Some Procedural Defenses for Foreign Defendants in American Securities Litigation
De Leon, Robert S., Journal of Corporation Law
The number of foreign securities and American Depository Receipts (ADRs) traded in the United States on exchanges or in American over-the-counter markets has skyrocketed in the last decade.1 Many foreign firms have benefited from this investment-either by issuing securities in the enormously liquid and relatively efficient American capital markets or by expanding their base of shareholders into the United States.2 In doing so, however, they have also exposed themselves to the risk of securities litigation here.
Indeed, there have been numerous civil security-holder actions against foreign issuers, their directors, and their senior officers.3 Nearly all of these actions assert claims under section 10(b) and rule lOb-5 of the Securities Exchange Act of 1934 (Exchange Act)4 and, in some cases, under provisions of the Securities Act of 1933 (Securities Act of 1933 (Securities Act)5 as well.6 These actions, on behalf of individual shareholders or entire classes of purchasers and sellers of the foreign issuer's securities, generally allege that investors were either misled in connection with the foreign issuer's securities offering in the United States or in post-offering securities transactions? Claims under section 10(b) and Rule lOb-5 of the Exchange Act can be asserted even if the issuer's securities are not registered with the SEC.8
The risk of being sued in American securities litigation is a serious one because of the burdens it often imposes on foreign defendants. Defending securities litigation is burdensome and expensive for domestic defendants. In enacting the Private Securities Litigation Reform Act of 1995, the United States Congress noted that abusive practices in private securities litigation had been routinely committed, including misuse of the discovery process "to impose costs so burdensome that it is often economical for the victimized party to settle."9 Foreign issuers and their directors and officers face even greater burdens in participating in complex proceedings that may be conducted in a foreign language thousands of miles away.
In defending securities actions, foreign issuers and their directors and officers may raise three general types of procedural defenses that usually are not litigated in actions brought against domestic defendants: (1) jurisdiction and venue, (2) agreements between the securities issuer and the complaining shareholder that disputes between them will be governed by foreign law (rather than United States law) or that such disputes will be determined abroad, and (3) forum non conveniens and abstention based upon the pendency or availability of civil actions in the foreign issuer's home country. This Article discusses the considerations raised by these defenses.
II. JURISDICTION AND VENUE
Section 27 of the Exchange Act provides for worldwide service of process for suits seeking damages for violations of the Act, including violations of the Act, including violations of section 10(b) and rule 10b-5.10 Nevertheless, as discussed below, for any securities (or other) litigation a court must have personal and subject matter jurisdiction over the defendants. If personal and subject matter jurisdiction exist, the venue of the action must also be in a proper federate 11 judicial district.12 Although federal courts customarily resolve questions of subject matter jurisdiction first, a court has the discretion to prioritize questions of personal jurisdiction.13
A. Personal Jurisdiction
For personal jurisdiction, each defendant must have so-called "minimum contacts" with the United States.14 Such contacts need not be physical ones.15 Minimum contacts exist, in general, when the defendant purposefully avails itself of the privilege of conducting activities within the United States, thus invoking the benefits and protections, as well as the burdens and liabilities, of its laws. 16
More specifically, minimum contacts exist if the defendant has, among other things, done business in the United States,17 performed one or more acts in the United States that are related to the wrongdoing alleged in the litigation,18 or purposefully availed itself of U. …