International public companies and US securities class actions – a hidden risk?

D&O liability exposures faced by internationally listed companies outside the US have increased during the past few years, and will continue to do so in the current environment. Much of this is related to the severity of securities class actions. In this article, we explore an area of emerging risk within securities class actions for companies and Boards: American Depository Receipts (ADR) exposure.

An established way for non-US companies to provide access for US investors to invest in their shares is for them to issue ADRs. An ADR is the receipt for a negotiable certificate representing a beneficial interest in a specified number of shares in a non-US company. The least regulated ADRs are Level I ADRs, which are traded over the counter and not listed on a national exchange such as the NYSE or Nasdaq. A recent court ruling in the US found that foreign companies with ADRs available in the US market could be brought into a US court even if the company itself did not seek to sell the ADRs to US investors.

The Toshiba case
American investors can currently purchase Level I ADRs for more than 200 UK companies, in excess of 900 European companies and 1000-plus companies in Asia-Pacific; most of which are large-caps. Where ADRs are not sponsored by the company, but instead registered solely by the depository institutions, that company’s board members may think they have limited exposure to US securities laws. However, a recent ruling involving the unsponsored ADRs of Toshiba should make directors of all listed companies sit up and take notice.

Following allegations of false and misleading financial statements, a securities class action was brought in California against Toshiba and certain named executive officers. Although the trial court dismissed the case, that decision was reversed on appeal. The appellate court found that the ADRs were securities within the meaning of the US securities laws and that the plaintiffs should be allowed to amend their pleadings to show that the transactions in which they purchased the ADRs were domestic US purchases. The case has been appealed to the US Supreme Court. In January, the lower court held that the plaintiffs could proceed with their lawsuit because they raised plausible allegations about the domestic nature of ADRs and Toshiba’s connection with the ‘unsponsored’ ADR programme.

The uncertainty around the outcome of the case may cause an increased number of claims to be brought by ADR holders against non-US companies. This could potentially lead to directors in the UK, Europe, Japan and other parts of the world facing litigation in US courts despite the companies themselves not seeking to sell shares to US investors.
For more details on the Toshiba case please see our paper at:

If there was any doubt about the seriousness of this precedent for UK, European and Japanese companies, the importance of this decision was acknowledged by their respective governments, who filed amicus curiae briefs with the US Supreme Court in relation to Toshiba.

There is no guarantee that the plaintiffs in Toshiba will eventually prevail. However, the case shows that even a foreign company with only Level I ADRs may still be subject to US securities laws. Companies dealing with any type of security that might possibly be the basis for a US suit would thus benefit from paying close attention to how the law develops in this area.

What about sponsored Level 1 ADRs?
While companies that sponsor their Level 1 ADRs should be aware of the possibility of being brought before a US court, boards may not be aware that the frequency of such cases has increased in recent years. Court decisions about whether any individual securities claim brought on the basis of Level 1 ADRs are allowed to proceed are very case-specific and courts have come to different conclusions based on the facts of each case. With reference to specific US securities actions in recent years against non-US companies, Volkswagen (emissions scandal), Tesco (accounting scandal), and Nissan (accounting and executive compensation scandal), have all been brought into US courts based on their Level 1 ADRs.

For many companies, these types of claims come as a surprise because they were not prepared for the possibility that their Level I ADRs, sponsored or unsponsored, could subject a company and its directors and officers to US securities laws.

As a result, we have seen several cases where foreign companies with Level I ADRs try to find a settlement as soon as possible in order to avoid the costs and complexity involved with US securities class actions. It is important for the directors and officers of public companies to learn the facts about their potential US exposure based on recent activities in the US and take the necessary precautionary actions, including ensuring that appropriate D&O insurance is in place.

In addition, from a risk management perspective, foreign issuers should consider adopting a number of strategies to limit their exposure. Please see the recent AIG and Norton Rose Fullbright co-authored paper that highlights these strategies:

Need for specialist claims and multinational experience
With the general increase in claims against companies with over-the-counter-traded ADRs, the need for experienced D&O claims handling is more important than ever. It is vital to have experienced defence counsel with strong knowledge of US law and the local courts when defending US class actions.

Furthermore, expert local handling of US securities claims, especially in the early days of a claim, can actually help mitigate the ultimate exposure. Local policies as part of a global programme mean local claims handling. Having dedicated units to handle complex claims is vital.

Other important considerations from a multinational D&O perspective are understanding and responding to tax and compliance issues. Having an exposure in the US may require the payment of local insurance premium taxes (IPT) for exposures insured by non-admitted carriers. A local policy is not only compliant with indigenous insurance regulation, it is a good mechanism by which insureds pay their IPT. Local policies are often issued representing a ‘good local standard’, which, in addition to being compliant, often contain coverages unique to the jurisdiction.

Contributed by Brian Botkin, global head of multinational, global financial lines, AIG, and Jason Kelly, head of international financial lines, AIG International

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