Originally from American Review of International Arbitration - ARIA

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Heeding the revival of the stormy relationship between arbitration and corporate governance, this article resumes the inquiry into the legal force, under U.S. law as would be applied by U.S. courts, of all-inclusive arbitration agreements in a public company’s constitutional documents, inserted by proper shareholder vote – whether upon or after incorporation, before or following an initial public offering – and commanding the exclusive resolution by arbitration of controversies among shareholders, directors/officers and the corporate entity.  The analysis is not confined to the arbitrability of derivative claims premised on fiduciary duty breaches or securities violations – the focal point of prior commentary.  Rather, it assumes that the ambit of the arbitration provision would cover the entire web of intra-corporate disputes, including direct claims related to operational issues (e.g., exercise of preemptive or appraisal rights),  and vets whether acquisition of an ownership stake in a public company automatically signals adherence to the arbitration agreement in its governing documents.

Puzzling questions about contractual freedom, public policy and the authenticity of consent arise under this hypothesis: would it be fair to bind the average unsuspecting retail investor to some inconspicuous clause in corporate documents that spirit away her right to sue in a “regular” court?  Could the issuer ever ensure that the content of its bylaws is adequately brought to the attention of prospective shareholders?  An American court has never decided the issues as framed here, but, in light of the remarkable progress made since the Pennsylvania company incident, there is no assurance that the scenario would play out before the SEC the same way as then.

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Part I of this article recounts in detail the domestic developments that have re-ignited a long forgotten controversy, focusing on the Committee’s proposals and the responses thereto.  Part II then lays out the findings of the first comprehensive survey on U.S.-exchange-listed public companies with an arbitration clause in their governing documents.  Careful research into public filings of U.S.-registered companies reveals traces of a pro-arbitration trend among foreign issuers and a corresponding policy turnaround on behalf of the SEC, both underestimated in the literature.

Against this rich background, Part III scrutinizes the legal underpinnings of arguments for and against the enforceability of arbitration clauses in public company constitutions. Analogizing from the widespread use of ADR techniques in the securities industry, blessed by the Supreme Court, as well as the evolution of the law on the arbitrability of conflicts in close corporations, this section finds legal objections to arbitration wholly unpersuasive. The article’s thesis coincides with the prevailing view among the handful of commentators identified above (Shell and Coffee) and throughout the article – i.e., that modern arbitration law does not bar the enforcement of charter-based clauses as valid arbitration agreements, even without disclosure requirements other than those already in place.

Part IV moves the discourse to the international level and pays due regard to legislative responses to this legal phenomenon in other nations, varying from statutory prohibition (Italy) to a legal obligation to arbitrate all or specific categories of intra-corporate differences, on an exclusive basis or even as a listing condition (Brazil).  The comparative analysis teaches useful lessons about the efficiency of granting public companies and their owners wide latitude in the selection of methods of intra-corporate conflict resolution, latitude not inconsistent with the history of the common law.

The final section briefly appraises the overall implications of intra-public company arbitration and, summing up, concludes that there is no reason why public company stockholders would, from a legal viewpoint, or should, as a matter of policy, be precluded from waiving their right to court adjudication.