Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010)-- a case where SCOTUS ruled that the antifraud provisions of the federal securities laws applied only to securities purchased or sold in the United States-- was supposedly a catalyst that would issue a new era of litigation involving applying U.S. law in foreign courts. See, for example, Sidestepping ‘Morrison’ through foreign law claims and litigation in Financier Worldwide and Can Morrison Be Outflanked?: How Foreign Purchasers Are Suing in U.S. and Foreign Courts in the Columbia University Law School Blog. According to these predictions, post-Morrison plaintiffs would attempt to reap the fruits of U.S. federal securities law in foreign jurisdictions.
These predications, however, failed to foresee that stockholders may actually seek to apply the local law whereas that company and officers will fight to apply the foreign law. This was the situation in Hazan v. Ceregon Networks, Ltd. There, Israeli shareholders filed a class-action lawsuit asserting claims sounding in fraud based on alleged false and misleading statements in the company’s SEC filings and public statements during the period between July and October 2014. These alleged misrepresentations caused the class plaintiffs to purchase shares that were exchanged on the Tel-Aviv Stock Exchange (TASE).
The parties disputed what law is applicable to the substantive claims of the shareholder, Israeli law or U.S. federal securities law. The company and officers argued that -- as a company listed on TASE and Nasdaq, a so-called "dual-listed" company, U.S. law should apply. The stockholders, on the other hand, asserted and argued that Israeli law should apply.
Israeli law appeared to support the company's position. For example, in Cohen v. Tower Semiconductors, Ltd., the Tel-Aviv District Court was presented with an almost identical problem that was at issue in Ceregon: What law applies to a dual-listed company with respect to liability for breaches of the company's reporting obligations in Israel? The court in Cohen v. Tower Semiconductors, Ltd. concluded that the applicable law is the foreign law, not Israeli law. This decision was appealed to the Israeli Supreme Court, the appellants withdrew the appeal before any precedential ruling was issued. Notably, however, at oral argument, the Supreme Court justices seemed to agree with the reasoning and conclusion of the court in Cohen v. Tower Semiconductors, Ltd.
At first, the Ceregon court, concluded otherwise. In a thorough and in-depth decision, The court ruled that there is no statutory basis for applying foreign substantive law to a securities litigation involving dual-listed corporations. While it is true that foreign law governs the method a dual-listed company must draft and publish their reports, as well as the scope of the public reports, it does not apply to substantive issues such as liability for fraud or misrepresentations.
Interestingly, the court found that requiring Israeli litigants to assert, prove and apply foreign-based securities laws and regulations would be costly, confusing and non-sensical. This type of ruling is important for other categories of cases where the Israeli Supreme Court has ruled that foreign law would apply, i.e., cases against Facebook, Google and the like.
The company and its officers didn't give up. They field a motion for reconsideration which was brought before a 3-judge panel. The panel reversed the court's previous decision and concluded that, for "dual-listed" companies, the foreign law applies both to reporting requirements and substantive causes of action.
In practice, that means that Israeli stockholder who seek to bring securities fraud claims against Israeli-U.S. dual listed companies, will need to engage expert legal counsel to file a report on the various causes of action available, i.e., a Rule 10b-5 claim, significantly increasing the expenses of the stockholders.
The court's ruling on reconsideration is most likely to remain the correct application of the law. If so, we are likely to see in the near future Israeli courts adjudicating Rule 10b-5 securities fraud actions. These types of cases, in turn, will likely be battling grounds for the parties' foreign/U.S. legal experts. In the end, the court will need to choose the more convincing expert report and/or delve into the complicated world of securities fraud law on its own and formulate its own opinion.
