Seems like I’ve been writing about litigation limits in corporate constitutive documents since 2014 (because I have).  So many blog posts I can’t search them all, and multiple papers (here, here, here, and here)

The issue on the table specifically right now is arbitration.

The idea that corporations could use charter and bylaw provisions to require mandatory arbitration has been floating around for quite some time.  And it’s not arbitration they’re after; the point would be to require individualized arbitration, so that stockholder claims could not be brought as class actions.

Back in 2016, I published a paper arguing, among other things, that any such provisions could only apply to state claims, not federal securities claims.  But then the Delaware Supreme Court disagreed with me.

I have also argued that if such bylaw and charter provisions are considered potentially “contractual,” they are not governed by the internal affairs doctrine, and the law of the state of incorporation should not apply. The Delaware Supreme Court agrees on the former point and not the latter, leading to much confusion in courts outside of Delaware.

I have also argued that bylaws and charters are not, in fact, contracts, but no one seems to agree with me on that, either.

Which leaves the question – would an arbitration bylaw or charter provision be subject to the Federal Arbitration Act, and thus beyond the power of states to regulate? I, of course, have argued no, but my track record here is somewhat wanting.

Anyway, for a long time, the SEC frowned on these provisions and refused to accelerate the registration statements of companies that adopted them, which meant no one adopted them at all at the IPO stage.

Nothing, though, stopped companies from adopting them once they were publicly traded, other than a kind of tradition and perhaps risk aversion.  Some have argued that they’d be more trouble than they’re worth, but more generally, adopting such a provision would mean expensive and time consuming litigation fighting about their legitimacy under state or federal law, with uncertain value, and might draw the ire of the SEC.  Like, if you’re an SEC that dislikes these provisions, you might think to yourself, “Hey, if this company is essentially exempt from private securities enforcement, we need to give them extra scrutiny” or something. Not necessarily worth it from the company’s perspective.

But that may be changing. 

The SEC just announced it’s reopening the issue of permitting arbitration provisions in the charters and bylaws of companies going public, and I assume that’s all code for the SEC definitely allowing such provisions as soon as administratively feasible.

Now, again, nothing at all stopped companies from adopting these provisions after public trading – which, to be fair, would affect Section 10(b) claims more than Section 11 claims – but the SEC’s open signal of approval, or lack of hostility, might work to encourage more uptake.

Except for the monkey in the wrench.

Just Sept 1, new amendments to the DGCL took effect that, for federal securities claims, straight up bar any charter or bylaw provision that would deny access to at least one court within the state of Delaware with jurisdiction to hear the claim.  In other words, Delaware corporations cannot use charters and bylaws to bar access to any court located in the state of Delaware for federal securities claims. The purpose of this provision was to address the Ninth Circuit’s decision in Lee v. Fisher, where a forum selection bylaw was used to deny access to any forum at all that had jurisdiction to hear the claim. But the new DGCL amendments go further; they don’t merely ensure the claim can be heard in some forum; by their terms, they ensure the claim can be heard specifically in a judicial forum – which bars, by implication, exclusive arbitration clauses. (And several years ago, Delaware barred charter and bylaw provisions that would block access to a Delaware court for state claims).

So right now, Delaware corporations cannot adopt mandatory arbitration provisions for federal claims in their charters and bylaws (or for state law internal affairs claims).

That said, the timing of this DGCL amendment is somewhat awkward because, at the moment, Delaware is locked a new fight for incorporations with Texas and Nevada.  And while I am not convinced the three states offer dramatic differences in terms of the battlefield over state law claims, securities claims are a different animal, and I could see allowing/disallowing arbitration agreements in charters/bylaws becoming a basis on which states credibly compete. (Until they all allow them, in which case, competition is over. Or until the FAA preempts all state law on this subject, which, again – let’s just say my arguments in this area have not proved persuasive.).

And another thing. New Shareholder Primacy podcast! Mike Levin and I talk, naturally, Tesla – the new proposed comp package for Musk, and the pending Delaware Supreme Court case regarding director compensation. Here at Apple; here at Spotify; and here at Youtube. (No new SH Primacy podcast next week, btw; but we’ll be back week after next).