- Scope of the law applicable under the Rome II Regulation — Culpa in Contrahendo — Class actions — Jurisdiction under the Brussels I Regulation
Seeking a Coherent Choice of Law Standard
22.01 In today’s world, the pursuit of collective litigation almost invariably comes in an international context. Not only do securities issuers operate across boundaries, but also investors increasingly target foreign markets. Against this backdrop, a prominent market deterioration like the recent crisis brings liability questions to (p. 402) the surface which are no longer confined to simply one jurisdiction, but rather span the globe.2
22.02 In this context, one question comes into the limelight, which had somehow been neglected in the legal discussion thus far: in view of the increasingly international settings of liability claims, it is often unclear according to which substantive securities law investors can pursue their claim against European or United States issuers. At first sight there seem to be three plausible possibilities: the law of the State where the securities have been bought; the law of the State where the issuer is located; or the law of the investor’s residence State. However, as we shall see, there is no universal consensus as to which is the most appropriate of these rules.
22.03 Given recent regulatory efforts, this is surprising. The European Commission’s Financial Services Action Plan (FSAP)3 has marked a new stage for European capital markets law. For the first time, we can now speak of a uniformly regulated European capital market. This is however not true for the corresponding liability rules; these are still broadly drafted general principles without any clear guidance. This is why significant differences between the Member States’ legal standards remain in this field.
22.04 At the same time, however, the European Union has adopted the Rome II Regulation4 and thereby for the first time harmonized the European private international law regimes for non-contractual liability. Whereas there is uniformity on the conflict of laws side now, it is still unclear to what extent and how it applies to issuer liability.
22.05 On the other side of the Atlantic, the United States Supreme Court decided the case of Morrison v National Australia Bank in June 2010, thereby for the first time elaborating on questions concerning the international scope of the United States securities regulation.
22.06 These developments have grown in importance since the international financial crisis. The United States is currently witnessing a wave of class actions, also involving European issuers;5 and in Europe too a multitude of lawsuits are (p. 403) pending.6 Above all, for internationally active issuers operating in various jurisdictions and whose securities are possibly traded on several markets, the question of the applicable law for their liability on the capital markets is gaining in importance. But also for investors the question arises, where and under which legal system can they bring litigation for their losses? This question concerns the applicable law as well as the means of collective redress provided by the different fora.
22.07 In the following, this chapter will seek to analyse the question of the international application of securities liability. Departing from the traditional tort law characterization7 of issuer liability, we will develop a concept where the primary task of capital markets responsibility can be seen in its role in corporate governance of the enterprise. On this basis, we propose to bundle the law that is applicable to a capital markets duty with the law that applies to the corresponding liability rule.
22.08 We proceed as follows: first, a short comparative section will sketch out the international securities class action regimes (section II) and the international application of the relevant primary duties (section III), before we enter into the legal discussion (section IV) and then present our own solution (section V). Finally, we will elaborate on the implications and the importance of our suggestion (section VI).
22.09 To begin with, it is important to recall the various collective action regimes that may play a role in international securities litigation. Our main examples of capital markets liability—prospectus liability, liability for misleading disclosure by issuers of securities admitted to trading on a regulated market, and the violation of disclosure duties in the context of public takeovers8—may be the subject of various group litigation proceedings in different countries. In the following, we will shortly discuss class action rules in the United States, England, Germany, and Switzerland and review EU plans in that field.
22.10 The most important example of collective redress in securities law is the class action pursuant to Rule 23 of the Federal Rules of Civil Procedure (FRCP) in the United (p. 404) States. Most claims assert liability under the SEC Rule 10b-5 that allows for class actions of investor groups.9 This is mainly due to the ‘fraud on the market’ theory, which was developed by extensive case law and which relaxes the requirements for proof of reliance by relieving the investors from establishing that they had individual knowledge of the incorrect stock market price.10 This development has provoked a wave of securities class action liability suits since the late 1980s.11
22.11 Even though England and Wales introduced a sort of opt-in class action— so-called group litigation orders (GLO)—in 2000,12 until now, it has not been used in the context of securities litigation.13 There are also ‘representative actions’ according to part 19.6 of the Civil Procedure Rules, under which a claim may be pursued on behalf of a properly identified class of persons with the same interest in a claim.14 The English courts interpret this tool rather restrictively, however, and the procedure is rarely used.15 There is consequently no experience on how to handle transnational collective securities litigation.16
22.12 German civil procedure law does not provide for class actions. However, in 2005 a special Act (Kapitalanleger-Musterverfahrensgesetz) introduced ‘model proceedings’ in capital markets liability cases.17 If at least 10 plaintiffs allege damages caused by the same misleading capital market information, one of them is elected ‘model plaintiff’ in an intra-court proceeding initiated directly before the Court of Appeal. In this model proceeding, all matters concerning the whole group of (p. 405) plaintiffs are litigated, the judgment principally binding the whole group.18 While there is no doubt that German courts would apply foreign law in the context of model proceedings—even though to the authors’ awareness no such case has occurred so far—, it is disputed whether an annex law to the model proceedings Act, stipulating the exclusive local and international jurisdiction of the courts at the place of the issuer’s incorporation, bars German courts—as far as they are not bound by the Brussels I Regulation—from recognizing and executing class action judgments by foreign courts against German-based issuers.19
22.13 Switzerland used to have 26 different cantonal rules of civil procedure. It only recently passed a federal act of civil procedure, which entered into force on 1 January, 2011.20 Neither the old cantonal rules nor the new Act provide for special procedures of collective redress.
22.14 The European Commission has contemplated plans for opt-in collective actions in various fields of business law. In 2008 it published a White Paper21 on anti-trust litigation, and recently conducted a public consultation considering collective redress mechanisms in financial services law.22 However, so far no concrete plans have been promulgated in the field of securities liability.23
22.15 Before we discuss the question of international capital markets liability, it is appropriate to briefly consider which rules of private international law apply to the rules of disclosure duties themselves, the violation of which may trigger a liability claim.
22.16 In the European Union, the directives on company law and securities regulation are primarily concerned with allocating supervisory and regulatory jurisdiction to different Member State competent authorities. The actual conflict of laws rules follow (p. 406) from this allocation but still work in the same manner as ordinary and unilateral applicability regimes. The disclosure rules of company law found in the Disclosure Directive (First Company Law Directive), the Directives on annual accounts and consolidated accounts (Fourth and Seventh Company Law Directives), and the Capital Directive (Second Company Law Directive) are governed by the lex societatis. This corresponds—generally accepted by now24, following the European Court of Justice judgments Centros, Überseering, and Inspire Art25—irrespective of the location of its ‘head office’, to the jurisdiction of the company’s registered office, even if the corresponding company carries out its activities exclusively in a Member State different from its State of incorporation. This corresponds to the law of the Member State in whose register the company is registered according to Article 3 of the First Directive.
22.17 Most of the disclosure duties found in European capital markets directives—ie for instance the Prospectus Directive, Market Abuse Directive, and Takeover Directive—equally point to the registered office of the issuer,26 whereby exceptions exist.27 The Takeover Directive contains a split regime: in the case of a stock exchange listing in the State of the registered office, the rules on the offer document are governed by this State’s law. If, however, the target company is exclusively listed on a regulated market of one or several other Member States, the offer document is governed by the law of the Member State in which the admission has first taken place or which the target company (in the case of several third-country listings) has selected according to Article 4(2) of the Takeover Directive. Matters of company law and the definition of the control threshold which triggers the mandatory bid obligation are governed by the law of the State where the offeree company has its registered office (Articles 4(2)(e) and 5(3) of the Directive).28
(p. 407) 22.18 The United States does not have a written private international law for the capital markets. American securities regulation, especially the Securities Act 1933, is a transaction-based regulatory regime. Consequently, also in the field of conflict of laws, the transaction is at the centre of attention. Generally, the Restatement (Third) of Foreign Relations Law of the United States distinguishes between three categories of jurisdiction: jurisdiction to prescribe, jurisdiction to adjudicate, and jurisdiction to enforce.29 With particular importance for securities regulation, section 416(1) contains detailed rules, in which situations the United States may exercise jurisdiction to prescribe.30
22.19 For a long time, the United States courts did not clearly distinguish between the jurisdiction to prescribe and the question whether the law Congress had enacted governed an international case at hand.31 In June 2010, however, the Supreme Court issued a landmark decision, according to which it is a matter of statutory construction whether a certain securities law is meant to apply only in the territorial jurisdiction of the United States or beyond.32 The decisive setting of points for the applicability of American disclosure duties is therefore contained in substantive law, whereby the Supreme Court held that there is a presumption against extraterritoriality, ‘When a statute gives no clear indication of an extraterritorial application, it has none.’33
22.20 To understand the application of United States securities laws to foreign issuers, it is necessary to briefly consider how such issuers are treated in the framework of United States securities regulation—ie within the substantive law.34 In practice, most foreign issuers do not distribute their securities directly in the United States, but issue so-called American Depository Receipts (ADRs).35 Under the Securities Act 1933, foreign private issuers can register their securities with a specific procedure and are then subject to the regulation of the SEC, albeit in a milder variant.36(p. 408) Foreign issuers who do not want to register with the SEC and investors who want to resell securities from unregistered foreign issuers in the United States can do so only within the limits of the safe harbour rules of Regulation S. By contrast, the obligation to register under the Securities Exchange Act 1934 follows the stock exchange listing or the number of investors. Unlisted foreign issuers are exempt according to Rule 12g3-2(a) if their securities are held by less than 300 persons resident in the United States. There is no obligation to register for issuers who are admitted to trading on a stock exchange in their home jurisdiction and who publish all periodical reports required by that law in English on their website.
