Shareholders Lawsuits and Arbitration Clauses in Corporate Charters

Should the Securities and Exchange Commission permit arbitration clauses in a public company's charter? A member of the SEC recently said yes.

"For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charters," said Michael Piwowar. "I would encourage companies to come and talk to us about that."

As Reuters reports, "The issue garnered attention in 2012, when the SEC pressured private equity firm Carlyle Group L.P. to drop a mandatory arbitration requirement before the regulator would sign off on its IPO plans."

Piwowar's use of the word "mandatory" cuts against his position because, as the saying goes, "arbitration is a matter of contract," and contracts are consensual, not mandatory. Piwowar's position should rest of the view that a corporate charter is contractual so becoming a shareholder is consent to (agreeing to a contract that provides for) arbitration of disputes. In contrast, making arbitration "mandatory" sounds like "forcing" shareholders to arbitrate, which is likely what Piwowar's opponents will argue.