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.

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.