Limiting ADR liability under US securities laws
There is a growing emerging risk of securities class action lawsuits for international large cap companies with ADRs in the US. This situation is ongoing and developing, and companies need to understand their risk and look to mitigate their exposure.
International law firm Norton Rose Fulbright and AIG have produced a paper looking at how companies can take practical steps to protect themselves. For example, how many companies are aware they have an unsponsored ADR programme?
Some context
- Public companies outside the US often avoid selling their securities in the US in order to limit their exposure to liability under US securities laws. It was thought that a company would be unlikely to face lawsuits from the plaintiffs’ bar as long as it was not actively selling securities in the US, even if its securities were being traded as American Depository Receipts (ADRs*) on US over the counter markets
- A recent US appellate court decision (Stoyas v Toshiba Corp) found that a foreign issuer could be liable under US securities laws for a sale of its securities in the US, even if the company was not involved in the sale (e.g. an ‘unsponsored’ ADR)
- AIG have been monitoring case developments and discussing the associated risks to clients for some time and have produced a white paper highlighting the need for specialist D&O claims experience
- In January this year the lower court in the Toshiba case applied the appellate court’s test for the first time and held that the plaintiffs could proceed with their lawsuit. As a result foreign companies should note that courts may subject them to potential liability even when they do not actively sell securities in the US
A summary of the recommendations for companies from the NRF/AIG paper
- Do not list ADRs on a US exchange
- Monitor and manage relationships with depository institutions. To minimise the risk of liability related to the sale of the unsponsored ADRs a foreign company should take steps to limit its facilitation of the sale of ‘unsponsored’ ADRs
- Limit direct interaction with potential ADR investors. A foreign company should consider limiting its interaction with potential purchasers of ‘unsponsored’ ADRs
As a result of these developments, It is likely that claims that courts would have quickly dismissed in the past will likely become more frequent, more difficult and more expensive.
* An ADR (American Depository Receipt) is a receipt for a negotiable certificate representing a beneficial interest in a specified number of shares in a non US company issued by a U.S. depository institution, usually a bank. ADRs are a mechanism whereby U.S. investors can purchase stock in companies abroad. International companies can benefit from ADRs, attract US investors and capital—without the process and expense of listing on the US stock exchange.