Friday, January 17, 2020

Securities Arbitration on the Ballot

As part of what is apparently my continuing series on developments concerning the use of corporate bylaws and charter provisions to limit federal securities claims….

Earlier this month, the Delaware Supreme Court heard oral argument on whether corporations may include provisions in their charters and bylaws requiring that federal Section 11 claims be heard only in federal court (video of oral argument here; prior posts on this issue here and here and here and here… you get the idea)

Running parallel with that, Professor Hal Scott of Harvard Law School submitted a proposal under 14a-8 requesting that Johnson & Johnson adopt a bylaw requiring that all federal securities claims against the company be arbitrated on an individualized basis. As I blogged at the time, the SEC granted J&J’s request to exclude the proposal on the ground that it appeared that NJ, the state of incorporation – following what it believed to be Delaware law – did not permit federal claims to be governed by corporate charter/bylaw provisions.  Scott filed a federal lawsuit over that, and the action was voluntarily stayed pending the Delaware Supreme Court’s ruling.

But Scott has not let the crusade rest.  As I learned from Alison Frankel’s reporting, Intuit shareholders will vote on one of Scott’s securities arbitration proposals at their January 23 meeting.  (I note that in this version of the proposal, Scott has corrected the text to acknowledge Canada’s existence – which he, ahem, previously overlooked)

Unlike J&J, Intuit did not seek to exclude the proposal from its ballot, but it does recommend that shareholders vote against.  Intuit says:

we are not aware of any other U.S. public company that has adopted the bylaw sought by the proposal and the proponent’s pursuit of the adoption of an identical bylaw by another company is currently the subject of litigation. As a result, there is significant uncertainty as to whether the adoption of such a bylaw is prudent at this time. Given this continued uncertainty, we believe that the adoption of such a bylaw likely would expose Intuit to unnecessary litigation or other actions challenging the bylaw and its consequences. Such challenges would not only be economically costly, but also would divert management’s time and focus away from Intuit’s business.

So, several things.

First, another public company did have such a bylaw, sort of, as I discuss in my Manufactured Consent paper – that company was Commonwealth REIT.   The bylaw did not bar class actions, though it did cover federal claims.

Second, Intuit’s objection is largely rooted in the uncertainty surrounding its legality.  Which is probably why Scott recently filed a comment letter with the SEC regarding its proposed amendments to Rule 14a-8, in which he asks the Commission to permit resubmission of failed proposals “if legal or regulatory circumstances relevant to the proposal have materially changed since its last submission.”  I assume he’s anticipating some losses, and wants to make sure he can resubmit these proposals if the Delaware Supreme Court - or anyone else (hint, hint) - rules his way.

Third, this is not the first time shareholders have had the opportunity to vote on arbitration bylaws.  Back in 2012, Professor Adam Pritchard at Michigan assisted shareholders at Gannett, Pfizer, Google, and Frontier Communications in filing their own proposed arbitration bylaws.  Pfizer and Gannett sought and received no-action relief to exclude the proposals, but Frontier and Google included them in their proxy statements (see here and here, respectively), though in both cases the companies recommended that shareholders vote against.  And in both cases, the bylaws were defeated (see here and here, respectively – I mean, Google has controlling shareholders, it was sort of fait accompli, but even the A shares voted against, so.)

All of which is to say – I’m betting the bylaw fails at Intuit, but (1) I’m terrible at predictions and (2) that will not be the end.  But for now, I guess, all eyes on January 23.

Edit: The proposal was defeated, on the following vote:


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