Becoming embroiled in civil litigation in the U.S. is a common concern of companies listed on U.S. markets but headquartered elsewhere. This concern is understandable. After all, statistics consistently show the U.S. has some of the highest volumes of litigation in the world, whether measured on an absolute or per capita basis.
Many factors contribute to that volume, including the perceived advantages for parties suing in the U.S. One perceived advantage is the prospect of a jury trial. This feature of U.S. litigation is generally absent from European civil law systems, and has been severely curtailed in other common law systems, including England and Wales, Canada and Australia. Although juries typically decide fewer than 1% of U.S. civil cases, the mere possibility of a jury trial can encourage plaintiffs to sue and defendants to settle.
The U.S. is also perceived to be an attractive forum for plaintiffs because of the availability of contingency fee arrangements, whereby a plaintiff only has to pay its lawyer from the proceeds of any recovery. This fee arrangement, which is tightly circ*mscribed or even prohibited in many other jurisdictions, encourages lawyers to file dubious claims that defendants might settle to avoid litigation costs and risks, and allows plaintiffs to pursue litigation essentially risk free. Costs rules are another reason the U.S. is seen as a more attractive forum in which to sue. Elsewhere, “loser pays” rules are common, while in the U.S. each side typically bears its own costs. Finally, litigating in the U.S. can allow plaintiffs access to expansive disclosure of documents and pre-trial testimony, often unavailable as broadly in other forums. This can significantly increase the costs and disruptions of defending a case, thereby increasing the likelihood of plaintiffs obtaining a favorable settlement.
Given the burdens that U.S. litigation can impose, it is important for companies to consider where they are most at-risk. This can trigger proactive measures to minimize those risks where possible. To aid in this endeavor, below are some of the most common sources of civil litigation risk for non-U.S. companies listed in the U.S., along with potential strategies to help mitigate those risks.
Securities Litigation
U.S. capital markets remain the largest and most developed pool of capital in the world. Securities litigation, however, continues to be among the top civil litigation risks for companies raising capital in the U.S. In 2022, 208 securities class action suits were filed in the U.S., including 34 against non-U.S. issuers.
Securities laws expose companies offering or listing securities in the U.S. to the risk of civil litigation in a variety of ways. These claims can be particularly concerning for non-U.S. companies because they are typically brought by investors seeking aggregate damages on behalf of all investors in the company’s securities. Senior executives and directors should explore these issues when considering the risks of listing on U.S. markets, particularly given that, in recent years, nearly one-fifth of companies undertaking an initial public offering (IPO) in the U.S. faced a U.S. securities class action within four years of the IPO.
For example, securities offerings can give rise to claims under the Securities Act if a registration statement or prospectus. is alleged to contain an untrue or misleading statement. These claims are described as “strict liability” because the plaintiff need not establish fraudulent intent. Claims can be brought against the company, the company’s directors and anyone who signed the registration statement. For board members of non-U.S. companies, defenses might include not only the “due diligence” and other defenses available to U.S. directors, but also potentially an additional defense if, under their legal system of organization, their functions are not equivalent to a U.S. director’s.
Securities fraud claims also pose significant litigation risk for U.S.-listed companies, with about 20 to 25% of securities fraud class actions being filed against non-U.S. companies. Importantly, these claims can be brought against companies and their senior officers in connection with secondary market trading. Exposure can be high given that class-wide damages approximate market capitalization losses occurring in response to negative news events supposedly revealing fraud. Claims can be based on public statements, including offering memoranda, annual and quarterly reports, press releases, press conferences and media statements. While the U.S. Supreme Court has limited plaintiffs’ ability to file securities claims against non-U.S. issuers for shares acquired by non-U.S. persons on non-U.S. exchanges, securities fraud claims remain possible where investors bought on a U.S. exchange. Although U.S. courts have generally prohibited claims based on unsponsored American Depositary Receipts (ADRs), they have permitted claims based on sponsored Level I ADRs that are traded over-the-counter rather than exchange-traded.
In addition to the risk of private lawsuits, the Securities and Exchange Commission (SEC) may initiate civil enforcement actions in pursuit of monetary penalties or other remedies based on these and other U.S. securities laws.