22.21 Together, these provisions create in practice three types of ADR programmes for foreign issuers: on the first level, an off-exchange ‘over-the-counter’ (OTC) trading can be established without any registration obligations, as long as English language versions of the periodical reports required by the home jurisdiction are published on the website of the company. On the second level, a foreign issuer can request admission to be listed on a United States stock exchange, whereupon it is required to publish annual reports. On the third level, an issuer can raise capital in the United States by additionally registering with the SEC.37 Additionally, ADRs can be registered by third parties, eg brokers. In this case reduced requirements apply, and the issuer is not subject to any disclosure duties.38
22.22 The takeover obligations only apply to securities which are registered with the SEC. For foreign issuers additional material relaxations apply: takeover bids for shares of ‘tier I’ issuers, having 10 per cent or less United States shareholders, are exempt from most information obligations if the bidder offers United States shareholders terms at least as favourable as those offered to other shareholders (equal treatment). ‘Tier II’ issuers, with a United States shareholding between 10 and 40 per cent, are subject to most obligations; there are a few exceptions only to avoid conflicts with the law of origin.
22.23 In the European context, the problem of the applicable liability rules has rarely been at the centre of attention during the negotiations on the mentioned legal instruments, or has sometimes even been expressly excluded from their scope because of its difficult character and the complicated issues of private international law. For instance, upon the adoption of the Transparency Directive, the European Council (p. 409) made the following statement, ‘The Council notes that the current rules on the law applicable to non-contractual obligations need to be examined further with regard to corporate liability in the situations covered by Article 6 of Directive 2003/71/EC and Article 7 of the present Directive’.39 Nevertheless, this issue has not been considered by the recent review of the Prospectus Directive.40
22.24 In the absence of international consensus, the different jurisdictions offer remarkably different choice of law rules and solutions. As regards the conflict of laws problem, most jurisdictions seem to favour a tort law classification.41 In the following, the rules of Swiss, United States, and European Union law shall be discussed as examples.
22.25 As far as the authors are aware, Switzerland is the only jurisdiction with a codified, universal conflict of laws rule for ‘claims originating in a public issue of equity holdings and bonds’. Article 156 of the Swiss law on private international law (IPRG) states that ‘claims originating in a public issue of equity holdings and bonds on the basis of prospectus, circulars and similar publications can be pursued according to the law applicable to the company or according to the law of the country where the issuance has taken place’. This alternative rule allows the victim to assert his prospectus liability claim at his own choice according to the lex societatis or the law at the place where the information was published.
22.26 In the United States, issuer liability is categorized as a matter of public law because of its inherent violations against public authority-based disclosure laws. According to this view, an investor-plaintiff does not only assert his own rights, but also enforces the public law and order of the State.42 Whilst the courts traditionally held the view that international jurisdiction of United States courts ultimately decides on the applicability of United States law (synchronism),43 the United States (p. 410) Supreme Court ruled in the 2010 case of Morrison v National Australia Bank that the extraterritorial applicability of United States security laws is a merits question, namely about the scope of a certain provision.44 According to Morrison, if United States law is not applicable, United States courts shall reject the claim according to Rule 12(b)(6) FRCP for failure to state a claim.45 A standard textbook on securities regulation gets to the heart of the consequences of both approaches: ‘A federal court will either apply U.S. securities law, or […] it will dismiss the claim. The option of applying foreign law is not available.’46
22.27 Additionally, United States courts require personal jurisdiction for foreign defendants, which is, however, generally fulfilled if an issuer distributes its securities in the United States.47
22.28 There is no choice of law rule in the area of issuer liability. The Morrison decision of the United States Supreme Court caused an about-face in this field of law, overruling the settled case law of decades, mainly developed by the Court of Appeals for the Second Circuit. The Supreme Court ruled in Morrison that it is a matter of statutory construction whether a liability rule has extraterritorial application, the interpretation being guided by the aforementioned presumption against extraterritoriality.48 As regards Rule 10b-5 liability the United States Supreme Court took the view that it only applies to transactions in securities listed on domestic exchanges, and domestic transactions in other securities. Justice Scalia, who delivered the opinion of the Court, expressively referred to potential conflicts with foreign law that this new criterion sought to avoid.49
(p. 411) 22.29 While this ruling elucidates the basic rules governing the extraterritorial applicability of United States securities liability, important issues remain unsolved.50 First, since the Morrison case involved only foreign investors, who sued a foreign issuer and had also bought their securities abroad (so-called ‘foreign-cubed’ securities fraud action51), the Supreme Court did not dwell on the question whether United States investors, who bought National’s ADRs on a United States stock exchange, could have brought their case under Rule 10b-5. When taking the ruling seriously, there seems hardly any doubt that investors, who buy ADRs in the United States on an exchange or over-the-counter (OTC), fulfil the requirements of the Morrison test. While in most cases this seems hardly objectionable, in constellations where ADRs are solely issued by United States brokers this result is questionable. Second, it was not entirely clear whether the ban of Morrison extends to transactions of United States residents on foreign exchanges in securities that were not listed in the United States (so-called ‘foreign-squared’ securities fraud action52). According to Morrison, Rule 10b-5 applies to domestic purchases and sales, but the Court did not specify whether this pertains only to the venue of the trade or also to the location of the person giving the purchase or sale order. Yet, considering that according to Justice Scalia, ‘it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the US’53 and given Morrison’s explicit goal of forestalling conflicts with foreign law, it seems safe to assume that foreign-squared claims were not intended to be covered by Rule 10b-5. This tendency has now been confirmed by a number of recent decisions.54 Third and most important, as a consequence of the new approach established in Morrison every legal provision has to be scrutinized separately whether, ‘there is the affirmative intention of the Congress clearly expressed to give [that] statute extraterritorial effect’.55
22.30 In Morrison, the Court already remarked in an obiter dictum that the Securities Act of 1933 had the same focus on domestic transactions as Rule 10b-5 and—in accordance with the interpretation given by Regulation S—did not include (p. 412) sales that occur outside the United States.56 This suggests that the Supreme Court would not only limit those prospectus liability provisions that explicitly relate to the registration of securities with the SEC to domestic transactions, but also claims based on section 12(a)(2) Securities Act of 1933, which literally comprises any prospectus or oral communication.
22.31 In the situation of takeover bids, the international applicability before Morrison followed the ‘effects’ test. After Morrison, it can be expected that only offers that are directed to United States ADR holders will fulfil the ‘transaction’ test and thus trigger the application of Rule 10b-5. However, it is unclear whether this principle extends to section 14(e) Securities Exchange Act 1934. This provision applies to untrue statements etc ‘in connection with any tender offer’, is not restricted to equity securities and it does not matter whether the target companies’ securities are registered with the SEC. This broad scope of section 14(e) seems to leave the possibility of catching the abovementioned case where the offer does not relate to the ADRs but only to the underlying (foreign) shares. However, it seems safe to assume that after Morrison the courts will ask for some United States element in the tender offer, notably the existence of United States share- or ADR-holders being included in the offer, and be it via their depository bank.
22.32 The European Union has so far mostly refrained from harmonizing the liability regime for capital markets. Where it has made explicit rules, there has been only minimum harmonization. Even fewer standards existed in the area of private international law. There is no explicit choice of law rule for issuer liability in the secondary law concerning the capital markets.57 Before the Rome II Regulation was adopted, the private international law of non-contractual liability had not been harmonized.
22.33 For the first time, the Rome II Regulation now creates a harmonized system for the choice of law for non-contractual obligations in the European Union.58 It is, however, unclear if the specific field of securities liability falls within the scope of application of the Regulation. This is because the Regulation provides for several exceptions from its scope of application: according to Article 1(2)(c), the Regulation does not apply to ‘non-contractual obligations arising under bills (p. 413) of exchange, cheques and promissory notes and other negotiable instruments to the extent that the obligations under such other negotiable instruments arise out of their negotiable character’; moreover, Article 1(2)(d) exempts ‘non-contractual obligations arising out of the law of companies and other bodies corporate or unincorporated’ from the scope of application. The relevance of these exemptions will not be discussed in detail here; the majority view in academic literature is now that these exemptions do not apply to capital markets liability.59 It suffices here to add an argument that has not been considered so far: during the negotiations on the Regulation, the British government had argued for the inclusion of an explicit exception for the field of issuer liability in the text of the Regulation, but it was ultimately not successful with this request.60 From this, we can deduce that as a result, an exclusion for capital markets liability was not intended.61 In consequence, the scope of application of the Rome II Regulation includes also issuer liability.62
22.34 However, the Rome II Regulation was not drafted with specific reference to questions of capital markets liability.63 None of the choice of law rules in Articles 4ff of the Regulation fits explicitly for this purpose. The reason might be that the doctrinal classification of the liability rules themselves is completely different across the Member States.64
22.35 To be sure, there have been attempts to understand Article 12 of the Regulation (dealing with culpa in contrahendo) so as to encompass for instance prospectus liability.65 This approach, however, should be rejected. The Regulation’s intention is that Article 12 applies only to non-contractual obligations presenting a direct link with the negotiations prior to the conclusion of a contract.66 In the case of the (p. 414) purchase of securities, however, no negotiations between the issuer and the investor take place, and no contractual or quasi-contractual relationship exists between them.
