Bylaws Requiring Arbitration

Public companies, particularly those formed in Delaware, sometimes consider including bylaw  provisions requiring shareholder suits for violation of Federal Securities Laws to be brought by arbitration.  The SEC recently was asked if such a proposed provision, strangely presented for proxy statement inclusion through a shareholder proposal, could be excluded from the proxy statement by the company (this is a reversal of positions which one might expect on the issue).

Based on the possibility that such a proposal would violate the law of the State of incorporation (New Jersey), the SEC permitted the exclusion of the proposal from the proxy solicitation, noting that the SEC could not rule on the legality of the provision but on the facts could agree it would take no action if such provision was excluded.

SEC Chair Jay Clayton issued a statement this week that recommended the courts as the proper venue to determine legality and proxy exclusion, and that recommended the Congress address the ground-rules for such bylaw provisions, particularly if included in company bylaws during the IPO process.

Reminder re DE law: by statute it is legal for bylaws to require shareholder suits to be brought only in Delaware, it is generally illegal to shift costs to unsuccessful plaintiffs, and I don’t think there is statutory law addressing mandatory arbitration (please correct me if any of that is in error).

See also https://corpgov.law.harvard.edu/2018/09/13/the-legality-of-mandatory-arbitration-bylaws/


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