The End of Shareholder Litigation? Allowing Shareholders to Customize Enforcement through Arbitration Provisions in Charters and Bylaws

Abstract:     
Shareholder litigation has been heavily criticized for its inability to compensate harmed shareholders or deter managerial misconduct. While some have suggested abolishing shareholder litigation altogether, this article takes a more moderate approach. I propose allowing shareholders to enforce charter and bylaw provisions that require arbitration of certain disputes. For example, an acquisitive company may require arbitration of merger-related suits, while allowing non-merger suits to proceed in court. Likewise, a company in an industry known for volatile stock prices could require a price drop of three or four standard deviations before the suit could be brought in court, rather than arbitration. Because enforcement would be customized on a company-by-company basis, shareholders could set a better balance between costs and benefits than the ham-fisted, one-size-fits-all regime functioning today. This proposal requires no legislative action; it requires only that the SEC bring its statutory interpretation in line with current Supreme Court precedent.

Number of Pages in PDF File: 58

Keywords: Arbitration, shareholder litigation, derivative suit, bylaws, charter, AT&T Mobility, class action, Delaware law, corporate governance

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