22.36 When assessing the private international dimension of capital markets liability, there seems to be wide international consensus that it belongs to tort law. Thus it can be assumed that the characterization for the purpose of European law will not yield a different result. If this is correct, newly drafted Article 4 of the Rome II Regulation could be applicable.67
22.37 The basic rule in Article 4 leads to the law of the country ‘in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur’. The reference to the law of the country in which the damage occurs raises difficulties in cases of capital markets liability because it is a tort liability for pure economic loss and does not require any physical damage.68 Strictly speaking, one would need to determine the location of the funds that have been damaged.69 Because capital markets information concern investors all over the world, when applying these rules, the issuers would have to worry that the investors might sue them according to the law of their respective home countries. It seems that exactly this result is intended as far as general tort law is concerned: the Commission draft of the Rome II Regulation explicitly states ‘that the laws of all the countries concerned will have to be applied on a distributive basis, applying what is known as “Mosaikbetrachtung” in German law’.70 According to this Mosaikbetrachtung (mosaic theory), nuisances arising out of the relationship between a person and the environment that occur within different jurisdictions are to be judged according to the different legal systems respectively.71 He who acts in a way that has consequences in a different country has to face liability under the law of that country.72
(p. 415) 22.38 In case of capital markets liability this classification gives cause for serious concern: besides the extreme practical difficulties in applying the mosaic theory,73 the multitude of possible liability regimes would cause unanticipated problems for issuers.74 More importantly such a classification would run fundamentally contrary to the aim of integrating the European financial markets. Most of the existing secondary European Union law concerning capital markets is based on the FSAP of 1999.75 This plan aims to create a single European financial market with clear and predictable rules for issuers as well as investors. If the Rome II Regulation introduced an element of uncertainty, this would seriously jeopardize the intended harmonization. This perception speaks in favour of finding a solution that is both idiosyncratic and specific for the capital markets, and of abandoning the general liability regime. Incidentally, the Rome II Regulation follows the same path in the special case of product liability.76
22.39 One could argue—as was done under former German private international law77—for the application of a lex mercatus criterion for the Rome II Regulation. This could be based on the exception clause of Article 4(3) of the Regulation, relying on a normally ‘manifestly closer connection’ to the place of the market where the securities are issued and bought.78 This solution is, however, not convincing: the lex mercatus criterion is not free of ambiguities either and does not account sufficiently for the peculiarities of the capital markets and its different manifestations.79 Also, the lex mercatus criterion does not fit into the system of European capital markets law.80
22.40 To conclude: despite all efforts to adapt capital markets liability to the general liability regime of the Rome II Regulation, it has become apparent that this does not yield appropriate results. The Regulation has not been tailored to the specific needs of capital markets and is obviously not geared towards securities liability. There is no indication in the legislatory material that considerations of capital markets liability played any role. It thus hardly comes as a surprise that all hitherto existing scholarly assessments have difficulties in applying the Rome II Regulation to securities liability without reservation, and that all of them reach different conclusions.81
22.42 This section is to develop a new, functional regime for the international applicability of securities liability rules, departing from the traditional discussion that we presented in section IV. In order to develop an adequate solution on how to classify capital markets liability for the purposes of private international law, it may be useful to begin with an examination of the objectives and the function of this special liability regime. The fact that even German law, which is generally described as a rather conservative tort law system,82 allows the recovery of pure economic loss in the field of capital markets liability, implies that this liability is not only about compensation of damaged investors but pursues additional goals.
Corporate Governance as the Purpose of Securities Liability
22.43 Securities liability sanctions most violations of capital markets law duties, mainly disclosure duties. Hence, the justification for this liability is closely connected to the rationale of the respective disclosure duties.
22.44 Internationally, the purpose of disclosure duties is defined as twofold: firstly, to protect the mechanisms of efficient price formation;83 and secondly, to protect investors by means of effective corporate governance devices.84 Correspondingly, securities liability not only targets market manipulation as such and the accompanying damages for specifically affected investors, but additionally attempts to avoid a loss of confidence in the market in general. For both instances, the primary goal is not only to inform specific investors or to compensate their losses; instead, disclosure duties and liability rules shift information to relevant market actors, entail repercussions on the management of a company, and thereby enable a control function of the market. This control function of the market offsets the direct (p. 417) loss of control by the shareholders that is the consequence of the company going public.
22.45 As a ‘correlate’ of the possibility to access public capital markets,85 legislation obliges issuers to inform their own shareholders—as well as the general public—comprehensively and on a regular basis, and to keep this information up to date in case of material changes in the reported circumstances. This ongoing information enables the market to assess the business situation of the issuer. On a (semi-) efficient capital market, any material change of the business outlook, especially changes that occur because of management decisions, should result in an immediate change of the share price.86 Thus, the capital market undertakes the task of judging the economic expediency of business decisions, which is a central task of corporate governance. In this context, the function of capital markets liability is to ensure that this crucial control function of the market is not impeded by misleading information.87 Thus, an effective liability regime in securities law for disclosure violations can promote compliance with these obligations and consequently enhance market transparency.88
22.46 The basic idea is that the management of listed companies has to accept control by unbiased pricing via disclosure duties in return for the internationally accepted principle of broad managerial freedom in the form of business judgment rules and other devices. Disclosure duties in capital markets law on the one hand state informational duties, and on the other hand also create accountability of the management vis-à-vis the anonymous investors of public companies.
22.47 Consequently, the purpose of securities liability is a function of this twofold justification of disclosure duties: on the one hand, capital markets liability grants compensation to investors for the losses they incur, but on the other hand it also finds a major justification in its purpose to enforce capital market-based accountability. Put differently, capital markets liability serves several objectives, only one of them being a traditional concept of tort law: beyond compensation for investors, the main function is to deter management from violating corporate governance-related rules.89(p. 418) Whenever management tries to escape from market control by manipulating public information, securities liability is triggered.90
Consistent Characterization of Corporate Governance Rules
22.48 When bearing in mind the purpose of securities liability as just defined, it can be seen as only one facet of a larger regulatory context, which concerns the management and its control within large companies and which is generally termed ‘corporate governance’. In order to find an adequate solution on how to characterize securities liability in the context of private international law, it is therefore helpful to consider how corporate governance rules generally operate and how they are characterized.
(a) Issuer Choice
22.49 An American discussion under the slogan of ‘issuer choice’ considers whether it is advisable to let issuers themselves choose the capital markets law applicable to them.91 Only recently this proposal has been put up for discussion in the context of European capital markets law.92 The underlying idea is that it should be up to the issuer to choose the applicable corporate governance regime, and that—following adequate disclosure—the market participants are able to reward a price premium or a discount, as the case may be. However, this proposal has not remained unchallenged.93 Some commentators doubt that the market is really able to price the issuer’s choice of law appropriately.94 Furthermore, it is argued that a choice of law rule in fraud cases would place too high a burden on successful establishment of the investors’ fraud action because the investors would have to pursue their claim under a foreign legal regime.95 Yet, the major problem of the proposal in allowing an issuer to choose its law seems to be that in doing so, one would have to artificially split up various components of capital markets law: on the one hand, there are rules (p. 419) for issuers that are up for a choice, and on the other hand there are rules regulating the market as such, which inevitably have to be governed by the law of the place where the trading venue is located.96
22.50 These two areas are, however, closely interlocked. Insider regulation, for instance, consists of the issuer-related rules on ad hoc statements on the one hand, and market-related rules on notification requirements and the actual surveillance of the ongoing trading on the other. Split laws like the insider regime can only be successfully implemented within a framework of harmonized rules, like the one constituted by the European capital markets directives. On a global basis, issuer choice is not a feasible concept because it does not sufficiently account for the way corporate governance works in Europe and the United States.
(b) Bundling of Issuer Liability and Applicable Securities Law
22.51 In the United States, State-level corporate law grants extensive contractual freedom and the federal securities regulation sets common standards for companies that offer their shares to the general public. In contrast, the system of European corporate governance is much more entangled; there are differences in levels (European Union and the Member States) and between company and capital markets law.97 Still, both systems show a coherent characterization system: in the United States, where securities regulation sets general standards for all companies despite the differences in the State-level corporate laws, these general rules are triggered when registering with the SEC or when affecting a certain number of United States investors. In Europe, the capital markets directives synchronize the characterization of capital markets and company law duties by bundling all duties of equity issuers at the State where the registered office is located: as we have seen, both company law and capital markets law broadly follow the law of the issuer’s incorporation.98 Within these boundaries, Member States are enabled to adapt the European standards to the national peculiarities by way of ‘gold-plating’ and thus create a consistent corporate governance system.
