A Johnson & Johnson shareholder filed a law suit asking a court to order the company to include that shareholder’s proposal for mandatory arbitration of securities claims in amended proxy materials before the planned April 25, 2019 annual shareholders’ meeting.
When the SEC’s Division of Corporation Finance told Johnson & Johnson (J&J) it could exclude from its proxy materials a proposal for a corporate bylaw on mandatory arbitration of securities claims that was submitted by The Doris Behr 2012 Irrevocable Trust (Doris Behr Trust) the Division also observed that the Doris Behr Trust could choose to litigate the matter in court. The Doris Behr Trust has now filed a lawsuit in New Jersey federal court contesting the basis (an opinion by the New Jersey Attorney General) upon which the SEC grounded its no-action letter to J&J. The Doris Behr Trust seeks declaratory and injunctive relief that would require J&J to include the proposal in amended proxy materials ahead of its scheduled April 25, 2019, annual shareholders’ meeting. The Doris Behr Trust also vowed to keep submitting the proposal to J&J until the company’s shareholders adopt it (The Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson, March 21, 2019).
Violation of state law? A key component of the SEC’s no-action letter was a letter it received from the New Jersey Attorney General stating that the Doris Behr Trust’s proposal on mandatory arbitration of securities claims would violate New Jersey law. The technical basis for exclusion is Exchange Act Rule 14a-8(i)(2): "If the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject."
The Doris Behr Trust asserts in its complaint that its proposal cannot violate federal law because the Federal Arbitration Act mandates enforcement of arbitration agreements and that the FAA would also preempt contrary state laws. Likewise, the Doris Behr Trust asserts that its proposal would not violate New Jersey law because the New Jersey Attorney General’s letter and J&J did not cite any state laws or judicial opinions that would bar the proposal. The complaint also posits that just because an arbitration agreement might be unenforceable, that fact would not result in a violation of law absent specific penalties for entering into a prohibited contract. The Doris Behr Trust also disputes the timing, and the SEC’s consideration of, J&J’s argument that the proposal would violate New Jersey law.
The question of whether the Doris Behr Trust’s proposal would violate any law may turn on the meaning of the Exchange Act’s anti-waiver provision contained in Section 29(a) ("Any condition, stipulation or provision binding any person to waive compliance with any provision of this title or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void"). The Doris Behr Trust points to the Supreme Court’s opinion in Shearson/American Express, Inc. v. McMahon (1987) which upheld the arbitrability of a jurisdictional matter regarding fraud suits that was not part of compliance with the Exchange Act’s substantive provisions. All nine justices agreed that the FAA established a federal policy favoring arbitration. However, four justices dissented from the part of the opinion dealing with the Exchange Act, although these justices concurred in another part of the opinion regarding civil claims under the Racketeer Influenced and Corrupt Organizations Act. The Doris Behr Trust also cites the more recent Supreme Court opinion in Epic Systems Corp v. Lewis (2018), also a 5-4 decision, for the proposition that the FAA cannot not be displaced by another federal law that had not "manifested a clear intention" for such displacement.
The Doris Behr Trust’s complaint seeks injunctive relief that would require J&J to include the Doris Behr Trust’s proposal in amended proxy materials before the April 25 shareholders’ meeting. The Doris Behr Trust also asks the court to order J&J to acknowledge the lawfulness of the proposal under federal and New Jersey law in order to remove, in its view, the "taint" resulting from J&J’s and the New Jersey Attorney General’s public statements that the proposal would violate federal or state law.
SEC, industry reaction. Following the no-action letter telling J&J it could exclude the mandatory arbitration proposal, SEC Chairman Jay Clayton issued a statement supporting the Division of Corporation Finance and reiterating that the issue was one the Commission should decide if it were presented in the widely expected context of a registration statement that contains a mandatory arbitration provision. Within weeks, the Division of Corporation Finance, in a letter signed by Director William Hinman, rejected the Doris Behr Trust’s request that the Division submit the matter to the Commission. Previously, the North American Securities Administrators Association and Council of Institutional Investors, combined representing a wide swath of state regulators and shareholders, sent letters to the SEC opposing the Doris Behr Trust’s proposal.
The case is No. 19-cv-08828.
Attorneys: Walter Stephen Zimolong (Zimolong LLC) for The Doris Behr 2012 Irrevocable Trust.
Companies: The Doris Behr 2012 Irrevocable Trust; Johnson & Johnson
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