Arbitration may Still be Coming to Shareholders Unhappy with the Publicly Traded Company Stock They own

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

Arbitration may Still be Coming to Shareholders Unhappy with the Publicly Traded Company Stock They own

February 18, 2019

SEC arbitrationArbitration may still be coming to shareholders unhappy with the publicly traded company stock they own.

In May 2018, the Securities and Exchange Commission’s (SEC) Head of Corporate Finance William Hinman testified in front of Congress and said the SEC had no plans to change its policy and force companies to settle disputes by arbitration.

This is not something we are not actively looking at — in terms of trying to bring something in and address this issue. It’s a complex issue. It involves our laws and regulations; it involves other federal laws, such as the federal arbitration act and state laws. As the Chairman’s (SEC Chairman Jay Clayton) correspondence (a letter Clayton sent to the committee) noted, if this issue were to come forward to my division in the context you mentioned, of an IPO of a US company, we would not be declared effective at the division level.” Hinman said at the hearing.

Hinman was responding to a question from Carolyn Maloney, a Democrat from New York, who was concerned that a change was coming after a Bloomberg article.

Now, a slightly different proposal may be coming; this one would allow publicly traded companies to install arbitration in such disputes on their own.

SEC Chairman Jay Clayton issued a statement about this proposal.

The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention.  As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration.

“On various occasions, I have been asked about this issue in the hypothetical context of whether the staff of the Division of Corporation Finance would declare effective the registration statement of a domestic company seeking to include mandatory arbitration provisions in its governing documents at the time of its initial public offering.  In response to these inquiries, I stated that, if the issue were to arise in an actual initial public offering of a domestic company, it would not be appropriate for resolution at the staff level but would rather be best addressed in a measured and deliberative manner by the Commission. 

“The issue has risen again, but it is being presented in a different context.  A domestic, publicly-listed company has received a shareholder proposal that would require the company to take steps to adopt mandatory arbitration provisions. The company has asked the staff of the Division of Corporation Finance for informal guidance on whether the company may exclude the proposal from its proxy statement.  Specifically, the request seeks the staff’s view on whether, under Rule 14a-8(i)(2), the company may omit from its proxy statement a shareholder proposal relating to mandatory arbitration of shareholder claims arising under the federal securities laws.  Rule 14a-8(i)(2) permits the exclusion of a proposal that, if implemented, would cause the company to violate any state, federal or foreign law to which it is subject. The company has argued that the proposal if implemented, would result in a violation of both federal and state law. 

“This is a complex matter under both federal and state law, and it has been interpreted differently by the company (arguing that such a clause would violate both state and federal law) and the proponent (arguing that such a clause would not violate state or federal law). The staff considered in its analysis the arguments made by the company, the proponent and the Attorney General of New Jersey, the state’s chief law enforcement officer, and legal advisor. The staff issued a response stating that it would not recommend enforcement action should the company decide to exclude the proposal on the grounds that it would violate New Jersey state law.  In the context of Rule 14a-8, the staff does not independently adjudicate the legality of any provision of state law, and it is not doing so in this matter.  Here, the parties have each asserted different interpretations of state law, neither party has identified New Jersey case law precedent directly on point, and the Attorney General has provided an opinion that implementation of the proposal would violate state law.  In light of the submissions, and in particular the letter of the Attorney General of New Jersey, I believe the approach taken by the staff—to not recommend enforcement action in this complex matter of state law—is appropriate.”

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