22.52 Capital markets liability should have its place in this system. We have shown that this liability regime is an integral part of listed companies’ corporate governance. If all rules of (capital market-related) corporate governance are uniformly characterized—in Europe according to the lex incorporationis,99 in the United States according to the federal securities regulation and, in case of foreign issuers, according to (p. 420) the registration with the SEC—there are good reasons to characterize securities liability accessorily to the applicable securities law, in other words to bundle liability and disclosure duties under the umbrella of the same applicable law. Such an approach would enable States to draft a consistent and comprehensive corporate governance regime, encompassing both substantive capital markets accountability duties and sanctions when these duties are violated, for all issuers under their jurisdiction, regardless of the precise marketplace or the residence of a coincidentally harmed investor. Moreover, bundling of disclosure duties and liability would enhance foreseeability of the applicable law for liability situations. This would ensure that the corporate governance function of securities liability (ie its deterrent effect) extends to international cases. Issuers will only internalize all relevant costs of breaching capital markets accountability duties if the applicable law is determined by the deterrence function of capital markets liability. If it is governed by the compensatory function instead, as advocated by alternative concepts like investors’ residence or lex mercatus, the impact of liability rules on corporate governance is significantly weakened, because the issuer cannot anticipate the applicable liability regime ex ante. We believe that such synchronism between duty and liability would not only bundle all that is relevant for corporate governance, but would have a number of additional advantages.
22.53 Firstly, there would be the advantage that the different elements of corporate governance (eg the substantive duties and the liability rules) could be much better reconciled with each other, thereby avoiding frictions between different legal systems. Under the current system, as discussed earlier, corporate and capital markets law duties are governed by the State in which the issuer’s registered office is located, while the liability rules—when characterized under general tort law—will often be governed by a completely different jurisdiction. Normally these two legal systems are not sufficiently harmonized with each other, and disclosure duties are not in line with liability rules or corporate law foundations, eg in the field of directors’ and officers’ personal liability. This can yield inappropriate results and frictions in the process of applying these legal rules as well as contradictory outcomes. In private international law, there can be situations where—due to different characterizations in different jurisdictions—out of two different rules, neither would apply (rule shortage) or, alternatively, both rules claim to be applicable (rule accumulation).100 These problems could be solved when using the same substantive rules and synchronizing disclosure duties and liability rules.101
22.54 Furthermore, there is the advantage that it is easier to predict the applicable law: according to our proposal, the liability rules for each equity issuer would be clearly and unambiguously governed by the lex incorporationis. Based on the existing disclosure duties, the investors can reliably learn which company and liability law (p. 421) rules are applicable to an issuer; they do not have to depend on imponderable criteria like the lex loci delicti or the lex mercatus criterion. At the same time, the lex incorporationis criterion also has advantages for the issuer: issuers do not have to deal with a multitude of different legal systems that would often be applied arbitrarily or according to the marketplace or the residence of an investor. Instead, not only the investor, but also the issuer can reliably predict according to which rules he might have to face a charge for possible offences. This will make it easier for issuers to comply with the law, and will thereby increase the effectiveness of the said rules with regard to their corporate governance impact.
22.55 Thirdly, this proposal could help to create consistency with public enforcement of securities regulation. In the European Union capital markets system, responsibility for public enforcement and supervision is located with the competent authority of the ‘home’ Member State.102 If, according to our proposal, the applicable liability law were to follow the jurisdiction of the home Member State, this could help to ensure a coherent overall system of enforcement. Both private and public enforcement procedures could then broadly be applied using similar rules and liability patterns.
22.56 Finally, our proposal is also advantageous for the States concerned: the accessory characterization of capital markets liability may allow individual States, both within the remaining scope of the European framework, and vis-à-vis the United States, to benefit from regulatory competition over stock-listed companies.103
Implementation within the Rome II Regulation
22.57 How can the proposed principle of synchronism between disclosure duties and liability rules be implemented within the existing law? In the European Union, the answer must be found in the application of the Rome II Regulation that has brought a unified conflict of laws regime for non-contractual duties in the European Union as of 11 January, 2009. As discussed before, the Regulation is (despite various doubts) applicable to securities liability claims.104
22.58 The regulation contains a general choice of law rule105 for tort law claims in Article 4(1), according to which ‘the law applicable to a non-contractual obligation arising out of a tort/delict shall be the law of the country in which the damage occurs, irrespective of the country in which the event giving rise to the damage (p. 422) occurred and irrespective of the country or countries in which the indirect consequences of that event occur’. This provision is based on the principle of the ‘closest connection’.106 The underlying idea is that the country in which the damage occurs regularly has the closest connection to the facts of the case; hence it is the law of this country that is competent to govern the dispute.107 In situations of pure financial loss, the precise interpretation of the term ‘place where the damage occurs’ is still ambiguous, despite some clarification by the Court.108 Some understand by it in such situations as the place where the investor relies on the information.109 Others prefer the place of residence of the investor110 or the place of the ‘reduced market value of the financial instrument’.111 The case law (on the Brussels I Regulation) seems to suggest, by contrast, that it is the country where the investor’s funds were located at the moment of the damage.112 But even if we were to overcome the difficulties in handling the term ‘place where the damage occurs’, the solution would be far from adequate.113 Following the Court’s interpretation, we would need to determine the location of the funds that have been damaged.114
22.59 For a start, this can lead to arbitrary results where the investor keeps his funds in an account in a country different from his country of residence. Moreover, this would leave the possibility of an issuer being vulnerable to multi-jurisdictional litigation conducted under numerous national laws; we have already explained that such an outcome is maybe intended for general tort law115 but completely unworkable for securities law.116 As mentioned earlier, in the field of capital markets liability, this rule raises concerns, especially over unpredictability and manipulability.117 In order to relax the inflexible rule and to allow for equitable fairness, Article 4(3) of (p. 423) the Regulation permits the application of the law of another country if ‘the tort/delict is manifestly more closely connected’ with this other country. This clause must, however, be used sparingly.118
22.60 Based on this rule it has already been proposed to let securities liability claims generally be governed by the law of the marketplace’s country, and thereby deviate from the law of the country where the damage occurs.119 This would trigger the law of the market where the investor purchases the securities.120 Normally, this will be the market where the securities are placed, where the securities in the course of an IPO are offered, and where information is disclosed.121 Such a rule could be extended to a two-sided marketplace rule for both domestic and foreign liabilities, employing a universal lex mercatus criterion.122 This would have many advantages. The law of the market is both for the issuer and for the investor a predictable and reliable jurisdiction.123 At the same time, the issuer does not face the application of a multitude of foreign legal systems; thus distortions in competition between issuers who are active on domestic or international markets are reduced.124
22.61 But it would not be free from problems; in some cases, the precise localization of the place of the market can be problematic. If the acquisition of the securities is carried out via a stock exchange, the places may be easy to determine and will normally correspond to the seat of the stock exchange at which the securities were traded. But in particular, shares are often traded at several stock exchanges in different countries (so-called ‘cross-listing’). If an investor wishes to acquire such a share, Article 21 of the Directive on Markets in Financial Instruments (MiFID) requires the investment firm who executes the order to choose the venue within the context of the ‘best execution’ principle.125 The execution may only be based on (p. 424) criteria such as price, costs, speed, likelihood of execution and settlement, size, or nature of the order. This implies that the place of execution (and hence the place of the ‘market’) is not predictable for the investor, save when he gives a clear instruction (Article 21(1) MiFID). Instead, the selection of the marketplace is determined by the investment firm according to economically advantageous circumstances.
22.62 Another argument against the market rule is the recent emergence of ‘dark pools’. These are marketplaces which allow traders to keep their transactions hidden; liquidity is deliberately not advertised or public information about trades is delayed as long as legally possible.126 By using these pools, traders making large transactions hope to reduce their market impact. The popularity of these dark pools has grown enormously: relying on innovative and sophisticated software, they allow for the execution of trading strategies that can be immensely profitable. It is obvious that the emergence of such trading venues poses factual problems on the determinability of the ‘place of the market’—be it that the market is simply unknown or that there has been a multitude of orders across a variety of marketplaces, each with an unknown volume. Finally, problems arise for securities traded OTC. Here, the place of the ‘market’ can be interpreted as referring to either the place of acquisition or to the market which is targeted with a public offer or a capital market information. Overall, therefore, the lex mercatus criterion is certainly superior to the lex loci delicti but still raises many concerns and practical problems.
