December 18, 2018

Mandatory Arbitration: The Shareholder Proposals Cometh…

Here comes another salvo in the battle over mandatory arbitration. Recently, John blogged about possible problems with “compelling shareholders to arbitrate” bylaws under Delaware law (here’s an article on that topic). Now comes news about the use of shareholder proposals to have companies adopt mandatory arbitration. Here’s the intro from this WSJ article by Dave Michaels:

Johnson & Johnson is being drawn into a battle over how much freedom shareholders have to sue companies, in a bid by lawsuit opponents to force regulators to pick sides over investors’ access to the courts. Hal Scott, a Harvard University professor who represents a trust that owns J&J shares, filed a shareholder proposal with the company that would push shareholder disputes into private arbitration hearings, instead of federal court. J&J doesn’t want to bring the proposal up for a shareholder vote, and this week the health-care products company asked the Securities and Exchange Commission for permission to reject it.

Supporters of mandatory arbitration say it would save companies money and time, arguing arbitration would be faster and less expensive than grinding out federal lawsuits involving thousands of investors. Proponents argue that class-action access to the courts is vital for holding corporations and executives accountable to shareholders. “This is an important issue for the capital markets,” Mr. Scott said in an interview. “It affects whether private companies want to go public, and whether foreign companies want to list [here].”

About 8.5% of all U.S. exchange-listed companies are projected to be targets of class-action lawsuits in 2018, according to Cornerstone Research, a litigation and economic consulting firm. That is well above the 20-year average of 2.9%, Cornerstone said. Securities class-action lawsuits typically focus on claims that public companies either misled investors about important facts or events, or failed to disclose important information that would have altered shareholders’ investment decisions.

Much of the expense is born by existing shareholders, with other shareholders sometimes benefiting from a settlement or judgment. Research into whether such judgments deter future wrongdoing has been inconclusive, said Donald Langevoort, a securities-law expert at Georgetown University. Mr. Scott is seeking to list his proposal for a bylaw change that would require mandatory arbitration on J&J’s 2019 proxy statement. J&J shareholders would vote on the measure next year.

J&J wrote the SEC this week asking permission to exclude the proposal from its ballot. Forcing investors into arbitration would violate parts of federal law that forbid asking investors to waive their legal rights, J&J’s attorneys wrote. The SEC rules every year on whether companies can omit different shareholder proposals. While public companies could benefit from arbitration, some fear it would offend investors if they were to push too aggressively for it. A J&J spokesman declined comment beyond the company’s letter.

SEC Chairman Jay Clayton has said he wants to avoid a brawl over mandatory arbitration that would pit business groups against investors and likely splinter the five-member commission along party lines. Some Republican commissioners say arbitration should be given a shot if stockholders agree with it.

SEC & PCAOB Revive Chinese Auditor Scare

This MarketWatch article by Francine McKenna says it all about this recent joint SEC/PCAOB statement about the lack of regulator access to audits of Chinese companies that are listed in the US. As the MarketWatch article notes, the SEC & PCAOB haven’t told us why they released this joint statement. Was it in reaction to something they know (that we should know)? Francine ponders whether there is some big China auditor fraud brewing and the US regulators will point to this statement as “we have a “disclosure regime” style here and well, we warned you, our hands are tied here.”

Also see this podcast with Tom Fox & Matt Kelly…

How PCAOB Inspections Might Impact You…

As noted in this article, the PCAOB recently published this “outlook” about it’s intended areas of inspection for next year – some of which impact areas that audit committees are responsible for…

By the way, we’re posting memos that summarize the recent AICPA conference in our “Conference Notes” Practice Area

Broc Romanek