The NYSE-Deutsche Börse Merger and Private Rights of Action Under the Securities Exchange Act
On February 15, 2011, NYSE Euronext, Inc. (“NYSE”) unveiled its merger plan with Deutsche Börse AG (“Deutsche Börse) which would result in cost synergies related in part to clearing and market operations. If consummated, the combined company would be 60% owned by Deutsche Börse shareholders, 40% owned by NYSE shareholders and the combined company would have dual headquarters in New York City and Frankfurt, Germany. Arguably, the New York Stock Exchange will no longer be American.
While there is no justification for knee jerk opposition to such an arguably unpatriotic transaction (the proposed merger is just the latest manifestation of the increasing and inevitable globalization of securities trading), we do have to ask how this globalization impacts the rationale of the Supreme Court’s decision last summer in Morrison v. National Australia Bank. That decision, as it has been interpreted by district courts, bars all investors, including U.S. citizens, from asserting Securities Exchange Act Section 10(b) fraud claims for the purchase of securities not listed for trading on a U.S. securities exchange. However, the globalization of securities trading was not made an issue in the briefing or argument in Morrison, nor was it discussed in the majority decision written by Justice Scalia.
That decision is based on the premise that when Congress passed the Securities Exchange Act in 1934, in the midst of the Great Depression, it did not specifically state that these anti-fraud provisions should have any extraterritorial application. It therefore followed that the many circuit courts that had established standards by which some but not all purchases or sales of securities outside the United States could be subject to Section 10(b) claims in U.S. district courts, were wrong. Rather, the Supreme Court imposed a stricter test limiting the reach of Section 10(b) to purchases and sales of securities listed on U.S. exchanges or unlisted securities where the transaction took place in the U.S.
There was a partial rejection of Morrison by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which reinstated extraterritorial reach for U.S. district courts to hear Securities Exchange Act fraud claims asserted by the SEC. However, Dodd-Frank also directed the SEC to solicit public comment and conduct a study to determine the extent to which private rights of action by investors under Section 10(b) should be explicitly extended to cover transnational securities fraud. (See Rich Margolies’ post on this at http://blog.abbeyspanier.com/2010/11/30/sec-requests-comments-for-its-study-on-extraterritorial-private-rights-of-action/. In response to that invitation for comment, a group of 42 law professors submitted a letter advocating such an extension. That letter specifically referenced the proposed Deutsche Börse/NYSE merger and its relevance to private rights of action for securities fraud, stating in part:
“Assuming that merger happens, there is the potential for most trades between U.S. buyers and sellers to occur offshore, likely in London. Even those of us who are deeply skeptical about extending U.S. securities law to its fullest reach agree that it would make little sense to apply the approach in Morrison to preclude application of the securities laws to those trades.”
It remains to be seen whether and to what extent the courts’ and Congress’s application of federal securities law will keep up with the realities of global securities markets.
Note: James Burrell co-wrote this post