The staff of the U.S. Securities and Exchange Commission has granted requests by Gannett and Pfizer to omit a novel shareholder proposal that seeks to mandate arbitration of investors’ securities fraud claims.
In separate no-action rulings on Feb. 22, the staff agreed with the companies’ arguments that the binding resolutions could be excluded from the firms’ proxy statements because they would violate federal securities laws.
The two similar proposals were filed by retail investors Donald and Susan Vuchetich of Ann Arbor, Michigan. Their proposed bylaw seeks to mandate the arbitration of claims for less than $3 million in damages that are brought by investors who bought shares after the bylaw’s effective date and related to corporate conduct after that date.
In their supporting statement at Gannett, the proponents argued: “Lawyer-driven class actions impose large burdens on corporations without meaningful benefits to shareholders. Suits commonly are filed soon after merger announcements or stock price changes to generate legal fees in settlements. Shareholders bear the ultimate costs of defending court class actions, funding settlements, and indemnifying officers and directors. Requiring arbitration on an individual basis should reduce such abuses. The proposed bylaw would affect only future purchasers of shares.” The proponents also supported their resolutions with legal opinions from two University of Michigan law professors, Adam Pritchard and Cyril Moscow.
In its no-action letter, Gannett said that the SEC staff has consistently maintained that arbitration clauses in the corporate documents of public companies are contrary to the public interest. Gannett also argued that the proposal would violate the anti-waiver provisions of Section 29(a) of the Securities Exchange Act of 1934 because it “would substantially weaken the ability of investors in the Company's securities to pursue a substantive Exchange Act right--the private right of action under Section 10(b) and Rule 10b-5.”
“Although sympathetic to the principal concerns espoused in the Proponent's supporting statement, the Company believes that the implementation of the Proposal would cause it to violate the federal securities laws,” Gannett said in its no-action petition. “Rather than having the Company's proxy statement serve as a test case for investor sentiment on the issue, the appropriate course of action is for the issue to be debated and decided by Congress, through amendment to the Exchange Act, or by the Commission, through the appropriate rulemaking process pursuant to the same and under the Securities Act of 1933, as amended.”
In its no-action request, Pfizer argued that the Vuchetichs’ proposal would violate Section 29(a) and asserted that the proposal would infringe on Delaware law.
The topic of arbitration has received more investor attention in recent months. Private equity giant Carlyle Group originally included an arbitration mandate in the documents for its planned public offering, but later dropped that provision amid opposition from the SEC staff and some lawmakers and activist investors.