Why the directors & officers of European organisations are more exposed than ever to US securities class actions

Securities litigation brought in California against Toshiba and certain named executive officers has paved the way for similar action against foreign companies, including European firms and their senior management.

Since the Morrison ruling in 2010 it was widely accepted that unlisted foreign firms were somewhat protected from US securities class actions. Now, with American Depositary Receipts (ADRs) recognised as "securities" by the US Ninth Circuit Court, it is clear the exposure has substantially shifted.

AIG’s Class Actions Bulletin shows that the second quarter of 2019 was dominated by securities class action filings against European companiesi . In total, 64% of the filings were made against corporates based in Europe and their directors and officers. And in the first half of the year, just over half of the filings were against European companies.

Until Toshiba, ADRs were viewed as less of a target for securities class actions. "The ruling by the Ninth Circuit that ADRs both fit the definition of 'security' and satisfy Morrison's requirements as 'domestic transactions', opens the door for similar action to be taken against European companies and their directors," warned Nepomuk Loesti, head of financial lines, AIG Europe.

"It could potentially lead to European directors and officers being dragged into court in the US despite the company itself not seeking to sell its shares to US investors."

ADRs are an established way for non-US companies to provide access for US investors to invest in their shares. Unlike the underlying foreign shares, which are traded on an exchange outside the US, ADRs are traded in the US.

At a time when the exposure to US class actions is growing, research carried out earlier this year by AIG in partnership with the Association of Risk & Insurance Managers (Airmic), suggests many directors are not as aware of the risks as they should be.

Only 18% of Airmic respondents said they believed their leaders were aware of the personal liabilities they face and just 14% have read and understood their D&O insurance policy.

i Data compiled from Stanford