Arbitration Clauses in Corporate Charters to Prevent Investor Class Actions?

The Securities and Exchange Commission, as I noted a few months ago, is considering whether to start allowing arbitration clauses in corporate charters, so investor-company disputes would go to individual arbitration rather than class-action litigation.

Opposing this reform is Secure Our Savings (SOS), which recently submitted a letter to SEC Chairman Jay Clayton. SOS wants the Chair "to reaffirm the SEC’s longstanding position that forced

arbitration provisions that prevent investors from bringing or participating in class actions

violate Section 29(A) of the Exchange Act." 

Criticizing SOS is Alan Kaplinsky, leader of the effort to enforce consumer-finance arbitration agreements with class waivers.

Shareholders Bound by Arbitration Clauses in Corporate Charters and By Laws?

Zachary D. Clopton of Cornell Law School and Verity Winship of the University of Illinois College of Law have published A Cooperative Federalism Approach to Shareholder Arbitration
128 Yale L.J.F. 169 (2018).

The abstract:
Arbitration dominates private law across an ever-expanding range of fields. Its latest target, however, may not be a new field as much as a new form: mandatory arbitration provisions built into corporate charters and bylaws. Recent developments in corporate law coupled with signals from the Securities and Exchange Commission suggest that regulators may be newly receptive to shareholder arbitration. What they do next may have dramatic consequences for whether and how corporate and securities laws are enforced.

The debate about the merits of arbitration is well worn, but its application to shareholder claims opens the door to a different set of responses. In particular, the overlapping authority of federal and state actors with respect to corporate law calls for approaches that sound in cooperative federalism. Yet cooperative-federalist approaches have been absent from recent debates about shareholder arbitration. This Essay explains why cooperative federalism is a natural fit for addressing these issues. Moreover, we marshal specific examples of cooperative solutions in this area that could help frame federal-state coordination going forward. Such a cooperative response would avoid unnecessary federal-state conflict and allow policymakers to approach shareholder arbitration with expertise, accountability, and mutual respect.

Will Securities Exchange Comm'n Permit Arbitration Clauses in Initial Public Offerings?

As Skadden explains, "Historically, the SEC has not permitted forced arbitration clauses in IPOs. The issue last arose in the context of an IPO of a U.S. company in 2012, when the Division of Corporation Finance took the position that it would not use its delegated authority to accelerate the effective date of the company’s registration statement because it was unable to conclude that such mandatory arbitration provisions were consistent with 'the public interest and protection of investors' as required by Securities Act Section 8(a)."

Various commentators weigh in:

IPO-Related Securities Litigation and the Idea of Shareholder Claim Mandatory Arbitration
By Kevin LaCroix

The Uncertain Role of IPOs in Future Securities Class Actions, by Jeff Lubitz, Institutional Shareholder Services,

SEC Weighs a Big Gift to Companies: Blocking Investor Lawsuits
By Benjamin Bain