22.63 We have argued that, from a functional perspective, the applicable disclosure duties and the corresponding liability rules should be bundled.127 Against the background of capital markets liability as part of corporate governance, as advocated in this chapter, it is therefore advisable as a general rule to use the exception clause, Article 4(3) of the Rome II Regulation, to characterize securities liability accessorily to the applicable capital markets duties. Since the European Union capital markets directives broadly follow the incorporation principle128, this will in most European Union cases lead to the lex incorporationis of the issuer, hence not only harmonizing with capital markets law but also with company law.129 The purpose of securities liability as developed in this chapter and considerations of public policy and practicability clearly suggest the application of Article 4(3) of the Rome II Regulation in a way that securities liability claims are always to be (p. 425) characterized accessorily to the applicable capital markets law duties. This interpretation of Article 4(3) for securities liability could eventually be endorsed by the European Court of Justice, who ultimately would need to interpret this provision. The Court is the sole authority in interpreting European Union law, and its rulings guarantee a uniform interpretation of European Union law, preventing national courts from reaching different and diverging outcomes.130
22.64 A possible objection to this could be that it was the legislator’s intention to treat Article 4(3) as an exception, limited to exceptional circumstances, and not to a whole type of liability claims.131 In other words, our proposal to apply Article 4(3) to securities liability claims overall might contravene the system of the Regulation and treat the exception like the rule. Such an objection is legitimate yet not ultimately convincing. As we have explained, the Rome II Regulation was not designed for the specific problems of securities liability and does not really fit for this type of claim.132 If, however, we conclude that the Regulation is principally applicable to this type of claim, we have to find a way to reconcile the specificities of securities liability with the rigid Rome II rules, which were designed primarily for other purposes. In any case, the appropriateness of an adequate solution should have priority over doctrinal sophistries. For the many reasons we have given, the effectiveness of securities liability will be substantially enhanced by following the solution we suggest here.133
Characterization in United States Cases
22.65 Our proposal to characterize securities liability accessorily to the disclosure duties of the respective issuer is not limited to intra-European cases. In United States cases, the consequence of the proposed bundling would be that United States securities liability is only triggered where an issuer is subject to United States securities law: the general rule would be that United States liability rules are only applicable if the issuer is registered with the SEC or intends to target a sufficient number of United States investors.134 This solution consequently subjects those issuers to the strict United States liability rules, who voluntarily register with the SEC.
22.66 By contrast, issuers who offer their shares in the United States according to Regulation S, or whose shares are only traded by third parties, do not bind themselves to the standards of United States law and hence should not be subjected to (p. 426) United States liability rules. This is consistent with the principle of synchronism between primary duties and liability and enables the development of globally coherent corporate governance standards. The United States Supreme Court’s Morrison decision has already smoothed half the way for our proposal. However, while the Supreme Court investigates whether a certain fraud provision is construed in order to apply to a transnational case—thereby reaching the conclusion that section 10(b) Securities Exchange Act 1934 is meant to cover transactions in securities listed on domestic exchanges and domestic transactions in other securities135—our proposal suggests beginning one step before by examining whether a certain issuer is actually obliged to comply with the disclosure duties of United States securities regulation. Those issuers that must adhere to United States disclosure duties should consequently be liable under United States fraud rules when they violate those duties, no matter where a transaction takes place or a certain investor is located.
22.67 What happens where an issuer is listed on a European and an American stock exchange? Following our general rule, liability also for cross-listings should be governed by the law of the disclosure regulation, which may lead to a regime duplication: a European issuer, who is listed on a European and a United States stock exchange, will then be subject to the disclosure duties and liability rules of its (European) State of incorporation as well as the respective duties according to United States securities regulation. Investors, who have been harmed, may then choose the liability rules, irrespective of their nationality or the place where they bought the securities. This result can be based on Article 4(3) of the Rome II Regulation as well.
22.68 This proposition is again motivated by considerations of corporate governance: empirical studies have shown that United States cross-listings enhance firm value.136 This effect is explained by legal or reputational bonding effects of United States law.137 By voluntarily cross-listing in the United States, the issuer subjects itself to an additional, mostly stricter regime. Investors, who buy securities from this issuer thereafter, pay a higher price that is based on the cross-listing’s reputational value. If the issuer frustrates the reliance on the cross-listing’s signal by disclosing misleading information, this does not harm only those investors who bought their shares in the United States. As was mentioned before, investors often cannot (p. 427) anticipate the venue where their purchase orders will be executed.138 Hence all investors should have the possibility to enjoy the stricter liability rules of the cross-listing country. Whether they should have a standing in the courts of that country is, however, a matter of international jurisdiction and, as opposed to United States practices until Morrison,139 should be treated separately.
22.69 Our proposal to characterize capital markets liability accessorily to the duties that have been violated has as its main advantage from the point of view of issuers as well as investors that it provides for maximal predictability. The place of incorporation and the fact of a registration with the SEC may be verified through the internet within seconds. Thus it is possible to subject the emerging single European capital market to a clear and uniform liability regime. Even though this regime was discussed mainly for equity issuances, it extends to debt instruments as well.
22.70 However, as Article 2(1)(i) Transparency Directive allows only for one ‘home Member State’ for each issuer, those issuers issuing equity and debt instruments will—as regards the secondary market duties and liability—fall under the uniform regime determined by the equity issuance, which is governed by the laws of the place of incorporation. Only for the debt issuance itself, those issuers may elect a different disclosure and liability regime according to Article 2(1)(m) Prospectus Directive. Companies which issue only debt instruments with a denomination of at least €1,000 may freely choose their ‘home Member State’ and thereby also the applicable liability regime. This regime is transparent and leads to predictable legal results. It also facilitates mechanisms of collective redress, such as class actions, because the applicable law is the same for the whole group of plaintiffs. However, the previous discussion makes the case to disentangle questions of class action forum on the one hand and of the applicable law on the other. If it is appropriate that a certain securities fraud be governed by a single legal system, this should not preclude other countries from adjudicating the claim.
22.71 Concerning litigation in the aftermath of the recent financial crisis our proposal implies that harmed investors in Europe have to sue issuers under the law of the country according to which the securities in question have been structured. As regards the possibility to sue in the United States our concept on the one hand widens the possibilities, but on the other hand also restricts them. This is because our proposition implies that it may be possible for all investors, irrespective of their nationality or the marketplace where they bought the securities, to sue for damages (p. 428) under United States law. This is however limited to issuers who voluntarily subjected themselves to United States standards. Furthermore, it is debatable whether to restrict the international jurisdiction of United States courts to cases where the respective securities were bought in the United States.
22.72 We would like to emphasize that our proposal only pertains to the liability of issuers and, as the case may be, of their directors and officers and other information intermediaries such as auditors, issuing banks, and the like. The proposal, however, does not extend to the fields of investment advice and intermediation. As mentioned earlier,140 one can distinguish between issuer-related and market-related capital markets law. In Europe, the latter can be found in the MiFID and contains the regulation of stock exchanges and other trading facilities141 as well as the rules for investment firms. Liability for damages arising from deficient investment advice and the liability of market operators for mistakes in executing buy and sell orders142 are questions of contract law and are therefore governed by the conflict rules of the law applicable to contractual claims.143 If legal systems allow tort claims based on the infringement of conduct of business rules for investment firms, these claims should be characterized either under the general tort law rule or—as being functionally contractual liability—accessorily to the rules governing contractual claims.144 Our proposal is essentially based on the goal to ensure unified principles of corporate governance for publicly traded companies. These considerations do not apply to the liability of banks for the infringement of (pre-)contractual disclosure duties, even if such a claim may also be based on tort law.
22.73 Finally, our proposal contributes to the debate on regulatory competition.145 In the aftermath of the judgments Centros, Überseering, and Inspire Art,146 incorporators (p. 429) already have the possibility to choose among the corporate laws of the 27 Member States, irrespective of where in the European Union they want to carry out their business.147 Regarding the change of corporate law regime for existing companies, the Court of Justice in Cartesio148 has put the kibosh on the legal development by allowing the Member States to preclude their companies from transferring the registered office to another Member State while remaining a domestic company. Nevertheless, there are a variety of possibilities in practice to achieve a de facto change of regime: eg by merging an existing company onto a foreign NewCo according to the rules of Directive 2005/56/EC on cross-border mergers149 or by choosing the legal form of the Societas Europaea (SE).150 Regulatory competition in the field of corporate law is hence a reality in Europe, irrespective of how one may feel about that.
22.74 As discussed earlier,151 at the same time when choosing the applicable company law, companies already opt for a certain capital markets law in case of a later IPO. The consequence of our proposal is that this choice of law would extend to the applicable securities liability rules as well, instead of just applying external criteria such as the lex mercatus or law of the investor’s residence State.152 Accordingly, there is regulatory competition at three levels: company law, capital markets law, and securities liability. In our view this is a desirable outcome. Our proposal makes sure that securities liability as an inherent part of the whole concept of corporate governance is characterized under one coherent and consistent criterion. That way each Member State has the opportunity to engage in gold-plating when transforming the European Union directives in order to tailor a coherent legal regime for listed companies. This not only reduces frictions within the legal system but also facilitates a level playing field for true regulatory competition over corporate governance. As this competition takes place within the existing framework and acquis of European harmonization, one may neglect the danger of a ‘race to the bottom’. Should there be any unfavourable developments in singular cases, these may be remedied easily by reforming or expanding the European framework.
