Courts in both the US and Canada seem intent on ensuring that their jurisdictions do not become havens for North American securities class actions.
In August, the Second Circuit expanded the restrictions surrounding “foreign-cubed” securities lawsuits where foreign purchasers of securities sue foreign issuers for violations of American securities laws with respect to securities traded on a foreign exchange. One day earlier, the Ontario Court of Appeal ruled that Ontario residents could not sue BP in Ontario because only a small number of BP shares traded on the TSE.
The seminal case in the US is the 2010 decision of the Supreme Court in Morrison v. Nat'l Australia Bank Ltd. The Court ruled that plaintiffs could sue for violation of the anti-fraud provisions of US securities law only where cases were predicated on a purchase or sale of a security listed on a domestic exchange, or where foreign-listed securities were the subject of a domestic transaction.
In May 2014, the US Court of Appeals for the Second Circuit dismissed a securities class action brought by purchasers of foreign-issued securities on a foreign exchange. In City of Pontiac Policemen's and Firemen's Ret. Sys. et al. v. UBS AG et al., the Court made it clear that US securities law would not be applied merely because a foreign security was cross-listed on a domestic exchange where the purchase was consummated on a foreign exchange. As well, the mere fact that the purchaser was a domestic company or that a buy order was placed in the US was insufficient to justify the application of American law. Indeed, the Court went so far as to suggest that even if a transaction was consummated on a US exchange, that in itself might not be sufficient to invoke US law.
In Parkcentral Global Hub Ltd. V. Porsche Automobil Holding SE, the Second Circuit went further, ruling that claims that were “predominantly foreign” might not be actionable in the US even if the Morrison test was satisfied. The case centred around Morrison's application to domestic “swap agreements” in derivative securities whose value was based on the price of foreign securities, all in circumstances where the counterparties to the swap agreements did not include the defendants and the allegedly fraudulent activity had occurred abroad.
“Parkcentral opens more avenues for US courts to refuse jurisdiction by giving them a bit of a clean slate to do so whenever there is a foreign aspect to a transaction,” says Christopher Caparelli in Torys LLP's New York office. “The decision will allow courts to focus on foreign facts, like where the stock is trading, as opposed to US facts, such as whether the plaintiff lives in the US or whether derivatives of the stock are traded here.”
The Ontario Court of Appeal reached much the same conclusion as the Parkcentralcourt in Kaynes v. BP, which dealt with the extra-territorial reach of Ontario's securities laws in a case based on alleged misrepresentations the company made regarding the April 2010 Deep Water Horizon oil spill. The mere fact that the plaintiffs resided in Ontario and part of the underlying misrepresentation was made in the province, the Court concluded, was not enough to attract jurisdiction where the volume of the company's shares traded in London and New York dwarfed the very small number of BP shares traded on the TSE.
As the Court saw it, it made much more sense for the Ontario residents to sue in the US. Indeed, a class action had already been commenced against BP in US Federal Court and there was no suggestion that the Ontarians would be at a disadvantage by joining that suit.
“I agree with BP's submission that permitting the plaintiff to use BP's negligible relative trading on the TSX … as a toehold for bringing foreign exchange purchasers under the jurisdiction of an Ontario court would be both opportunistic and a classic example of the ‘tail wagging the dog',” the Court wrote.