At an Open Commission Meeting last week, the SEC approved a 20-page policy statement reversing a longstanding policy that the Staff wouldn’t accelerate the effectiveness of a registration statement if the company’s bylaws had a provision mandating arbitration. The SEC also made a related change to Rule 431(e) of the Rules of Practice so that the delegated authority for the Staff to declare registration statements effective matches this new policy change.
Here are four things to know:
- The SEC is not endorsing mandatory arbitration bylaws: The SEC’s policy statement makes clear that the Commission isn’t meant to “express any views on the specific terms of an arbitration provision, or whether arbitration provisions are appropriate or optimal for issuers or investors.” As SEC Chair Atkins noted in his statement on the policy, the purpose of the policy statement is merely to clarify that mandatory arbitration bylaws aren’t inconsistent with the federal securities laws.
- State law might prohibit the adoption of mandatory arbitration bylaws: If a company is considering adopting such a bylaw, it will need to check state law as some states have laws prohibiting their adoption. For example, Delaware law generally prohibits charters and bylaws from mandating arbitration for claims that would otherwise be litigated in court, particularly for internal affairs claims (see Section 115 of the Delaware General Corporation Law). There are some recent exceptions to this such as last year’s enactment of Section 122(18) of the DGCL allowing corporations to enter into stockholder agreements that include mandatory arbitration provisions.
- Proxy advisors and institutional investors might not want mandatory arbitration bylaws: We haven’t heard the views yet from proxy advisors and larger investors about whether they would object to the adoption of this type of bylaw.
- Rationale for original ban on mandatory arbitration bylaws: When the SEC first adopted the ban on mandatory arbitration bylaws, it was concerned that such bylaws were inconsistent with the anti-waiver provisions of the federal securities laws – Securities Act Section 14 and Exchange Act Section 29(a) – which state that any condition that would bind a person to waive compliance with those laws is void.
Authored by
Broc Romanek