A recent ruling by Delaware’s top court could be a harbinger of the outcome in another legal battle over whether shareholders’ securities class actions can be forced into arbitration.
The March 18 decision by the Delaware Supreme Court approved the use of corporate charter provisions that drive some investor fraud suits from state court to federal court, where they’re more likely to be dismissed.
Other courts often look for corporate law guidance from Delaware, where most U.S. companies are incorporated. As a result, the ripple effects of the decision are likely to reach beyond the state’s borders.
“It could reshape the landscape of shareholder litigation,” said Ann Lipton, a professor at Tulane Law School.
A federal district court in New Jersey, for example, is considering the related issue of whether a proposed bylaw at Johnson & Johnson could require shareholders to arbitrate their securities claims.
Letting companies use their charters to bind shareholders to play by their rules in court, as Delaware has done, could put an arbitration bylaw on the table, Lipton said.
Companies prefer arbitration, which is considered cheaper and more efficient than going to court. But it’s opposed by shareholder advocates who argue lawsuits act as a check on corporate behavior.
The Delaware case, Salzberg v. Sciabacucchi, involved corporate charter provisions adopted by Blue Apron Holdings Inc., Roku Inc., and other companies that have gone public in recent years. The provisions require that suits triggered by post-initial public offering stock drops be filed in federal court.
A footnote in the decision said Delaware’s corporate code bars mandatory shareholder arbitration for suits over issues involving Delaware law, like board oversight. But the footnote doesn’t address arbitrating other types of claims, such as those under federal securities law.
“That’s an open question,” said William Chandler, who formerly served on Delaware’s Chancery Court and is now a partner at Wilson Sonsini Goodrich & Rosati.
New Jersey’s attorney general cited an earlier Chancery Court opinion in the Blue Apron case when weighing in on the dispute over arbitration at Johnson & Johnson, saying such a bylaw would violate its state law.
But that earlier opinion has now been reversed, setting up a potential new clash in the arbitration case.
“There’s tremendous implication for our case,” said Harvard law professor Hal Scott, an advocate of arbitration and trustee of a fund invested in Johnson & Johnson.
The case, Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson, was put on hold while the Delaware suit was being appealed because arguments for dismissing his suit rely on the earlier lower court ruling in the Delaware case.
“I feel confident now we will win,” Scott said.
Paul Bland, executive director of Public Justice, a nonprofit legal advocacy group that opposes arbitration clauses, isn’t convinced that the New Jersey court will side with Scott. Doing so would run counter to federal arbitration law’s requirement for agreement between the parties, Bland said.
The Delaware decision described bylaws like a contract between companies and investors who buy their stock, he said. While companies like Blue Apron changed their bylaws before going public, Johnson & Johnson would be adopting an arbitration bylaw after investors already bought shares.
“The idea that you could add a corporate bylaw saying you can’t bring a securities class action claim in court and that could apply retroactively to people who bought shares before the bylaw was in place” goes against that “contract,” Bland said.