Absolute Activist Value Master Fund Ltd. v. Ficeto: Second Circuit Decision Further Defines the Extraterritorial Limits of US Securities Laws

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In Absolute Activist Value Master Fund Ltd. v. Ficeto, the Second Circuit clarified the extraterritorial reach of Section 10(b) of the Securities Exchange Act of 1934. The Court held that transactions involving securities that are not traded on a domestic exchange may still be subject to Section 10(b) (and therefore Rule 10b-5) if title to a security is transferred within the United States or one party incurs irrevocable liability within the United States to purchase or deliver a security. This decision provides a bright line as to when civil liability under Section 10(b) and Rule 10b-5 may arise for foreign investors and foreign issuers of securities in securities transactions not listed on a US exchange.

Morrison and the extraterritorial reach of Section 10(b)

In 2010, the US Supreme Court ruled in Morrison v. National Australia Bank Ltd., that Section 10(b) of the 1934 Act does not apply extraterritorially.2 In so holding, the Supreme Court adopted a “transactional test” which provides that Section 10(b) only applies to “transactions in securities listed on domestic exchanges” or to “domestic transactions in other securities.” The Supreme Court further noted that with respect to securities not registered on domestic exchanges, “the exclusive focus [is] on ‘domestic’ purchases and sales.”

In Absolute Activist, the Second Circuit interpreted the second prong of the Morrison test—under what circumstances the purchase or sale of a security not listed on a domestic exchange should be considered “domestic” within the meaning of Morrison.

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