Shareholder arbitration champion prods J&J into allowing vote - but still wants more
- Law firms
- Related documents
(Reuters) - An emeritus Harvard Law School professor engaged in a years-long crusade to force shareholders to arbitrate their securities claims has a shot next month to convince Johnson & Johnson investors at their annual meeting to give up their right to file class actions.
But that’s not all Hal Scott wants. He’s suing in federal court in Trenton, New Jersey for a preliminary injunction that would require Johnson & Johnson to tell shareholders that his mandatory arbitration proposal is legal under state and federal law – even though Scott has failed in three years of litigation against J&J to obtain a court ruling that it is.
The preliminary injunction battle is the latest development in a controversy that was red hot a few years ago, as Republican appointees on the Securities and Exchange Commission hinted at reconsideration of the commission’s steadfast opposition to corporate provisions requiring shareholders to waive the right to sue. Shareholder groups mobilized in support of class actions. Advocates on both sides watched warily as newly public corporations litigated in Delaware Chancery Court to uphold corporate charter provisions that required IPO investors to sue in federal court, anticipating that those forum selection provisions might presage mandatory arbitration clauses.
The furor peaked when Scott, a longtime critic of shareholder class actions, demanded in 2018 that J&J allow its shareholders to vote on a proposal that would direct J&J’s board to adopt a mandatory arbitration bylaw. (Scott submitted the shareholder proposal as the trustee of the Doris Behr 2012 Irrevocable Trust, a J&J shareholder.) J&J sought SEC permission to exclude Scott’s proposal from its proxy materials in 2019. The SEC ultimately blessed the exclusion, based on the New Jersey attorney general’s opinion that the Scott proposal was likely a violation of state law.
Scott then sued J&J in Trenton federal court, first trying to force the company to put his proposal up for a shareholder vote, then seeking a declaration that mandatory shareholder arbitration is legal under New Jersey and federal law.
His arguments crystallized after the Delaware Supreme Court ruled in 2020’s Salzberg v. Sciabacucchi that companies can specify a forum (but still a court) for shareholders' Securities Act claims. Scott’s lawyers from Zimolong LLC and Mitchell Law contended, among other things, that the Sciabacucchi decision negated the New Jersey AG’s opinion on the legality of his proposal under state law.
U.S. District Judge Michael Shipp has twice dismissed Scott’s suit as unripe, first in July 2021 and again (after Scott filed an amended complaint) on Tuesday. In both decisions, the New Jersey judge declined to supply an advisory opinion on Scott’s legal arguments.
In the midst of the J&J litigation, Scott’s campaign suffered an additional setback when shareholders of Intuit Inc voted overwhelmingly against the Behr trust’s mandatory arbitration proposal at Intuit’s 2020 annual meeting. The Intuit proposal, as I reported at the time, generated an avalanche of opposition from shareholder groups, including the Council of Institutional Investors and the proxy advisors ISS and Glass Lewis. Intuit’s board also opposed the proposal, citing the trust’s litigation with J&J.
Scott, however, pressed on. J&J told him after Delaware’s Sciabacucchi ruling that it was willing to allow the Behr trust’s mandatory arbitration proposal to go up for a shareholder vote. Scott did not submit a proposal before the company’s annual meeting in 2021 but did this year.
J&J included the trust’s proposal in the proxy materials issued on Wednesday in advance of the company's April 28 annual meeting. In Scott’s statement supporting the proposal, the Behr trust touted the provision’s legality, asserting that the U.S. Supreme Court has “repeatedly held that mandatory individual arbitration provisions do not conflict with the federal securities laws.”
J&J’s proxy also included a statement from the company’s board in opposition to the mandatory arbitration proposal. The anodyne one-paragraph statement said simply that directors do not believe the trust’s proposal is in the best interests of shareholders or the company and that, aside from the trust, no investor has called for mandatory arbitration.
Scott’s preliminary injunction brief, filed on Friday, said J&J’s statement does not go far enough: Because the company previously cast doubt on the legality of the proposal in communications with the SEC, he said, J&J is required under the Securities and Exchange Act to correct its misstatements. (J&J told Scott what the board opposition statement would say before issuing its proxy materials.) Scott said the trust will suffer an irreparable injury if the “taint” of J&J’s previous statements about the proposal’s illegality influences the shareholder vote.
J&J’s lawyers at Skadden, Arps, Slate, Meagher & Flom responded in a letter on Monday. The board’s statement, they pointed out, does not refer to the proposal’s legality at all. Even if Scott is right about its permissibility under state and federal law, the letter said, J&J has no obligation under the Exchange Act to repudiate arguments that the company made to the SEC and in court – but did not assert in previous proxy disclosures to shareholders.
Scott declined by email to comment on the injunction motion. J&J did not respond to my query on the latest wrinkle in its long-running litigation with the Behr trust. Given that Shipp has already refused twice to decide the merits of Scott’s assertion that the proposal is legal, it seems to me to be extremely unlikely that he will grant an injunction that forces J&J to issue a new proxy conceding that point.
But it’s worth noting how little attention Scott’s latest mandatory arbitration proposal has received. When Scott’s Intuit proposal was up for a vote in 2020, as I mentioned, institutional investors turned out in force to urge shareholders to reject it. So far, there’s been no similar movement on the J&J proposal. I reached out to the Council of Institutional Investors, for instance, to see if it planned to opine. General counsel Jeff Mahoney told me there’s been no internal discussion about the J&J proposal.
The debate over mandatory shareholder arbitration has cooled off, but Scott’s still pushing. His opponents had better keep an eye out.
N.J. judge tosses suit testing legality of shareholder arbitration
New battleground in the fight over mandatory shareholder arbitration: Intuit’s annual meeting
The case against mandatory shareholder arbitration
Our Standards: The Thomson Reuters Trust Principles.