November 26, 2025
Summary by Bloomberg AI
- Courts are scattered on whether US law applies to certain American depositary receipts, with recent rulings and a settlement showing divergent outcomes.
- The categorization of ADRs as foreign or domestic under US law becomes tricky when an investment fund has new ADRs created from stock purchased abroad.
- There is a circuit split on whether courts can decline to apply US law even when a domestic transaction took place, if the overall dispute is predominantly foreign.
In just a matter of months, three rulings and a one settlement showed just how scattered courts are on whether US law reaches some American depositary receipts, stand-ins for stock traded on foreign exchanges.
The securities fraud cases, which involve Bayer AG, Toshiba Corp., and other companies, illustrate the complexities and difficult policy choices facing courts assessing whether purchases of new ADRs qualify as foreign or domestic under US law when the issuer didn’t arrange for their appearance in the US market. The divergent outcomes likely herald a US Supreme Court revisit and resolution.
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Season of Developments
The US Court of Appeals for the Ninth Circuit in August said a pension fund couldn’t sue over ADRs converted from Toshiba stock purchased in Japan because the conversion in the US didn’t make the stock domestic. That non-precedential opinion is in tension with an earlier Ninth Circuit ruling in that case, as read in 2023 by a Northern District of California judge whose class certification order paved the way for investors to wrest $38 million from Bayer AG in a settlement finalized in October.
The appeals court’s 2018 opinion in Stoyas v. Toshiba Corp. adopted a test with three alternative ways to find a domestic transaction in circumstances where the trade wasn’t on an exchange. And, in granting class status in Bayer, Chief Judge Richard Seeborg said even though the investors’ brokers purchased shares in Germany, other parts of the process occurred in the US.
The Bayer investors’ expert showed title passing in the US from the depository institution that issued the ADRs to a broker, and from the broker to the investors. That’s “sufficient to establish that these transactions are domestic,” said Carol Gilden of Cohen Milstein Sellers & Toll PLLC, who represented the plaintiffs.
But in the recent Toshiba memorandum opinion, the key factor was the agents’ purchase in Japan. The Ninth Circuit called the conversion to ADRs in the US “irrelevant.”
Gilden said the new Toshiba decision “has no precedential value and is limited to the facts in that case.” Further, the facts “were different than in Bayer where we had a very well-developed record, probably better than the record in Toshiba,” she said.
Meanwhile, the Second Circuit in November certified a class of Credit Suisse bondholders on the strength of their “standardized” method for showing which purchases were domestic, as Seeborg did in Bayer.
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Policy Tug-of-War
Underlying most of the suits are claims the foreign issuer misled the market, usually through conduct in its own country. That’s where policy considerations animating courts’ guidelines come in.
For Gilden, anti-fraud imperatives go hand-in-hand with the sale of stock. “Foreign companies come to the US markets because they can raise a tremendous amount of capital from investors here, which includes overseas investors who invest in the US markets—all of whom rely on the integrity of our markets and the accountability that the federal securities laws provide,” she said.
“Our markets give a premium—that is established by academic studies,” she said. “That’s why companies like to raise capital in the US markets and investors like to invest here.”