Morrison is a typical foreign-cubed action: the defendant, National Australia Bank (NAB), is incorporated in Australia with its shares listed on various non-US exchanges, and the relevant plaintiffs were Australian residents who bought ordinary shares of NAB outside the US. The claim centred on statements made by NAB in Australia about its US subsidiary, HomeSide Lending, which led to allegations of securities fraud under Section 10(b) of the Exchange Act (section 10(b)) (see box “Key terms”).

Both the lower courts applied the conduct and effects test (see box “Key terms”) to determine whether they had subject matter jurisdiction, and decided that they did not. Although some conduct had occurred in the US, Australia was essentially “the heart of the alleged fraud” (see News brief “US securities fraud litigation: how long is the extraterritorial reach?”, www.practicallaw.com/4-384-2275).

The Supreme Court affirmed the lower courts’ dismissal of the claim, but not their reasoning. It emphasised that the central issue was not subject matter jurisdiction, but whether section 10(b) had extraterritorial application.

The Supreme Court applied the principle of statutory interpretation that, absent clear intent to the contrary, a Congressional statute applies only within the territorial limits of the US. It held that section 10(b) will apply only in connection with the sale or purchase of a security listed on a US exchange and the sale or purchase of any other security in the US. This new transactional test therefore focuses on the location of the transaction in question, rather than where the alleged fraud occurred.

Non-US issuers have, unsurprisingly, welcomed the establishment of the transactional test, which not only restricts their potential exposure to the significant costs and risks of US class action litigation, but provides much needed certainty in this area.

Shareholders of non-US issuers may be less pleased as a relatively low-cost and low-risk route to redress seems to have been closed to them. The Supreme Court’s decision is likely to cause aggrieved shareholders to seek redress in non-US courts; in particular, the courts where the securities are registered or where the transaction took place.

It is too early to tell if Morrison will lead to the courts of EU member states being inundated with class action securities claims. However, what appears certain is that group litigation, including securities actions, will be part of the landscape of English litigation over the next five or ten years.

While there is not a track record of large-scale securities actions in the English courts, there are causes of action available to shareholders under English law in respect of misleading public statements and there are defined procedures for collective actions. Of course, those procedures differ to those in the US in certain respects; for example, the procedure for collective actions remains "opt-in" rather than "opt-out" and trial by jury is not available (for background, see Briefing “Collective claims: learning from the US experience”, www.practicallaw.com/2-380-5212).

One area commonly highlighted as creating a relative disadvantage for claimants is that England, unlike the US, does not recognise the fraud on the market doctrine (see box “Key terms”). However, although this doctrine has not been adopted by the common law, section 90 of the Financial Services and Markets Act 2000 (FSMA) (which establishes a statutory claim for compensation for false or misleading statements in listing particulars) does not specify a requirement of reliance by a claimant and so arguably it is sufficient to show that the market price was affected by the relevant statements.

Further, there is no requirement for a claimant to demonstrate scienter (that is, guilty knowledge) under section 90 of FSMA, as there is under section 10(b), as liability is assumed unless a due diligence defence is established.

Non-US issuers have generally sought to avoid the jurisdiction of US securities laws wherever possible. Following Morrison, they may be more likely to seek to structure securities transactions so that they take place wholly outside the US. Similarly, Morrison may potentially affect the number of foreign companies that decide to list their securities on a US exchange.

In contrast, US buyers of securities may be keen to ensure that, where possible, they acquire shares in US listed issuers or, if they are acquiring shares in a foreign issuer, the transaction takes place in the US so that a private claim under section 10(b) may be available (as such a claim might otherwise be dismissed for lack of jurisdiction).

However, a note of caution for non-US issuers: the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was passed by the House of Representatives on 30 June 2010 and approved by the Senate on 15 July 2010, will, when signed into law by President Obama, amend the Exchange Act and extend jurisdiction to US federal courts in enforcement actions brought by the US Securities Exchange Commission (SEC), even for securities actions which take place outside the US. Congress intends to reserve the right for the SEC to pursue enforcement actions in cases where the Morrison decision is unlikely to permit a private claim.

The Dodd-Frank Act is silent on the extraterritorial application of section 10(b) for private claims. However, the SEC has been instructed to conduct a public study to determine the extent to which these provisions should have extraterritorial effect in private actions, and to report back to Congress within 18 months. Accordingly, Congress may yet have the final word on this issue.