According to a recent study conducted by PricewaterhouseCoopers, shareholder litigation against foreign companies is on the rise this year. But experts note the numbers are low, and that they may actually decrease over the long term.
The study compared the 15 class actions filed against foreign registrants in all of 2003 with the 21 through Sept. 15, 2004. The study notes that the 2004 number is "likely to eclipse the previous high of 23 foreign companies" that were sued in 2002.
“Closer cooperation between U.S. and foreign regulators, and more frequent reviews of foreign filings as required by Sarbanes-Oxley, will result in increased exposure for companies,” noted PwC partner Grace Lamont, who authored the study.
A Significant Trend?
Though the numbers seem to be headed higher, some have questioned whether the trend is significant. That's especially considering the fact that the two-dozen or so cases mentioned in the PwC study are a small percentage of the universe of U.S.-registered foreign firms. According to Lamont, there are approximately 1,400 foreign companies listed on U.S. exchanges.
In addition, the percentage of cases against foreign firms is smaller than those against U.S. companies. Last year, 1.9 percent of total domestic registrants were subject to securities class action lawsuits, Lamont clarified to CW in an email. Suits against foreign companies represented approximately 1.1 percent of all foreign registrants listed on U.S. exchanges.
Carton
According to Bruce Carton, executive director of Institutional Shareholder Services' Securities Class Action Services, the numbers aren’t quite large or steady enough to be able to draw strong conclusions.
“I don’t think there’s anything really startling here,” said Carton. “If it went down to 10 next year, I don’t think anyone would be stunned. The most you could say is that the levels from 2002 to the present seem to be a clear step above what you saw from 1996 to 1999.”
Globalization Of Litigation
Lamont at PwC disagrees. "A combination of closer cooperation between U.S. and foreign regulators and more frequent reviews of foreign filings as required by Sarbanes-Oxley, will result in increased exposure for companies," wrote Lamont in an email to CW.
Frackman
Other experts agree with her.
Andrew Frackman, a partner in the New York office of O’Melveny & Myers, said his firm is in fact seeing an increase in securities class actions against non-U.S. issuers, particularly those based in Asia.
“As the world economy continues to globalize, and more foreign companies seek to access the U.S. capital markets," he said, "we will see more securities fraud actions against foreign companies that are registered in the U.S. and traded on U.S. exchanges.”
Another reason private shareholder actions against foreign companies are on the rise, Frackman says, is because little opportunity exists to sue many of the companies in their home country. “Most European countries do not offer the same opportunities for private actions, for a variety of reasons, including the lack of a contingency fee system.”
Frackman also points to “the importance of U.S. markets, the use of them by non-U.S. companies to seek investors and financing, and the substantial size of many of these foreign companies” as a reason that the investigations and suits will stay on the rise.
PwC's Lamont also notes that the number will most likely continue to increase as Sarbanes-Oxley mandates more frequent reviews of foreign filings. "The unknown consequences of reporting on internal controls under SOX Section 404, and the conversion throughout Europe to International Financial Reporting Standards in the next year, represent other potential areas of risk where companies could fall foul of laws and regulations."
And while Carton at ISS isn't convinced the 2004 numbers are necessarily indicative of a meaningful trend from last year to this year, he does agree that the study at least shows a general, longer-term increase in litigation against foreign companies. “Clearly, the big foreign companies are not immune to the accounting problems that big U.S. companies face,” said Carton.
Auspitz
Jack Auspitz, a partner at the law firm of Morrison & Foerster, agrees that the number is up for now, but thinks it may actually decrease over time as foreign firms become more familiar with U.S. litigation exposure issues and trends, and subsequently protect themselves better.
“Foreign issuers sometimes are not sophisticated about the U.S. shareholder litigation industry, where any bad news that causes the price of the stock to fall can lead to the filing of a complaint," notes Auspitz. "They are often more concerned with the requirements of their home country than with the legal practices in jurisdictions that seem very foreign to them, in every sense of the word.”
As a result, companies oversees can mistakenly assume that certain rules or regulations are not applicable to them, or that their physical location keeps them under the radar and out of harm's way. “Occasionally, foreign issuers think they are immune from U.S. litigation because of the difficulty of serving them or enforcing a judgment,” he says.
However, notes Auspitz, as those companies become more familiar with U.S. litigation issues, their knowledge of—and compliance with—regulatory mandates and class-action defenses may make litigation less likely over the long haul. “As they become more attuned to the lawsuit consequences of being listed for trading on a U.S. exchange," notes Auspitz, "the number of lawsuits may decrease.”
The complete PwC study is available from the box above, right, as are related resources.
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