22.75 This chapter defines the main purpose of securities liability in its function for efficient corporate governance. Against this background, it is preferable to characterize securities liability claims in accordance with the primary capital markets duties, and therefore apply the same substantive law to both elements. The traditional proposals to either apply the general conflict of tort law principles or to use the lex mercatus criterion are not appropriate.
22.76 The solution presented in this chapter applies the liability law that corresponds to the applicable capital markets law to any given situation. On the basis of the European capital markets directives, this will mostly be the law of the country where the issuer’s registered office is located. This has many advantages: besides a synchronism of company law, capital markets law, and securities liability, our solution guarantees predictability, legal certainty, and reliability for the legal practice—benefiting issuers as well as investors. This approach conforms to the idea of regulatory competition and yields appropriate results in intra-European as well as transatlantic cases. The creation of a clear conflict of laws rule in this field facilitates mechanisms of collective redress and might thereby help to stimulate more (and more efficient) private enforcement of securities liability, thus leading to enhanced issuers’ accountability and better governance.
1 This chapter heavily draws on our paper ‘The international dimension of issuer liability’, which appeared in (2011) 31 Oxford Journal of Legal Studies 23, with kind permission by the publisher. We would like to thank Jürgen Basedow, Paul L Davies, Anatol Dutta, Christian Heinze, Christopher Hodges, Wulf A Kaal, Roger W Kirby, and two anonymous referees for their very helpful comments on earlier drafts of the original paper.
2 Note, for example, the growing foreign ownership reported of United Kingdom-based companies. See www.statistics.gov.uk.
5 Jennifer Bethel, Allen Ferrell, and Gang Hu, ‘Legal and Economic Issues in Litigation Arising From the 2007–2008 Credit Crisis’, Working Paper 2008, available at: http://ssrn.com/abstract=1096582, report on 251 class actions in connection with the subprime crisis on the cut-off date 15 November, 2008, amongst them claims against European issuers like Credit Suisse Group, Fortis, SociétéGénérale, Swiss Re, UBS, and UBS Financial Services. According to calculations by Cornerstone Research, Securities Class Action Filings 2011: A Year in Review (2012) at 14, the amounts claimed in class actions in relation to the financial crisis total up to $40 billion for 2007, $90 billion for 2008, $29 billion for 2009, $12 billion for 2010, and $3 billion for 2011.
6 For example, in Germany, the Bundesgerichtshof (BGH) held that IKB (Deutsche Industriebank AG, a bailed-out bank) might be liable for not disclosing IKB’s risks regarding asset-backed securities tied to the United States mortgage market, see BGH, judgment of 13 December, 2011—XI ZR 51/10  Der Betrieb (DB) 450. Also, IKB’s former CEO, Stefan Ortseifen, was convicted by the BGH of market manipulation for misstating IKB’s risks in a press release, see BGH, decision of 20 July, 2011—3 StR 506/10,  Die Aktiengesellschaft (AG) 702.
7 The expression ‘characterization’ can be described as a classification of law under private international law rules. See Lawrence Collins et al, Dicey, Morris & Collins on the Conflict of Laws (14th edn, Sweet & Maxwell 2008) at ch 2.
10 The leading case is Basic Inc v Levinson, 485 US 224, at 247 (1988): ‘An investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price. Because most publicly available information is reflected in market price, an investor’s reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action.’
12 Civil Procedure (Amendment) Rules 2000 (SI 2000/221), r 9 and sch 2; CPR, pt 19.10ff. For a critical assessment see Rachael Mulheron, Reform of Collective Redress in England and Wales: A Perspective of Need—A Research Paper for Submission to the Civil Justice Council of England and Wales (2008).
13 (n 12) at 15. For a discussion of GLO in the context of securities litigation see Eilís Ferran, ‘Are US-Style Investor Suits Coming to the UK?’ (2009) 9 Journal of Corporate Law Studies 315, at 321ff.
14 The representative action differs from the GLO in that it does not require each claimant to issue proceedings and then opt in as with the GLO. Instead, the represented parties are considered bound by the judgment in the representative action without having to issue proceedings in their own name. In this sense it is akin to an opt-out United States class action.
16 The introduction of both opt-out and opt-in basis class actions was proposed in the Finance Bill 2010. Whilst the concept of some form of collective redress was supported by businesses, the details of the proposals were strongly opposed. In the rush for the May 2010 general election, the proposal was dropped.
17 See further Duncan Fairgrieve and Geraint Howells, Collective Redress Procedures: European Debates in chapter 2 of this volume.
18 For a short overview see Wolf-Georg Ringe, ‘Class actions in German law? The “Capital Markets Model Proceedings Act”’  Bulletin of Legal Developments 196; Duncan Fairgrieve and Geraint Howells, ‘Collective redress procedures—European debates’ (2009) 58 International & Comparative Law Quarterly 379, at 393.
19 See Christian Heinrich, in Hans Joachim Musielak (ed), Kommentar zur Zivilprozesordnung (8th edn, Franz Vahlen 2011) at § 32b para 7; Jan von Hein, ‘Der ausschließliche Gerichtsstand für Kapitalanleger-Musterverfahren—eine Lex Anti-Americana?’  RIW 602.
23 As to the European discussion on class actions see recently Christopher Hodges, ‘Collective redress in Europe: the new model’ (2010) 29 Civil Justice Quarterly 370; Gerhard Wagner, ‘Collective redress—categories of loss and legislative options’ (2011) 127 Law Quarterly Review 55. See further Duncan Fairgrieve and Geraint Howells, Collective Redress Procedures: European Debates, in chapter 2 of this volume.
24 The question of the relevant company law regime has been debated for a long time. The ‘real seat theory’, according to which the ‘real seat’ (ie the head office) of a company decides on the applicable law, is more and more rejected now in favour of the ‘incorporation doctrine’. Cf Wolf-Georg Ringe, ‘Sparking Regulatory Competition in European Company Law—The Impact of the Centros Line of Case-Law and its Concept of “Abuse of Law”’ in Rita de la Feria and Stefan Vogenauer (eds), Prohibition of Abuse of Law: A New General Principle of EU Law (Hart Publishing 2011) at 107.
25 Case C-212/97 Centros v Erhvers-og Selskabsstyrelsen  ECR I-1459; Case C-208/00 Überseering v Nordic Construction Co Baumanagement GmbH  ECR I-9919; Case C-167/01 Kamer van Koophandel en Fabriekenvoor Amsterdam v Inspire Art Ltd  ECR I-10155. The most recent decision in this series, Case C-210/06 CartesioOktatóésSzolgáltatóbt  ECR I-9641, does not change this concept.
26 See Arts 13(1) and 2(1)(m)(i) of the Prospectus Directive for the prospectus duty; Art 2(1)(i)(i) of the Transparency Directive for periodic disclosure; Art 2(1) of Market Abuse Implementation Directive 2003/124/EC in conjunction with Arts 20, 21, and 2(1)(i)(i) of the Transparency Directive (cf Art 32 of the Transparency Directive) for ad hoc disclosure. Cf in more detail, Alexander Hellgardt, ‘Europäisches Kapitalmarktrecht und Corporate Governance—Unternehmensüberwachung als Ziel der Europäischen Kapitalmarktregulierung’ in Harald Baum et al (eds), Perspektiven des Wirtschaftsrechts (de Gruyter 2008) 397, at 418ff.
30 Defined as ‘to make its law applicable to the activities, relations, or status of persons, or the interests of persons in things, whether by legislation, by executive act or order, by administrative rule or regulation, or by determination of a court’, see s 401(a) Restatement (Third) of Foreign Relations Law of the United States (1987).
31 See eg Europe and Overseas Commodity Traders, SA v Banque Paribas London, 147 F.3d 118, 129 (2d Cir. 1998) (holding that it is not sufficient for the applicability of United States law when a foreigner, who is a visitor to the United States, is called there from abroad).
32 Morrison v National Australia Bank Ltd, 130 S.Ct 2869, 2877 (US 2010); see also EEOC v Arabian American Oil Co, 499 U.S. 244, 248 (1991). In a similar vein, already beforehand, Erez Reuveni, ‘Extraterritoriality as Standing: A Standing Theory of the Extraterritorial Application of the Securities Laws’ (2010) 43 UC Davis Law Review 1071.
36 James D Cox, Robert W Hillman, and Donald C Langevoort, Securities Regulation (6th edn, New York 2009) 215ff. In practice, foreign issuers can use a transaction structure for equity issuances known as ‘A/B Exchange Offer’ or ‘Exxon Capital Transaction’ and which facilitates a significant acceleration of the issuance process, see Cox, Hillman, and Langevoort (this footnote) at 379f.
37 Joseph Velli (n 35) at S43f.
38 James D Cox, Robert W Hillman, and Donald C Langevoort (n 36) at 553; see also In re EADS Co Securities Litigation, 2010 WL 1191888 at *2 (SDNY 2010).
41 On the following Klaus J Hopt and Hans-Christoph Voigt, Prospekt- und Kapitalmarktinformationshaftung (Mohr Siebeck 2005) 9, at 44ff; Alexander Hellgardt, ‘Mandatory Disclosure’, in Jürgen Basedow, Klaus J Hopt, and Reinhard Zimmermann (eds), Max Planck Encyclopaedia of European Private Law (Oxford University Press 2012), Vol. II, 1118, at 1121.
