NEW YORK, June 21 U.S. business advocates have long complained of what they see as frivolous shareholder litigation weighing on American corporations. Now, they say, more foreign companies may also find themselves caught in the grip of U.S. courts.
A recent ruling by a federal judge in New York allowing a group of European plaintiffs to join a U.S. shareholder lawsuit against entertainment conglomerate Vivendi (VIV.PA) has corporate lawyers abuzz about the power of U.S. courts to hear investors' legal claims worldwide.
Legal experts say multinational companies increasingly are vulnerable to lawsuits by aggrieved shareholders filed in the United States, even when their business primarily is conducted abroad. Others, though, say the corporate community is exaggerating and that most U.S. investor suits do not involve foreign companies at all.
In March, U.S. District Judge Richard Holwell in Manhattan ruled that investors in France, England and the Netherlands -- but not from Germany and Austria -- were eligible to participate in a U.S. shareholder class-action lawsuit contending that Vivendi engaged in securities fraud.
The judge based his decision on the finding that any potential judgment against the company likely could be enforced in courts in France, Britain and the Netherlands, but not in Germany and Austria.
The Vivendi case is particularly notable, legal experts say, because the bulk of Vivendi shares are traded on European exchanges and owned by European investors, not traded on U.S. exchanges or held by American stockholders .
"One could view this as one more case in the U.S. courts' attempt to become a world court for aggrieved shareholders," said Christian Word, a partner at law firm Latham & Watkins, which is not involved in the Vivendi litigation but has been closely watching developments in the case.
"We have a very creative plaintiffs' bar," he said. For shareholder lawyers, the Vivendi case suggests that "if you want to bring in foreign nationals to a class action you just have to plead it creatively."
Foreign investors look to U.S. courts as their main avenue for class-action suits, because laws here allow large-scale collective actions and the United States has a much more plaintiff friendly legal structure.
U.S. class-action litigation involving foreign companies is not new, with companies such as Italian dairy group Parmalat and Canadian technology company Nortel Networks Corp. NT.TO sued in U.S. courts by investor groups in recent years. A $2.45 billion settlement in the Nortel case last year was one of the largest ever in a U.S. class-action securities fraud lawsuit.
In the Vivendi case, shareholders sued in 2002, accusing the company, former Chief Executive Jean-Marie Messier and former Chief Financial Officer Guillaume Hannezo of hiding Vivendi's true financial condition ahead of a three-way merger with Seagram Co. Ltd and Canal Plus SA.
Vivendi has denied any wrongdoing. A Vivendi spokeswoman in New York declined to comment on the case when contacted this week.
Business advocates say that many other foreign companies could find themselves in the same position as Vivendi, further threatening the competitiveness of U.S. financial system as foreign firms shy away from entering the U.S. market because of litigation fears.
"Today, the United States' foreign neighbors must fear that a global class action in a U.S. court may threaten the solvency of even their largest companies," Columbia University law professor John Coffee wrote in an article for the National Law Journal earlier this month.
"Understandably, Europe has doubts about U.S. courts serving as securities policemen for the world," he wrote.
Still, data suggest that while foreign investors are playing a growing role in U.S. shareholder suits, the litigation risk here is not that big for foreign companies.
In 2006, there were 13 securities class actions filed against foreign issuers, down from 19 in 2005 and a record-high 30 actions filed in 2004, according to a study by PricewaterhouseCoopers Securities Litigation Services.
Adam Savett, vice president at Securities Class Actions Services, a research arm of shareholder adviser Institutional Shareholder Services, said that potential lawsuits come with the territory when a company does business in the United States.
"If you're listed on the U.S. exchange, and you conduct business in the United States, you're generally subject to the U.S. securities laws," he said. "With that comes potential liability and potentially having to answer a complaint in U.S. courts."