Compelling Arbitration of Stockholder Class Actions Based on Federal Securities Law

Joseph W. Bartlett, Founder VC Experts and Cathy Reese, Principal, Fish and Richardson

7 minutes to read

With recent endorsementsfrom two influential advisory bodies, i.e., the Interim Report of The Committee on Markets Regulation (the so-called "Paulson Committee")[1] and the McKinsey report sponsored by Mayor Bloomberg and Senator Schumer, "Sustaining New York's and the US' Global Financial Services Leadership,"[2] it would appear that, as soon as the same is put to the test, the SEC is likely … at least more probable than not … to relax its informal opposition to charter provisions which provide for compulsory arbitration of shareholder lawsuits, including class actions, against US public companies registered with the SEC. There is little doubt remaining that compulsory arbitration of shareholders suits, including egregiously expensive class action litigation, is legal under the Federal Arbitration Act and, therefore, preempts State law based on "unconscionability." The principal cases on this subject, emanating in fact from the US Supreme Court, are cited in the two reports and are discussed in some detail in a lengthy memorandum on the subject and now available at, on 10/31/2006 ("Tort Reform In The Securities Sector"), Buzz of the Week and/or on the Fish & Richardson website,

Assuming corporate management agrees with the legal analysis in both the reports and the cited memorandum, the question then has to do with the appropriate charter amendment. What language suggests itself as appropriate and recommended, given the necessity of adapting arbitration procedures to concerns expressed on the fairness and equity of the same. A copy of a proposed charter amendment is attached … and available on the Fish & Richardson website at If interested, please contact Joseph W. Bartlett at or Cathy Reese at in the Wilmington, Delaware office.


Any and all disputes or controversies arising out of, related to or in connection with claims or demands by stockholders of the Corporation against, on behalf of, or for the benefit of the Corporation or its officers and directors, whether in tort, contract or otherwise, and based, in whole or principally, on violations of federal law and regulation respecting the purchase, retention and sale of "securities" as defined in Section 2(a) of the Securities Act of 1933 shall be finally settled and determined by arbitration under the American Arbitration Association then current Rules of Commercial Arbitration (the "AAA Rules"). Each appointed arbitrator in connection with the arbitration shall have an international reputation as being experienced in the legal and technical matters related to the dispute. The seat of arbitration shall be Wilmington, DE. The arbitrator(s) may hold hearings at such other locations as the arbitrator(s) shall determine, after consultation with the parties. The arbitral proceedings and all pleadings and written evidence shall be in the English language. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or true copy thereof. The written award of the arbitrator(s) shall be final and binding upon the parties, and judgment on or enforcement of the award so rendered may be sought, had or entered in any court having jurisdiction, all provided that the following specific provisions shall apply and, in the event of a conflict with the AAA Rules, shall control.

  • Each appointed arbitrator in connection with the arbitration shall be experienced in the legal and technical matters related to the dispute: preference shall be given to at least one member of the tribunal (the "Tribunal") being experienced in financial matters and/or accounting conventions.
  • Upon commencement of any proceeding involving, in whole or in part, alleged violations of the federal securities law, including Rules and Regulations of the Securities and Exchange Commission (the "SEC"), notice shall be contemporaneously served on the SEC at its offices in Washington, D.C., in accordance with procedures adopted by the SEC with reference to compulsory arbitration charter provisions or, in default of any such procedures, the Division of Corporate Finance, Office of Chief Counsel, Securities and Exchange Commission, 100 F Street, N.W., Washington, D.C. 20549, by registered mail, return receipt requested. The SEC shall be afforded the opportunity periodically to review each proceeding and publish such rules as it may deem appropriate to insure that the procedures are appropriately designed to serve the interests of justice.
  • The SEC, or its designee, shall be afforded the opportunity to participate in hearings before the Tribunal and express its views on issues involving the interpretation or application of Federal securities law to the facts of the proceeding, by filing a memorandum with the Tribunal and participating, with the consent of the Tribunal, in oral argument to the Tribunal to the extent the opportunity for oral argument is afforded to the parties, it being understood that the SEC will not participate as if a party in the instant proceeding but will limit its participation to functioning as an advisor/amicus on federal securities law issues.
  • The Tribunal shall have the power to consolidate any and all actions arising out of the same or related subject matter(s) in one proceeding for purposes of: document production; depositions; expert testimony and other like interlocutory matters; and may consolidate entire proceedings into a single class arbitration, appoint lead counsel for the class, determine the compensation of lead counsel and impose other rules of procedure consistent with the Private Securities Litigation Reform Act and other federal procedural law governing class litigation.
  • All settlements will be submitted to the Tribunal prior to the award of counsel fees out of the proceeds of such settlement.
  • The decisions of the Tribunal shall be in writing and shall contain a statement of the facts and rulings on matters of law, unless the amount in controversy is less than $50,000 and the Expedited Procedures in Article 39 of the AAA Rules are applicable;
  • The decisions of the Tribunal shall be final and binding, subject to appeal to the appropriate state or federal courts, such appeals limited to legal issues arising under federal and/or state legal principles.
  • Notice of the charter provisions and the corresponding language in the by-laws of the Corporation (the "Provisions") shall be affixed on the face of all certificates representing securities issued by the Corporation, with an appropriate summary of the substance of the Provisions and directions on how to obtain, at the Corporation's expense, a complete and up to date copy of the Provisions; a copy of the entire text of the Provisions will be available on the Corporation's website; all written or digital communications with security holders of the company will contain a legend directing the holder to the appropriate portal for access to the full text of the Provisions; upon registration of the Corporation under Sections 12(g) and 15(d) of the Securities Exchange Act of 1934, all registration statements and other public disclosures required by law shall contain a legend indicating the existence of the Provisions and clearly identifying the opportunity to access the text of the same.
  • In connection with the registration by the Corporation of any securities under the provisions of the Securities Act of 1933 (the "`33 Act") or the Securities Exchange Act of 1934 (the "`34 Act") the Corporation shall issue a press release, and notify all members of any underwriting syndicate and/or any broker/dealers making a market in the Company's, announcing the existence of, including instructions on how to access, the Provisions.
  • In connection with the registration of any securities for public distribution securities, by the Corporation pursuant to the `33 Act, the registrant shall, at the commencement of the registration process, file a certified copy of the Provisions with the SEC in accordance with such rules as the SEC shall promulgate or in default of any such Rules, with the Division of Corporation Finance, Office of the Chief Counsel; the SEC will be expressly invited and authorized to comment on any or all of such Provisions in the interest of the fair and equitable resolution of security holder claims, demands, disputes and controversies and is expressly authorized to condition its approval of any registration materials filed by the registrant on compliance with the SEC's comments and requirements as to the content of the Provisions, all in light of the stated objective of the Corporation and the SEC, as stated above.

    [1] For a full copy of this Report, see 11.30Committee_Interim_ReportREV2

    [2] For a full copy of this Report, see NY_REPORT_20_FINAL