Australian companies and directors need to be alert to the potential risks associated with a new law that allows US regulators to pursue foreign securities fraud involving non-US investors
Despite a recent decision in the US Supreme Court to bar Australian shareholders from launching a class action against the National Australia Bank in the plaintiff-friendly US courts, Australian directors are still exposed to the long arm of US law following President Obama’s recent signing into law the high profile Dodd-Frank Act.
The case of Morrison v National Australia Bank, in which the US Supreme Court ruled that US securities fraud laws applied only to shares bought or sold in the US or to securities listed on an American stock exchange, significantly limited the types of securities lawsuits that could be brought in the US, by non-US investors and US regulators, against companies not listed on an American exchange.
Yet barely a month later, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, partially overturning the Morrison case and restoring the powers of the Securities Exchange Commission (SEC) and US Department of Justice to pursue foreign securities fraud involving non-US investors, so long as some conduct relating to the violation occurred within or impacted on the US.
Australian directors should take note of the aggressive stance of US lawmakers and not become complacent about their US exposures, according to Kemsley Brennan, special counsel in the insurance group of law firm Colin Biggers & Paisley.
“The long arm of the US law is alive and well and still reaching into our backyard,” he said.
“There was much initial excitement that the Morrison decision had brought an end to so-called ‘foreign-cubed’ lawsuits which have caused Australian companies and their directors much anxiety over the attempts of US regulators and courts to impose US law beyond its borders.
“But that excitement has quickly disappeared with the US regulators wasting no time in clawing back their powers.”
While the Dodd-Frank Act did not undo the prohibition on foreign private investors hauling foreign companies into the US courts, Brennan said that it is possible that this too could be a short-lived reprieve for Australian directors.
“Under Dodd-Frank, the SEC has been directed to report back to Congress in 18 months on the pros and cons of reviving a private right of action, so it may all be up for grabs again in the near future,” he noted.
Regardless of how the Dodd-Frank reforms concerning private investor lawsuits panned out, Brennan said that Australian directors needed to be mindful that their exposures in the here and now remained significant.
“At present, Australian companies and directors can still be sued by non-US investors if their companies are listed in the US. Importantly, there are many Australian companies which have raised capital in the US markets through issuing American Depositary Receipts and these will continue to attract exposure,” he explained.
“Coupled with the reinstated powers of the SEC and Department of Justice, the upshot is that these types of claims will continue to grow and US securities class actions will remain a threat for Australian companies so long as they have a relevant US connection.”
On top of this, Brennan observed that Australian companies and directors also needed to be alert to broader US litigation risks driven by US regulators and plaintiff class action lawyers pursuing violations of US anti-trust, product liability or employment laws.
In 40 per cent of all US class actions, he said that directors of non-US companies are the directors most frequently joined to class action proceedings after CEOs and CFOs.
“Australian companies operating in the US need to be mindful of these personal risks and ensure their directors and officers insurance arrangements properly protect them from potentially astronomical legal costs.”
No country comes close to the US in terms of the volume and costs of litigation, or the level of settlements and court-awarded compensation, said Brennan. US class action defense costs can start at US$3 million ($3.2 million) and exceed US$10 million prior to cases reaching hearing. And where damages are concerned, the average settlement is US$12 million, with many cases exceeding that figure, Brennan said.