Bylaws Mandating Arbitration of Stockholder Disputes?
68 Pages Posted: 7 Jun 2014 Last revised: 11 Apr 2015
Date Written: 2015
Would a board-adopted bylaw mandating arbitration of stockholder disputes and eliminating the right to pursue such claims on a class action basis be enforceable? That question came to the fore as a result of late June 2013 decisions from the United States Supreme Court and the Delaware Court of Chancery, which, when read together, suggest that the answer to this question is yes. In American Express Co. v. Italian Colors Restaurant, the United States Supreme Court, interpreting the Federal Arbitration Act, upheld a mandatory arbitration provision, including a class action waiver, in a commercial contract. The decision focused upon the arbitration provision as a contract subject to the FAA. Next, the Delaware Court of Chancery rendered its opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corp. The decision, which emphasized that bylaws are contracts between a corporation and its stockholders, upheld the validity of bylaws adopted by the boards of Chevron Corporation and FedEx Corporation requiring that intra-corporate disputes be litigated exclusively in Delaware courts. Subsequent United States Supreme Court and Delaware Supreme Court decisions addressing forum selection and the board’s power to adopt bylaws have only strengthened the argument.
In addition to complementing each other, both American Express and Boilermakers address a similar issue, namely, the explosion in class action and derivative litigation that settles primarily for attorneys’ fees, most commonly in the context of mergers and acquisitions. Stockholders ultimately bear the costs of such litigation. Class actions and derivative lawsuits are forms of representative litigation, in which named plaintiffs seek to act on behalf of a class of stockholders or the corporation itself. The plaintiffs are customarily represented by attorneys on a contingent fee basis, making the lawyer the “real party in interest in these cases.” If mandatory arbitration bylaws barring class actions were enforceable, the logical outcome would be a marked decline in class actions, since the alleged existence of a class is a principal driver of attorneys’ fees.
This Article examines the legal and policy issues raised by arbitration bylaws, whether adopting such bylaws would be attractive to public companies, likely reaction from stockholders and opportunities for private ordering. Since arbitration is a creature of contract, this article argues that there are opportunities for corporations to craft bylaws that take into account company-specific issues, while responding to many likely criticisms. However, the inherent bias of some stockholders and corporations against arbitration is likely to make experimentation in this area slow and difficult.
Keywords: arbitration, bylaws, stockholder, class action, derivative, contract
JEL Classification: G34, K12, K22, K41
Suggested Citation: Suggested Citation