A division of the United States Securities and Exchange Commission (“SEC”) has issued a no-action letter stating a New Jersey-based company, Johnson & Johnson, may omit a shareholder’s proposal to require mandatory arbitration of shareholder claims and prohibit class arbitration without becoming subject to an Agency enforcement action. Under Rule 14a-8(i)(2) of the Securities Exchange Act of 1934, a public company may exclude a shareholder proposal that would result in the violation of an applicable state or federal law. In many cases, however, a company will request a no-action letter from the SEC before doing so in order to guard again an ensuing enforcement action
In a letter dated December 11, 2018, legal counsel for Johnson & Johnson asked the SEC to weigh in regarding whether the company may exclude the shareholder’s arbitration proposal. According to Johnson & Johnson, the shareholder’s request would require the company to violate both federal and New Jersey law. In addition, the Attorney General of the State of New Jersey submitted a letter to the SEC’s Division of Corporation Finance in support of Johnson & Johnson’s position. The New Jersey Attorney General stated “the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law.”
On February 11th, the Division of Corporation Finance issued a no-action letter stating in part:
In light of the submissions before us, including in particular the opinion of the Attorney General of the State of New Jersey that implementation of the Proposal would cause the Company to violate state law, we will not recommend enforcement action to the Commission if the Company omits the Proposal from its proxy materials in reliance on rule 14a-8(i)(2). To conclude otherwise would put the Company in a position of taking actions that the chief legal officer of its state of incorporation has determined to be illegal. In granting the no-action request, the staff is recognizing the legal authority of the Attorney General of the State of New Jersey; it is not expressing its own view on the correct interpretation of New Jersey law. The staff is not “approving” or “disapproving” the substance of the Proposal or opining on the legality of it. Parties could seek a more definitive determination from a court of competent jurisdiction.
The SEC no-action letter closed by specifically stating the Agency was “not expressing a view as to whether the Proposal, if implemented, would cause the Company to violate federal law.”
On the same day the no-action letter was issued, SEC Chairman Jay Clayton published a public statement titled, “Statement on Shareholder Proposals Seeking to Require Mandatory Arbitration Bylaw Provisions.” In his statement, Chairman Clayton reiterated that the agency did not express an opinion regarding whether the shareholder’s mandatory arbitration proposal actually violates federal or state law. According to Chairman Clayton:
The staff of the Division of Corporation Finance explicitly noted that it was not expressing a view as to whether the proposal, if implemented, would cause the company to violate federal law. Since 2012, when this issue was last presented to staff in the Division of Corporation Finance in the context of a shareholder proposal, federal case law regarding mandatory arbitration has continued to evolve. Further, I am not aware of any circumstances where the Commission has weighed in on the legality of mandatory shareholder arbitration in the context of federal securities law. In light of the unsettled and complex nature of this issue, as well as its importance, I agree with the approach taken by the staff to not address the legality of mandatory shareholder arbitration in the context of federal securities laws in this matter, and would expect our staff to take a similar approach if the issue were to arise again. I continue to believe that any SEC policy decision on this subject should be made by the Commission in a measured and deliberative manner.
More generally, it is important to note that the staff’s Rule 14a-8 no-action responses reflect only informal views of the staff regarding whether it is appropriate for the Commission to take enforcement action. The views expressed in these responses are not binding on the Commission or other parties, and do not and cannot definitively adjudicate the merits of a company’s position with respect to the legality of a shareholder proposal. A court is a more appropriate venue to seek a binding determination of whether a shareholder proposal can be excluded.
Based on the statements of both Chairman Clayton and the Division of Corporation Finance it will be interesting to see whether the shareholder, an irrevocable trust whose Trustee is also the Emeritus Nomura Professor of International Financial Systems at Harvard Law School, chooses to file litigation over the matter.