42 Harold G Maier, ‘Extraterritorial Jurisdiction at a Crossroads: An Intersection between Public and Private International Law’ (1982) 76 American Journal of International Law 280, 289; Russell J Weintraub, ‘Extraterritorial Application of Antitrust and Securities Laws: An Inquiry Into the Utility of a “Choice-of-Law” Approach’ (1992) 70 Texas Law Review 1799, at 1818f; Onnig H Dombalagian, ‘Choice of Law and Capital Markets Regulation’ (2008) 82 Tulane Law Review 1903, at 1930.
43 Morrison v National Australia Bank Ltd, 547 F.3d 167, 177 (2d Cir. 2008); Schoenbaum v Firstbrook, 405 F.2d 200, 208 (2d Cir. 1968); In re CP Ships Ltd Securities Litigation, 578 F.3d 1306, 1313 (11th Cir. 2009).
44 Morrison v National Australia Bank Ltd, 130 S.Ct 2869, 2877 (US 2010). For a critical account of the decision, see Roger W Kirby, ‘Access to United States Courts by Purchasers ofForeign Listed Securities in the Aftermath of Morrison v. National Australia Bank Ltd’ (2011) 7 Hastings Business Law Journal 223.
45 Morrison (n 44) at 2877.
46 James D Cox, Robert W Hillman, and Donald C Langevoort (n 36) 1144. See also Hannah L Buxbaum, ‘Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict’ (2007) 46 Columbia Journal of Transnational Law 14, at 65f. However, in one case concerning Canada, the Court of Appeals for the Second Circuit once mentioned the possibility to apply Canadian law in an obiter dictum, see DiRienzo v Philip Servs Corp, 294 F.3d 21, 31 (2d Cir. 2002), cert denied, 537 U.S. 1028. As far as the authors are aware, however, there are no cases in which this de facto happened.
47 Cf Pinker v Roche Holdings Ltd, 292 F.3d 361, 371 (3d Cir. 2002): Initiating an ADR programme by a foreign issuer is sufficient to establish personal jurisdiction on him. Furthermore, there is the possibility to reject litigation on grounds of the doctrine of forum non conveniens. See Robinson v TCI/US West Communications Inc., 117 F.3d 900, at 908f (5th Cir. 1997); In re EADS Co Securities Litigation, 2010 WL 1191888 at *9 et seq (SDNY 2010). In detail on international jurisdiction of United States courts in securities liability matters, see Robert S De Leon, ‘Some Procedural Defenses for Foreign Defendants in American Securities Litigation’ (2001) 26 Journal of Corporation Law 717.
49 Morrison (n 48) at 2884ff. For a similar view, even before the decision, see Margaret V Sachs, ‘The International Reach of Rule 10b-5: The Myth of Congressional Silence’ (1990) 28 Columbia Journal of Transnational Law 677.
50 Over the past months, the securities litigation landscape has featured ongoing battles in the trial courts regarding the precise scope and application of Morrison. The most prominent examples were probably Elliott Associates v Porsche Automobil Holding SE 759 F.Supp.2d 469 (SDNY 2010) and In re Vivendi Universal, SA Securities Litigation, 765 F.Supp.2d 512 (SDNY 2011).
52 For an assessment of Morrison’s consequences on foreign-squared claims, see Joseph N Sacca, ‘Restricting the extraterritorial application of anti-fraud provisions of the US securities laws’ (2010) 25 Butterworths Journal of International Banking & Financial Law 484, at 486.
53 Morrison (n 48) (emphasis in the original).
55 Cf Morrison (n 48).
56 Morrison (n 48) at 2885.
57 See Luca Enriques and Matteo Gatti, ‘Is There a Uniform EU Securities Law After the Financial Services Action Plan?’ (2008) 14 Stanford Journal of Law, Business & Finance 43, at 59; Michael Tison, ‘Financial Market Integration in the Post FSAP Era. In Search of Overall Conceptual Consistency in the Regulatory Framework’ in Guido Ferrarini and Eddy Wymeersch (eds), Investor Protection in Europe (Oxford University Press 2006) 442, at 461.
58 For an introduction to the Rome II Regulation, see Adam Rushworth and Andrew Scott, ‘Rome II: Choice of law for non-contractual obligations’  Lloyd’s Maritime and Commercial Law Quarterly 274.
59 See on this, Jan von Hein, ‘Die Internationale Prospekthaftung im Lichte der Rom II-Verordnung’ in Harald Baum et al (eds), Perspektiven des Wirtschaftsrechts—Beiträge für Klaus J. Hopt (de Gruyter, 2008) 371, at 379ff; Christoph Weber, ‘Internationale Prospekthaftung nach der Rom II-Verordnung’  WM 1581, at 1584.
62 Coming to a similar conclusion von Hein (n 59) at 379ff; Tomas MC Arons, ‘All roads lead to Rome: Beware of the consequences! The law applicable to prospectus liability claims under the Rome II Regulation’  Nederlands Internationaal Privaatrecht 481; Weber (n 59) at 1584. Cf also the opinion of the German Bar Association, ‘Opinion on the Draft Rome II Regulation by the German Bar Association, Committee for Private Law’ (9 August, 2002) at 5, available at: http://ec.europa.eu/justice/news/consulting_public/rome_ii/contributions/deutschen_anwaltvereins_de.pdf.
63 Similarly, Philipp Tschäpe et al, ‘Die ROM II-Verordnung—Endlich ein einheitliches Kollisionsrecht für die gesetzliche Prospekthaftung?’  Recht der Internationalen Wirtschaft (RIW) 657, at 661.
64 Tschäpe et al (n 63) at 661.
65 Michel Tison and Fran Ravelingien, ‘Roma locuta, causa finita? Conflict en rechtelijke capita selecta inzake bancaire aansprakelijkheid na de Rome II-Verordening’ in Johan Erauw and Piet Taelman (eds), Nieuw internationaal privaatrecht: meer Europees, meer globaal (Kluwer 2009) at 239.
68 Christoph Weber (n 59) at 1585. Generally on this problem Jan Kropholler, Internationales Privatrecht (6th edn, Mohr Siebeck 2006) at 523.
69 This corresponds to the case law on Art 5(3) of the Brussels I Regulation: Case C-168/02 Kronhofer v Maier  ECR I-6009. Occasionally, the place of residence of the investor is given preference: Christoph Benicke, ‘Prospektpflicht und Prospekthaftung bei grenzüberschreitenden Emissionen’ in Heinz Peter Mansel et al (eds), Festschrift für Erik Jayme (Sellier 2004) 25, at 33; Kai Bischoff, ‘Internationale Börsenprospekthaftung’ (2002) 47 AG 489, at 491ff. By contrast, Philipp Tschäpe et al (n 63) want to refer to the place of the ‘reduced market value of the financial instrument’.
73 Bernd von Hoffmann and KarstenThorn (n 71) at s 11, para 32.
75 See n 3.
77 Stefan Grundmann, ‘Deutsches Anlegerschutzrecht in internationalen Sachverhalten—Vom internationalen Schuld- und Gesellschaftsrecht zum internationalen Marktrecht’ (1990) 54 RabelsZ 283, at 308; Klaus J Hopt, ‘Emission, Prospekthaftung und Anleihetreuhand im internationalen Recht’ in Bernhard Pfister and Michael R Will (eds), Festschrift zum siebzigsten Geburtstag von Werner Lorenz (Mohr Siebeck 1991) 413, at 421.
79 See paras 22.60–22.62 below.
80 Jan von Hein (n 59) at 391f.
82 Cf Mauro Bussani and Vernon V Palmer, ‘The liability regimes of Europe—their façades and interiors’ in Mauro Bussani and Vernon V Palmer (eds), Pure Economic Loss in Europe (Cambridge University Press 2003) 120, at 125.
83 John C Coffee, ‘Market Failure and the Economic Case for a Mandatory Disclosure System’ (1984) 70 Virginia Law Review 717; Frank Easterbrook and Daniel Fischel, ‘Mandatory Disclosure and the Protection of Investors’(1984) 70 Virginia Law Review 669; Gregg Jarrell, ‘The Economic Effects of Federal Regulation of the Market for New Security Issues’ (1981) 24 Journal of Law & Economics 613.
84 Paul G Mahoney, ‘Mandatory Disclosure as a Solution to Agency Problems’ (1995) 62 University of Chicago Law Review 1047. See also Reinier Kraakman et al, The Anatomy of Corporate Law (2nd edn, Oxford University Press 2009) 275.
86 Eugene Fama, ‘The Behavior of Stock-Market Prices’ (1965) 38 Journal of Business 34; Eugene Fama, ‘Capital Markets: A Review of Theory and Empirical Work’ (1970) 25 Journal of Finance 383; Ronald J Gilson and Reinier Kraakman, ‘The Mechanisms of Market Efficiency’ (1984) 70 Vanderbilt Law Review 549.
