> Vol. 94
> No. 3 (2021)
Arbitrating Security Class Actions: The Limits of Forum Selection Bylaws
In November 2018, The Doris Behr 2012 Irrevocable Trust offered a shareholder proposal “to adopt a mandatory arbitration bylaw” in Johnson & Johnson’s annual proxy statement. Led by Professor Hal Scott, the shareholder’s proposal would ban class action shareholder disputes and require investors to resolve federal securities disputes through arbitration.
Predictably, the Doris Behr 2012 Irrevocable Trust proxy proposal set off a flurry of legal actions. Johnson & Johnson first proposed to exclude the proposal from its proxy materials, and sought no-action letter to that end from the Securities and Exchange Commission (“SEC”), claiming that, if implemented, the arbitration bylaw would require the Company to violate state law. In February 2019, the staff of the SEC agreed with Johnson & Johnson and issued the requested no-action letter based on New Jersey state law. The staff’s decision, however, did not end the matter. The same shareholder filed an action in federal court in New Jersey seeking to enjoin Johnson & Johnson’s April 25 annual meeting because, according to the complaint, the Company improperly excluded its proposal. The New Jersey District Court denied Plaintiff’s motion for a preliminary injunction. Later, in June 2021, the district court granted Johnson & Johnson’s motion to dismiss on mootness and ripeness grounds.
While the Doris Behr Irrevocable Trust’s arbitration proposal is uncommon, it is not new. For instance, in 2012, shareholders of Gannett and Pfizer sought to include an arbitration bylaw in each company’s respective proxy materials, but the SEC permitted both companies to exclude the proposal because, according to the SEC, it would violate federal law. Unlike the Johnson & Johnson proposal, which narrowly covered “claims under federal securities laws,” the proposal from both the Gannett and Pfizer shareholders used more capacious language to cover “[a]ny controversy or claim brought directly or derivatively.” More recently, the trustee of CommonWealth REIT adopted a comparably broad arbitration bylaw, which covered all shareholder disputes.
Since October 22, 2021
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