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The US Supreme Court on Thursday struck a blow against shareholders outside the US seeking big legal pay-outs when it ruled to limit foreigners’ rights to use the American legal system to sue corporations.
The ruling to dismiss a lawsuit against National Australia Bank by Australian investors who were seeking damages in a New York court for fraud will have broad ramifications for a number of other pending multimillion dollar cases.
These include a shareholder suit against Paris-based Vivendi, the entertainment and telecoms group. It will also be likely to force non-US shareholders to think twice before attempting to use US courts to make claims against companies if they did not buy their shares there.
The NAB investors had argued before the Supreme Court that the case should be heard in the US because it centred on allegations of fraud by a Florida-based NAB subsidiary called HomeSide Lending, a mortgage servicer. NAB bought the Florida group for $1.22bn in 1998 but was forced to take writedowns of $2.2bn a few years later. The subsidiary was later sold to Washington Mutual, which in 2008 was seized and sold by the US government to JPMorgan.
Justice Antonin Scalia wrote in the majority’s decision that the NAB’s shareholders’ argument, that deception at the heart of the writedowns had occurred in Florida, was not sufficiently relevant to give the matter US jurisdiction. Instead, the place where the purchase and sale of stock originated – in this case, Australia – was paramount.
Lawyers for Vivendi regarded the judgment as a “huge victory”, a person familiar with the matter said. Vivendi was found liable by a jury in a US court in January of misleading investors about its financial health from 2000-2002.
The case is believed to be the largest class action law suit related to securities transactions ever heard in a US court, involving 1m plaintiffs.
The Supreme Court ruling could disqualify two-thirds of the plaintiffs in the Vivendi case, greatly reducing potential liabilities.
Class action cases are not allowed in French law and French companies have become increasingly alarmed at the rise in litigation attempts by French shareholders joining US class action cases.
The Australian, British and French governments had filed a brief in the case arguing against jurisdiction to help protect their companies from US litigators. They argued that shareholders who bought securities in a foreign jurisdiction should be covered by the laws of that jurisdiction and not the US. French companies including Vivendi, EADS, Lagardère and Alstom also filed briefs in the NAB case.
“It doesn’t mean that foreigners can’t use the US courts if, for example, they bought securities on an exchange in the United States. They can sue the same way that an American investor would,” said Doug Hallward-Driemeier, a partner at Ropes and Gray.
“What it means is that a foreign company whose stocks are sold on a foreign exchange should feel confident that they can buy a US subsidiary without all their sales becoming subject to lawsuits in the US under US disclosure rules.”