pursue their claims in their local courts.