Foreign companies facing U.S. securities class actions by owners of unsponsored American Depositary Receipts got good news on Thursday from the 9th U.S. Circuit Court of Appeals.
The court denied a Robbins Geller Rudman & Dowd petition for leave to appeal a Jan. 7 trial court decision that rejected certification of a class of Toshiba Corp ADR investors.
Robbins Geller, as I’ve reported, contended that the appeals court should step in to review the class certification ruling because the trial judge, U.S. District Court Judge Dean Pregerson of Los Angeles, committed a serious legal error by creating a new test to determine whether a securities transaction is extraterritorial, and therefore not actionable in U.S. courts under the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank.
But 9th Circuit Judges Richard Paez and Paul Watford apparently agreed with Toshiba’s lawyers from White & Case, who argued that Pregerson’s decision not to certify the class was based not on a legal issue but on the specific facts of the ADR purchases by Robbins Geller’s client. (ADRs, as I’ll explain below, are U.S.-traded securities based on the common shares of companies listed on foreign stock exchanges.) In denying review, the 9th Circuit cited its stringent requirement, from 1985’s Chamberlan v. Ford Motor Co, that interlocutory appeal of class certification decisions is warranted only when the ruling is “manifestly erroneous.”
It’s obvious why Toshiba benefits from the appellate court’s refusal to give Robbins Geller a chance to revive classwide claims of Exchange Act violations. (Pregerson left open the possibility that investors can sue as a class for violations of Japanese securities laws.) But Toshiba isn’t the only beneficiary of the 9th Circuit’s order: Other foreign companies can capitalize on the same litigation tactics that White & Case used to defeat class certification.
The key to that strategy was what I’ve previously called a clever bit of repurposing of extraterritoriality arguments. In case you’ve forgotten the long history of the Toshiba case, Pregerson initially dismissed the class action because he found investors had not engaged in a domestic transaction with Toshiba, which had no role in creating or offering the unsponsored American Depositary Receipts at issue in the case.(Foreign companies can sponsor ADRs based on their common shares, but unsponsored ADRs are created by U.S. depository institutions that issue tradeable certificates based on common shares of companies whose stock is listed on foreign exchanges.) The 9th Circuit revived the case in 2018, ruling that the class could proceed if investors’ ADR trades were domestic transactions, regardless of Toshiba’s involvement.
On remand (after Toshiba tried and failed to get the U.S. Supreme Court to review the 9th Circuit ruling), Pregerson denied the company’s motion to dismiss the class action. The judge ruled that Robbins Geller’s client, an automotive workers’ pension fund, had adequately alleged that it acquired Toshiba ADRs in a domestic transaction, after its New York-based advisor placed an order for the securities with New York-based traders at Barclays Capital Inc.
But Toshiba and White & Case refused to abandon the extraterritoriality issue when Robbins Geller moved to certify the investor class. After intensive discovery from the pension fund, its investment advisor and Barclays, Toshiba argued that the fund’s ADR deal actually occurred not in the U.S., when it placed an order for the securities, but in Japan, when Barclays acquired the Toshiba common shares that it delivered to Citigroup Global Markets Inc, a registered depository institution, for conversion into ADRs. The pension fund, White & Case argued, could not serve as a class representative for other Toshiba ADR investors because it had acquired its ADRs in a foreign transaction and was thus not a typical class member.
Moreover, Toshiba said, determining the actual location of the pension fund’s ADR deal took more than a year of discovery from the fund, its advisor and its brokers. That fact-intensive process, it argued, proved that ADR investors’ claims are too individualized for classwide litigation.
Pregerson did not address the predominance question, holding only that the pension fund was not a typical class member. But in client alerts about his decision denying class certification, two law firms homed in on Toshiba’s argument that ADR trading is too fact-specific for class litigation.
“Even if it is uncertain whether a plaintiff’s transactions were foreign or domestic, the typicality requirement can be defeated if resolving that issue will require considerable amounts of their time and prejudice absent class members,” Cleary Gottlieb Steen & Hamilton wrote in a Jan. 21 alert.
Paul, Weiss, Rifkind, Wharton & Garrison asked the big question in its Jan. 28 report on Pregerson’s class certification ruling. “How can a court certify any class of unsponsored ADR purchasers when a fact-intensive inquiry will be required to determine on an investor-by-investor basis which (if any) investors incurred irrevocable liability in the United States and are properly part of a class?” the alert said. “This issue likely impacts, among other things, the ascertainability and predominance requirements of Rule 23, and could render class treatment inappropriate in securities class actions involving unsponsored ADR holders.”
Robbins Geller can still appeal Pregerson’s class certification decision, but not until there’s a final judgment in the case. Until then, the 9th Circuit’s rejection of an interlocutory appeal means foreign companies facing ADR class actions should continue raising extraterritoriality arguments against class certification.
Toshiba counsel Christopher Curran of White & Case declined to comment. Pension fund lawyers Joseph Daley and Willow Radcliffe of Robbins Geller didn’t respond to my email query.