Banning Shareholder Suits: Corporate Charter Arbitration Clauses

Suppose a corporate board proposes, and shareholders approve by majority vote,  a charter amendment providing that all intra-corporate disputes, such as shareholder securities fraud or fiduciary duty suits, be submitted exclusively to binding arbitration.  Would that be valid under state corporation law?  Would federal arbitration law require that it be validated, without regard to whether it would be invalid under state corporation law?

As I write in an op-ed  for the Baltimore Sun today, a dispute over this question is likely to occur in the near future. My prediction is that the Supreme Court can be expected to combine two fictions to mandate that states validate these: that corporate charters really are contracts and that its arbitration jurisprudence is all about enforcing contracts.

The Baltimore Sun entitled the piece “So much for your day in court,” with the tag-line: “Most people are completely unaware that arbitration is taking the place of trials in civil matters across the country.”  I have a more substantial law review article, in Law & Contemporary Problems, discussing the broader point about the Supreme Court’s use of contract rhetoric in its arbitration opinions.  It was based in turn on several posts on this blog, including those of   April  2011 and Nov. 2010.

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3 Responses

  1. nidefatt says:

    Scream. I suppose it’s a symptom of two things: 1. our joy in allowing a free market to decide prices (i.e. arbitrators can charge whatever v. Courts) and 2. A Supreme Court full of non-practitioners who do not, for the life of them, understand the importance of evidentiary rules or anything else our Court system provides. Most countries look at our discovery rules and blanche. This is our Supreme Court backing down.

  2. Chris says:

    I am not sure how this would work for federal securities claims under the 1933 Act or 1934 Act, given the combination of (1) the right to bring suit in court under both the 33 and 34 Act, and (2) antiwaiver provisions in both the 33 and 34 Act.

  3. John D says:

    Fighting issue will be whether the 1933 Act & 1934 Act or the Federal Arbitration Act of 1925 controls.