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PDF hosted at the Radboud Repository of the Radboud University Nijmegen The following full text is a publisher's version. For additional information about this publication click this link. Please be advised that this information was generated on and may be subject to change. Recognition of US Class Actions or Settlements in Europe by Tomas Arons* With the Morrison-judgment, access to US securities class actions is denied for non-us transactions. Granting preclusive effect to class settlements concluded with European investors should prevent re-litigation before European courts. Recognising US class action/settlement judgments under Dutch, French English and German law requires the following: (1) the US courts must have had jurisdiction; (2) the class must have been properly notified; (3) opt-out mechanisms must not be manifestly against public policy; and (4) interested parties must be sufficiently informed. Absent class members are bound unless they explicitly opt out. European jurisdictions (recently) allow for a similar binding effect. The Dutch WCAM and the English representative actions have opt-out features. The German Capital Market Model Case proceedings is based on the opt-in model; only persons bringing a claim before a (lower) court are bound to the outcome of the model case proceedings. The recently adopted French collective action proceedings are also opt-in, however, filing an individual (damage) claim is not required at the first stage in which a representative organisation requests the court to rule whether the defendant acted tortiously towards the represented group. Table of Contents ECFR 2015, Introduction US collective action: recognition issue Recognition of US class action/settlement judgment under Dutch law Recognition of US class action judgments and settlements under French law Recognition of US class action judgments and settlements under English law Recognition of US class action judgments and settlements under German law Recognition under EU law Concluding remarks * Assistant professor at the Institute for Financial Law as part of the Business & Law Research Centre (Onderzoekcentrum Onderneming & Recht, OO&R) of the Radboud University Nijmegen. ECFR 3/2015 Recognition of US Class Actions or Settlements in Europe Introduction With the Morrison v National Australia Bank 1 judgment, the United States Supreme Court ( USSC ) ruled that the protection of US federal securities legislation 2 is not available to foreign claimants suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges. These cases are referred to as f-cubed 3 securities fraud cases. After diverse court rulings on the question whether foreign claimants who bought the defendant s securities on a foreign exchanges could be part of the class in a federal class action against foreign defendant companies accused of violating US federal securities legislation, the USSC effectively denied these foreign claimants access to US class actions. In order to proceed as a federal class action, it is required that a court certifies the class, i.e. the court rules that the prerequisites to pursue as a class action are met. One of these prerequisites is that the questions of law or fact common to class members predominate over any questions affecting only individual members. Furthermore, it is required that a class action is superior to other available methods for fairly and efficiently adjudicating the dispute. 4 In the above-mentioned f-cubed securities fraud cases, courts had to rule on the defence motion that the foreign claimants could not be part of the class because the class action judgment would not be recognised by the foreign 1 Morrison v National Australia Bank Ltd, 24 June 2010, 129 S.Ct. 2762, 174 L.Ed.2d In particular section 10(b) of the Securities and Exchange Act of 1934 ( 1934 SEA ). It prescribes that: [i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Pursuant to its authority granted under the 1934 SEA, the Securities and Exchange Commission ( SEC ) adopted Rule 10b-5 that prohibits the following: [i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 3 Foreign claimants suing before US courts foreign defendants for securities bought on foreign exchanges. 4 Rule 23(b)(3) of the US Federal Rules of Civil Procedure. 464 Tomas Arons ECFR 3/2015 courts. Hence, a US class actions is not a superior method of adjudication because the issue could be re-litigated before a foreign court not granting preclusive effect or res judicata to the US class actions judgment. The US courts quite extensively reviewed evidence on the likelihood of recognition of class action judgments by courts in Germany, France, Austria, the UK and the Netherlands. After the Morrison v National Australia Bank-judgment, it is clear that European investors who acquired their securities on a non-us exchange can no longer be part of a US class action. Nonetheless question of recognition of US class action judgments by courts in the EU remain important for various reasons. Especially, the opt-out character of a US class action judgment or class settlement reached between the lead plaintiff and the (lead) defendant before the final class action judgment is given, seems an obstacle to recognition. Article 6 of the European Convention on Human Rights( ECHR ) and various constitutions in Europe guarantee their citizens a right to a fair trial. It has been argued that this right may be violated when individual claimants who did not opt out are bound by the class action/settlement judgment. First of all, no formal convention on jurisdiction and recognition is available between the above-mentioned European jurisdictions or the EU and the USA. Secondly, US class settlements with European class members are used as defences against damage claims by European investors before European courts. 