89 See Merritt B Fox, ‘Civil Liability and Mandatory Disclosure’ (2009) 109 Columbia Law Review 237, 253ff; John C Coffee, Jr, ‘Reforming the Class Action’ (2006) 106 Columbia Law Review 1534, 1585ff.
90 Alexander Hellgardt (n 87) at 223ff.
91 See Stephen Choi and Andrew Guzman, ‘The Dangerous Extraterritoriality of American Securities Regulation’ (1996) 17 Northwestern Journal of International Law & Business 207, Stephen Choi and Andrew Guzman, ‘Portable Reciprocity: Rethinking the International Reach of Securities Regulation’ (1998) 71 Southern California Law Review 903, 914ff, who use the slightly misleading term of ‘portable reciprocity’; Roberta Romano, ‘Empowering Investors: A Market Approach to Securities Regulation’ (1998) 107 Yale Law Journal 2359, 2401ff wants to shift securities law in the United States to the State level and then allow issuers to choose; see also Alan R Palmiter, ‘Toward Disclosure Choice in Securities Offerings’  Columbia Business Law Review 1, at 86ff, who wants to make registration under Securities Act 1933 optional, whereby issuer liability should play an important role of control.
92 Luca Enriques and Tobias Tröger (n 27) at 546ff.
96 Cf also Kitch (n 95) at 633f, who points out that the proposals concern only the issuers, but not the regulation of stock exchanges or brokers.
97 In detail on this and the following, Alexander Hellgardt (n 26) at 418ff.
98 See the references in (n 26) and accompanying text.
99 See also Merritt B Fox, ‘Securities Disclosure in a Globalizing Market: Who Should Regulate Whom?’ (1997) 95 Michigan Law Review 2498, 2580ff; Merritt B Fox, ‘US Perspectives on Global Securities Market Disclosure Regulation: A Critical Review’ (2002) 2 European Business Organization Law Review 337, who pleads, from an American perspective, also for the registered office as the relevant criterion.
103 The concept of a ‘race to the top’ is the basic philosophy for the proposal supporting issuer choice; see in detail on the regulatory competition, section VI.
104 See para 22.33 above.
105 The specific rule in Art 12 Rome II Regulation is not applicable, see para 22.35 above.
106 Abbo Junker, ‘Die Rom II-Verordnung: Neues Internationales Deliktsrecht auf europäischer Grundlage’  NJW 3675, at 3677; Stefan Leible and Matthias Lehmann, ‘Die neue EG-Verordnung über das auf außervertragliche Schuldverhältnisse anzuwendende Recht (‘Rom II’)’  Recht der Internationalen Wirtschaft 721, at 724f.
107 HM Treasury, ‘Extension of the statutory regime for issuer liability—Consultation’ (July 2008), available at: www.hm-treasury.gov.uk, at 10.
109 Lisa Chan, ‘Issuer liability for disclosures: proposed extension of the statutory regime’ (2008) 14(3) International Bar Association Newsletter Securities Law 5, at 6; London Stock Exchange, ‘Extension of the statutory regime for issuer liability—July 2008’ (8 October, 2008), available at: http://www.londonstockexchange.com/about-the-exchange/regulatory/statute-regime-issuer-liability-response.pdf, at 2.
111 Philipp Tschäpe et al (n 63).
112 This seems to follow from Kronhofer (n 108) at para 17, although this case concerned Art 5(3) of the Brussels Regulation which employs the term ‘place where the harmful event occurs’ (emphasis added). The place of the ‘harmful event’, according to settled case law, covers both the ‘place where the damage occurred’ and the ‘place of the event giving rise to it’, see Kronhofer (n 108) at para 16.
113 Cf the critical comments made by the London Stock Exchange (n 109).
114 This corresponds to the case law of the Court of Justice of the European Union on Art 5(3) 3 of the Brussels I Regulation: see Kronhofer (n 108).
115 See on the ‘mosaic theory’ (n 70) and accompanying text.
116 See para 22.38 above.
119 Arons (n 62) at 485 suggests either the application of the marketplace rule via Art 4(3) of the Regulation or alternatively favours a change of the existing law de lege ferenda. Cf on the application of the escape clause, German Bar Association (n 62).
120 Note the similarities with the United States Supreme Court decision in Morrison, discussed in para 22.28 above.
122 Christoph Benicke (n 69) at 36; Annette Floer, Internationale Reichweite der Prospekthaftung (Nomos 2002) at 152ff.
125 Art 21 MiFID has been implemented in Germany in s 33a WpHG (Securities Trading Act); in the United Kingdom, it has been implemented as part 11.2 of the COBS (Conduct of Business Sourcebook), which is part of the FSA rules. See on this topic Committee of European Securities Regulators, ‘Best Execution under MiFID—Questions and Answers’ (May, 2007), available at: www.esma.europa.eu/system/files/07_321.pdf and Jan von Hein, ‘Best Execution’ in Stefan Grundmann et al (eds), Festschrift für Klaus J. Hopt (de Gruyter 2010) vol 2, 1909, at 1916ff.
126 Robert Hatch, ‘Reforming the Murky Depths of Wall Street: Putting the Spotlight on the Security and Exchange Commission’s Regulatory Proposal Concerning Dark Pools of Liquidity’ (2010) 78 George Washington Law Review 1032.
127 See para 22.51–22.56 above.
128 See paras 22.16–22.17 above.
129 See, as to the similar result, International Capital Markets Association (ICMA) and Securities Industry and Financial Markets Association (SIFMA), Joint ICMA/SIFMA Response to HM Treasury Consultation on Extension of the Statutory Regime for Issuer Liability July 2008 (16 October, 2008) 2.
131 See European Commission, ‘Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Non-Contractual Obligations’ (Rome II) COM 2003(427) 12: ‘Since this clause generates a degree of unforeseeability as to the law that will be applicable, it must remain exceptional.’
132 See para 22.34 above.
133 See especially paras 22.52–22.56.
134 See para 22.20 above.
136 See eg Craig Doidge, George A Karolyi, and René M Stulz, ‘Why are foreign firms listed in the U.S. worth more?’ (2004) 71 Journal of Financial Economics 205; on the implications of the Sarbanes-Oxley Act see Kate Litvak, ‘Sarbanes-Oxley and the Cross-Listing Premium’ (2007) 105 Michigan Law Review 1857. But see Amir Licht, Christopher Poliquin, Xi Li, and Jordan Siegel, ‘What Makes the Bonding Stick? A Natural Experiment Involving the Supreme Court and Cross-Listed Firms’ Harvard Business School Working Paper 11-072.
138 See para 22.61 above.
139 In the aftermath of the Morrison decision, United States courts now have to differentiate between the international applicability of United States securities regulation and the international jurisdiction of United States courts, see Morrison v National Australia Bank Ltd, 130 S.Ct 2869, 2877 (U.S. 2010).
140 See paras 22.49–22.50 above.
141 In detail on the separate trading systems and their regulation Christoph Kumpan, Die Regulierung außerbörslicher Wertpapierhandelssysteme im deutschen, europäischen und US-amerikanischen Recht (de Gruyter 2006).
142 See, eg Andreas Fleckner and Christian Vollmuth, ‘Geschäfte zu nicht marktgerechten Preisen im außerbörslichen Handel’  WM 1263 on the legal situation for so-called ‘mistrades’; these are deals mistakenly agreed at non market-driven prices.
143 Which are now subject to the ‘Rome I’ Regulation (EC) no 593/2008 of the European Parliament and of the Council of 17 June, 2008 on the law applicable to contractual obligations  OJ L177/6. See in particular Art 4(1)(h).
145 The debate on regulatory competition in business law has its origins in the charter competition between State corporate law systems in the United States, won by Delaware. This quickly led to the suspicion of a ‘race to the bottom’, see Lucian Bebchuk, ‘Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law’ (1992) 105 Harvard Law Review 1437. Other commentators, however, suggested that it is rather a ‘race to the top’, see Roberta Romano, The Genius of American Corporate Law (AEI Press 1993). With reference to Europe, see John Armour and Wolf-Georg Ringe, ‘European Company Law 1999-2010: Renaissance and Crisis’ (2011) 48 Common Market Law Review 125; with reference to European capital markets law, see Luca Enriques and Tobias Tröger (n 27).
146 On this para 22.16 above.
147 See in more detail Wolf-Georg Ringe (n 24).
150 Art 8 of the SE Regulation allows for an identity retaining, cross-border transfer of the registered office. See Wolf-Georg Ringe, ‘The European Company Statute in the context of Freedom of Establishment’ (2007) 7 Journal of Corporate Law Studies 185.
151 Para 22.17.
152 It should be mentioned that the marketplace is equally subject to a choice by the issuer and would allow the latter to engage in regulatory arbitrage in that the issuer may combine an extremely permissible capital markets law with an extremely liberal liability regime. This danger is not as theoretical as it may seem: the founders of ‘new market’ start-up Comroad who had simply made up far above 90 per cent of the company’s alleged turnover (see OLG Munich  NZG 679) would have probably chosen a different country for their primary listing, had they been certain of the application of the market principle.