On January 14, 2019, the United States Supreme Court invited the Solicitor General to file a brief expressing the views of the United States in connection with a pending petition for writ of certiorari regarding whether, in determining if Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) may apply to a securities transaction—including one involving American Depositary Receipts (“ADRs”) which are not sponsored by the foreign issuer and are traded on over-the-counter markets—it is sufficient to show that the transaction itself was domestic. Toshiba Corp. v. Auto. Indus. Pension Trust Fund, et al., No. 16-56058 (Jan. 14, 2019). Under the Ninth Circuit decision for which review is being sought, a foreign issuer that has no involvement in establishing or selling the ADRs can be subject to Section 10(b) as long as the plaintiff purchased or sold the ADRs in a domestic transaction. As noted by the defendant and various amici in support of the petition for certiorari, the Ninth Circuit’s holding significantly extends the extraterritorial application of Section 10(b) to non-U.S. companies which have not elected to avail themselves of the U.S. capital markets.
The Ninth Circuit’s approach appears to be in tension with the concerns expressed by the Supreme Court in the seminal case of Morrison v. Nat. Aust. Bank. In Morrison, the Court emphasized the importance of the presumption against extraterritoriality of U.S. statutes and held that Section 10(b) and SEC Rule 10b-5 only apply to (i) the purchase or sale of a security listed on a U.S. securities exchange, or (ii) the purchase or sale of any other security in the United States. 561 U.S. 247 (2010).
Since Morrison, lower courts have addressed its rule that Section 10(b) only applies to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities” (id. at 267) in various contexts. The transnational nature of transactions involving ADRs, in particular, has given rise to a number of decisions concerning the applicability of Section 10(b). ADRs are negotiable certificates issued by a U.S. depositary institution, typically banks, which represent a beneficial interest in a specified number of shares of a non-U.S. company. They allow investors in the United States to invest in foreign companies and facilitate access to the U.S. capital markets. ADRs can be traded on U.S. exchanges, such as the New York Stock Exchange, or on over-the-counter markets, such as the Over-the-Counter Bulletin Board. Unsponsored ADRs are registered by depositary institutions with the Securities and Exchange Commission (“SEC”) without the foreign company’s participation, whereas sponsored ADRs are jointly registered by the depositary institution and the foreign company.
Courts have repeatedly held that Section 10(b) claims based on ADRs listed on a domestic exchange are permitted under Morrison. The law is more unsettled concerning whether Section 10(b) claims can be brought on the basis of transactions related to ADRs or other instruments that are not listed on a U.S. exchange. The Morrison court did not define the scope of “domestic” transactions. In two significant cases, the Second Circuit has (i) set forth a test to determine if the transaction is domestic for purposes of Section 10(b) application (Absolute Activist), and (ii) held that, in any event, finding that a transaction is domestic is not sufficient to conclude that Section 10(b) applies to the transaction, if the claims are “so predominantly foreign as to be impermissibly extraterritorial” (Parkcentral). The Second Circuit has held that a transaction is domestic “if irrevocable liability is incurred or title passes within the United States.” Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 62 (2d Cir. 2012). Numerous courts, including the Third Circuit, have...