5 The question of reciprocal recognition has been enhanced by the enactment of the Dutch Collective Settlement of Mass Damage Act (Wet Collectieve Afwikkeling Massaschade, WCAM ). The WCAM provides for a judicially approved settlement agreement declared binding on all class members unless they opt out. 6 Because of this mass settlement mechanism available in Europe, it is even more important for defendants that US class action settlements are recognised and granted preclusive effect. Otherwise, claimants could re-litigate or resettle claims already dealt with. In paragraph 2, I will briefly discuss US case law on the questions of superiority and predominance in f-cubed securities class actions; cases in which the recognition issue arose. Paragraph 3 describes the recognition of judgments by 5 Amsterdam District Court 23 June 2010 (SOBI/Deloitte), ECLI:NL:RBAMS:2010: BM9324, JOR 2010, 225 with commentary from I.N. Tzankova; Amsterdam District Court 26 June 2013 (VEB/Deloitte), ECLI:NL:RBAMS:2013: In principle the binding declaratory judgment of the Amsterdam Court of Appeal has to be recognised by the courts in the EU. See also: T.M.C. Arons and W.H. van Boom, Beyond Tulips and Cheese: Exporting Mass Securities Claim Settlements from The Netherlands (2010) 21 European Business Law Review 6, pp ; T.M.C. Arons, Cross-Border Enforcement of Listed Companies Duties to Inform (Kluwer 2012), ch. 11; A. Stadler, Die grenzüberschreitende Durchsetzbarkeit von Sammelklagen in M. Casper et al (eds), Auf dem Weg zu einer europäischen Sammelklage? (Sellier 2009); A. Stadler, Grenzüberschreitender kollektiver Rechtsschutz in Europa (2009) 3 JZ, pp ECFR 3/2015 Recognition of US Class Actions or Settlements in Europe 465 non-us courts. The recognition of US class actions/settlement judgments by the Dutch courts, especially in the SOBI 7 /Deloitte- and the VEB 8 /Deloittecase will be discussed in paragraph 4. Paragraph 5 deals with the question of recognition by French courts. The answer in this regard under English and German law will be analysed in paragraphs 6 and 7 respectively. Paragraph 8 provides a brief discussion how this question of recognition is dealt with under EU law. In paragraph 9 some concluding remarks are given. 2. US collective action: recognition issue Before setting out the role played by question of international recognition of US class action/settlement judgments in f-cubed securities fraud cases, I will briefly discuss the private international issues dealt with in Morrison v NAB. 9 On the basis of the so-called conduct test, the US courts assumed jurisdiction if the securities fraud in the USA is the direct result of conduct outside the USA. 10 In order to assess whether a class action is superior, the court in the Vivendi-case applied the test whether the plaintiffs were able to establish a sufficient probability that a foreign court will recognise and grant res judicata or preclusive effect to a US class action judgment. On the basis of expert evidence, the court ruled that recognition of the US class action was likely under French, Dutch and English 11 law. Therefore, the court granted certifi- 7 SOBI is the Dutch Company Information Research Foundation (Stichting Onderzoek Bedrijfsinformatie). 8 VEB is the Dutch Shareholders Association (Vereniging van Effectenbezitters).. 9 On personal jurisdiction in class action proceedings: Newberg on Class Actions (4th edn), 1.15; Cf. Vivendi-case where the French media company Vivendi dually listed in New York and Paris, was sued by shareholders who claimed damages. The plaintiffs allege that the defendants (Vivendi, its former CEO, Mr Messier, and its former CFO, Mr Hannezo) continued reporting favourable financial results resulting in a series of false and misleading public statements. Moreover, the plaintiffs allege that the defendants filed financial statements at the SEC that were materially false and misleading. Thereby they violated sections 10(b) and 20(1) of the 1934 Act and SEC Rule 10b-5. In re Vivendi Universal, S.A. Securities Litigation 381 F.Supp.2d 169 (4 November 2003, U.S.D.C./ S.D.N.Y.) (Vivendi I). Upheld in No. 02 Civ. 5WL (22 October 2004, U.S.D.C./S.D.N.Y.) (Vivendi II). In re Alstom SA Securities Litigation; In re Royal Bank of Scotland Group PLC Securities Litigation; In re Societe Generale Securities Litigation the conduct test was applied as well. 11 M.P. Murtagh, The Rule 23(b)(3) Superiority Requirement and Transnational Class Actions: Exlcuding Foreign Class Member in Favor of European Remedies (2011) 1 Hastings Int l & Comp. L. Rev., p. 30, Fn. 163 notes that this result in the Vivendi case conflicts with at least one earlier case involving a UK defendant, where certification was denied because, inter alia, a judgment in favour of defendants would not bar future 466 Tomas Arons ECFR 3/2015 cation to a class consisting of all persons domiciled in the USA, France, England and the Netherlands who purchased or otherwise acquired ordinary shares or American Depository Shares ( ADRs ) of Vivendi Universal SA between 30 October 2000 and 14 August Certification of a class consisting of German and Austrian shareholder was rejected, because the court ruled it unlikely that German or Austrian courts would recognise the US class action judgment. 12 The other test applied is the effects tests. This test established jurisdiction, if the conduct originating outside the USA had a substantial influence on US securities markets or US domiciled investors. Before Morrison, US courts assumed jurisdiction when either of these broad ranging tests were fulfilled. The USSC in Morrison rejected the US court s assumptions of jurisdiction by applying the conduct test or the effects test; instead the court affirmed a presumption against extraterritoriality of US securities legislation. In effect it adopted a transactional test: the antifraud provisions in US securities legislation and, as a consequence, US federal procedural law including the class action provisions are only applicable to transactions in securities listed on a US stock exchange or otherwise securities sales in the USA. 13 actions by the absent class members against the same defendants in the United Kingdom and other countries. For such an effect an opt-in procedure before the US court would be required. However, the court held that since the class size is only 25 members; the need for an opt-in class is one more indication that joinder is more appropriate than creation of a class. Because an opt-in arrangement requires class members to signify that they wish to pursue this action and will be bound by it, it is essentially joinder without any of the responsibilities and burdens that ordinarily attend personal participation: for example, paying costs and being deposed. (CL Alexanders Laing & CruicksBank v Goldfeld, 127 F.R.D. 454, at ) F.R.D. 76 (21 May 2007, U.S.D.C./S.D.N.Y.) (Vivendi III). 