(Reuters) - When shareholders of the tax and accounting software company Intuit Inc gather for the company’s annual meeting on Jan. 23, they will have a chance to vote on a historic proposal to require investors to arbitrate their federal securities claims individually, rather than suing in class actions. Intuit appears to be only the second public company in the U.S. to allow investors to vote on a mandatory shareholder arbitration proposal - Google shareholders voted down a shareholder arbitration proposal in 2012 – and the first to consider such a proposal since the U.S. Supreme Court’s pro-arbitration rulings in 2013’s American Express v. Italian Colors (133 S.Ct. 2304) and 2018’s Epic Systems v. Lewis (138 S.Ct. 1612).
The Intuit proposal, as I’ll explain, faces a tsunami of opposition. But in the seemingly unlikely event that shareholders adopt the proposal, the company’s board will have to consider adopting an unprecedented bylaw requiring investors to surrender their right to go to court to sue as a class. At the moment, no public company in the U.S. forces shareholders to waive class action litigation.
The company did not initiate the mandatory shareholder arbitration proposal. According to Intuit’s proxy statement, the proposal was demanded by the Doris Behr 2012 Irrevocable Trust, which owns 900 shares of the company. If the trust’s name rings a bell, it’s probably because trustee Hal Scott, an emeritus Harvard Law professor and longtime opponent of shareholder class actions, created a ruckus in late 2018 when he submitted a similar mandatory arbitration proposal to Johnson & Johnson in advance of its 2019 annual meeting.
As you might remember, J&J asked for – and ultimately obtained - the Securities and Exchange Commission’s blessing to exclude the proposal from its proxy materials. The Behr trust then sued J&J in federal court in Trenton, asking U.S. District Judge Michael Shipp to rule that mandatory shareholder arbitration is viable under state and federal law. (That case, in which two big state pension funds are appearing as amici to represent shareholders’ interests, seems to be headed for a stay as the Delaware Supreme Court weighs whether corporations can specify a forum for securities claims.)
Unlike J&J, Intuit did not ask the SEC to allow the company to exclude the Behr trust’s mandatory shareholder arbitration proposal from its shareholder proxy materials. The company did not respond to my email requesting comment on its decision to allow shareholders to vote on whether the board should move to adopt a bylaw mandating arbitration of securities claims.
Intuit’s board is urging shareholders to vote down the unprecedented proposal to require investors to arbitrate their securities claims. Its proxy statement noted that the Behr trust is entangled in litigation from its attempt to force a vote on an identical demand of J&J. “As a result, there is significant uncertainty as to whether the adoption of such a bylaw is prudent at this time,” Intuit told shareholders in its proxy filing. “Given this continued uncertainty, we believe that the adoption of such a bylaw likely would expose Intuit to unnecessary litigation or other actions challenging the bylaw and its consequences.”
Investor, consumer and labor groups have mobilized to defeat the Behr trust’s mandatory arbitration proposal. Secure Our Savings, a coalition of 54 organizations opposed to curtailing shareholder class actions, sent a letter this week to Intuit’s directors and officers, noting their concern that the company is allowing the proposal to be voted upon and cautioning the board against “a major and unprecedented change in your bylaws that would force everyday investors, consumers (and) workers into a system that strips them of their fundamental rights to hold Intuit accountable in a court of law.”
The Council of Institutional Investors took a less confrontational approach in its Jan. 9 letter to Intuit’s chairman and lead independent director. CII thanked the Intuit board for opposing the Behr trust’s mandatory arbitration proposal and explained the group’s longstanding position that shareholder arbitration provisions “represent a potential threat to principles of sound corporate governance that balance the rights of shareowners against the responsibility of corporate managers to run the business.” The proxy advisors ISS and Glass Lewis have both issued recommendations against the Behr trust proposal.
New York State’s pension fund filed an SEC solicitation advising other Intuit investors to vote against shareholder arbitration. In an email statement, N.Y. Comptroller Thomas DiNapoli said that mandatory arbitration discourages good corporate governance. The Intuit proposal, he said, “would diminish investors’ ability to hold corporate officers accountable for unacceptable behavior.”
Behr trustee Scott, meanwhile, has sent letters to Intuit’s 10 biggest shareholders - including BlackRock, Vanguard, Fidelity, State Street Global Advisors and T. Rowe Price - arguing that one sure-fire way to resolve any lingering uncertainty about the legality of requiring arbitration of shareholder claims is to adopt a bylaw and test it in court. Scott acknowledged that Delaware, where Intuit is incorporated, has not ruled definitively on the issue but said he is committed to resolving any ambiguity under Delaware law regardless of whether the Intuit proposal is voted down. In an email, Scott declined my request for additional comment.
In one sense, it will be a big victory for mandatory shareholder arbitration opponents to defeat the Intuit proposal. If Intuit’s shareholders vote against arbitration, they’ll signal support for securities class actions, even as the Supreme Court promotes arbitration and conservative SEC commissioners hint at softness in the agency’s once-unwavering stance. SOS, CII and the investor community have certainly mustered a robust response to Hal Scott’s Intuit proposal. But as the SOS letter to Intuit said, it’s worrisome that they had to do so.
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