Derivative Actions
The past few years have seen a rise in the number of derivative actions filed in U.S. courts by shareholders purporting to assert claims on behalf of non-U.S. companies that their directors and officers violated fiduciary duties. For example, actions have been filed in New York State court against directors and officers of large European corporations, including Barclays, Credit Suisse, Deutsche Bank, Novartis, Société Générale, Standard Chartered, Volkswagen, Bayer and UBS. The recent increase in these actions followed a New York appellate decision declining to apply Cayman Islands legal prerequisites to bringing a derivative action that the U.S. court deemed non-substantive. While recent decisions rendered by New York courts, including on whether the U.S. is an appropriate forum, have poured some cold water on these efforts, this risk remains.
Sanctions
The number of countries, entities and individuals around the world subject to U.S. economic sanctions increased significantly during 2022. These sanctions are enforced primarily by the U.S. Treasury Department’s Office of Foreign Assets Control, including through enforcement actions seeking monetary penalties. This can be a particularly concerning source of litigation given that sanctions violations are typically not intent-based and can be triggered based on very limited U.S. connections. Moreover, U.S. sanctions laws can be challenging to monitor because they reflect constantly evolving national security concerns and are documented through a complex web of statutes, regulations, executive orders and rules, as well as licenses reflecting exceptions and exclusions.
Foreign Corrupt Practices Act
Payments and gifts to non-U.S. government officials to obtain business or commercial advantages can create a significant enforcement risk under the U.S. Foreign Corrupt Practices Act (FCPA). In addition to U.S. criminal exposure, of the 25 FCPA-related enforcement actions filed in 2022, more than a quarter were filed by the SEC, which describes enforcement of the FCPA as “a high priority area.” Total financial penalties imposed on companies more than quadrupled in 2022 compared to 2021, reaching $1.5 billion.
Data Privacy
While the U.S. does not currently have a comprehensive federal data privacy law like the European Union’s General Data Protection Regulation (GDPR), several states (California, Virginia, Colorado, Connecticut and Utah) have new comprehensive privacy legislation entering into force in 2023. Three states (Illinois, Texas and Washington) have also previously enacted biometric data privacy laws. Violations of these laws could give rise to class action litigation and civil enforcement action by state attorneys general or by the new California Privacy Protection Agency.
Mitigation Strategies
Given the financial costs and management distraction of U.S. litigation, non-U.S. companies listed in the U.S. should consider proactive measures to reduce their risks. Risk mitigation strategies include those listed below.
Use of a U.S. litigation risk matrix as part of risk planning. This can list sources of U.S. litigation risk in light of the company’s operations and profile, and can be used as a tool for risk monitoring and mitigation.
U.S. securities litigation planning. Boards, senior officers and others responsible for the non-U.S. company’s public statements can receive training on U.S. securities law risks and requirements. These risks are heightened when engaged in a securities offering. Boards should also ensure that their director and officer liability insurance policies remain suited to addressing the evolving risks of U.S. securities litigation and consider public offering of securities insurance for the particular risks associated with securities offerings.
Organizational documents. Recent U.S. court decisions suggest that forum selection clauses within companies’ organizational documents, such as articles of incorporation or association, can protect against the risk of U.S. derivative actions by helping ensure that such litigation must be brought in a company’s home forum instead of the U.S.
Sanctionscompliance. U.S. sanctions law risks are most effectively mitigated by comprehensive sanctions compliance programs, including robust due diligence procedures, developed using a risk-based approach. Similarly, companies can minimize FCPA risks by having clear, simple and easy-to-apply policies in place for personnel to follow for payments, focusing on higher risk jurisdictions, and having accounting systems and other programs designed to evaluate and ensure compliance with the FCPA and other extraterritorial anti-bribery laws, including the U.K. Bribery Act.
Privacy policies. Regularly updating data management and protection policies is critical to avoid running afoul of new privacy legislation appearing across the U.S. The growing patchwork of legislation poses challenges from a compliance perspective and requires proactivity in designing and updating compliance programs.
While non-U.S. companies listed in the U.S. can never completely expunge U.S. litigation risk, undertaking frequent risk assessments can represent the most effective technique for identifying risks and implementing mitigants. Ultimately, risk-reduction strategies all entail costs and resource commitment. However, in the long run, they can pay for themselves by avoiding the financial and reputational costs of U.S. litigation and its disruption to business operations.
David Reinis a partner andEric Andrewsis an associate at
Sullivan & Cromwell LLP.