13 It is noteworthy that the Morrison doctrine on jurisdiction in securities fraud cases is limited to securities litigation instigated by private parties. The SEC and US prosecutors have, on the basis of the amendments adopted under the Dodd-Frank Act, jurisdiction to start proceedings against violators of the Securities and Exchange Act s antifraud provisions, if the conduct within the USA significantly furthers the violation (conduct test) or the conduct originating outside the USA had a foreseeable influence on US securities markets or US investors (effects test). S. 929P(b)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L , H.R. 4173) amends s. 27 of the 1934 SEA by adding at the end the following new subsection: (b) Extraterritorial Jurisdiction. The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of the antifraud provisions of this title involving (1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States. ECFR 3/2015 Recognition of US Class Actions or Settlements in Europe 467 US class actions had become an instrument for foreign investors to make use of collective action procedures that are not available in the jurisdiction of the foreign company or the place where the securities are listed. 14 In Morrison, the USSC restricted access to US court proceedings in securities fraud cases to claimants who acquired their securities on a US stock exchange respectively concludes the securities transactions in the USA. 15 One of the arguments brought forward by the respondents to adopt this restriction is the fact that US class action/settlement judgments would not be recognised as having preclusive effect by important jurisdictions in Europe Non-recognition of the US judgment would lead to two undesirable situations if: a. the claimant wins the US class action or settles, but this judgment is not recognised in the foreign state where important assets of the defendant are situates; or b. the defendant wins the US class action and members of the class successfully claim before a foreign court which does not recognise and grant preclusive effect to the US class action/settlement judgment. 16 As already mentioned, no convention on the recognition and enforcement of civil judgments is applicable between any of the European countries and the USA. Therefore, I will briefly describe in the following paragraphs whether the jurisdictions of the Netherlands, France, the UK and Germany recognise these class action judgments or class action settlements or, in case there is no relevant case law in this respect, the likelihood of recognition. The importance of the judgment in Morrison is that the US class action or class settlement mechanism is no longer available to claimants who did not acquire their securities on a US stock exchange and claimants who did not conclude their securities transaction in the USA. 14 On various occasions, US courts have assumed jurisdiction under these rules and ruled on securities class action claims initiated by US and foreign domiciled claimants against non-us companies for conduct outside the United States where the securities are not listed on a US exchange. To make their grievances regarding the wide assumption of jurisdiction by US courts known, European companies and European governments issued a brief to the USSC as amici curiae in support of the respondents, National Australia Bank. An overview of all briefs is available at: gov/search.aspx?filename=/docketfiles/ htm . 15 Affirmative to this jurisdiction rule: H.L. Buxbaum, Transnational Regulatory Litigation (2006) 26 2 Va. J. Int l L., pp ; H.L. Buxbaum, Multinational Class Actions under Federal Securities Law: Managing Jurisdictional Conflict (2007) Colum. J. Transnat l L., pp ; S.J. Choi and L.J. Silberman, Transnational litigation and global securities class-action lawsuits (2009) 2 Wis. L. Rev., pp Note that the restriction of access to US class actions in f-cubed cases was technically speaking not a case on jurisdiction per se, in Morrison, the USSC ruled against the application of US securities law to claims arising from transactions concluded outside the USA. 16 Murtagh (2011), p. 2; 24; 26. This seems to be the case in the VEB/Deloitte-case. This case will be discussed in paragraph 4. 468 Tomas Arons ECFR 3/2015 However, for these claimants there may be an alternative available: claimants who acquired their securities on a European stock exchange may have access to the WCAM procedure in order to have a settlement agreement concluded with the company declared binding on all EU domiciled investors by the Amsterdam Court of Appeal. 17 The attractiveness of the WCAM procedure for collective settlements between companies and organisations representing investors domiciled in the EU, especially in cases of corporate misinformation, has been enhanced by the applicability of the recast Brussels I regulation. 18 On the basis of this European regulation on jurisdiction, recognition and enforcement of judicial decisions, the Amsterdam Court of Appeal s decision has to be recognised and granted binding effect by all courts in the European Economic Area (EU+Norway, Liechtenstein and Iceland) and Switzerland19, Recognition of US class action/settlement judgment under Dutch law According to Dutch law, judgments rendered by foreign courts not belonging to an EEA-jurisdiction, are to be recognised by a Dutch court in order to be enforceable in the Netherlands. 21 The conditions for recognition are not laid down in statutory provisions. On the basis of Dutch c
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