April 24, 2018
Adopting Commissioner Piwowar’s proposal to permit companies to impose mandatory arbitration provisions in connection with their IPOs would rapidly lead to the end of meaningful securities law remedies for investors.
This proposal in fact presents as great a threat to investor rights as anything I have seen in the past thirty years—ranking with challenges in the Supreme Court to the fraud-on-the-market doctrine underpinning securities class actions. To put it bluntly, Commissioner Piwowar’s proposal is calculated to and would in fact deny investors their rights under the securities laws in almost all situations.
While the proposal by Commissioner Piwowar presently is restricted to use by newly formed public companies, it would inevitably spread over time as companies with such provisions make up an increasing share of listed companies. Further, the scope of forced arbitration provisions would certainly morph beyond companies applying for IPOs, as existing public companies, emboldened by the precedent, will find ways to amend their charters or bylaws to force investors out of court and into arbitration proceedings. The temptation for public companies to avail themselves of what effectively is a “get-out-of-jail-free card” by restricting investors’ ability to use both the court system and the class action mechanism will be irresistible.
So why would this mark the beginning of the end of effective remedies for investors? The answer is that forced arbitration would compel investors to participate in a process that undermines all of the critical elements of current securities litigation that makes that process a fair and economically rational option for investors.So why would this mark the beginning of the end of effective remedies for investors? The answer is that forced arbitration would compel investors to participate in a process that undermines all of the critical elements of current securities litigation that makes that process a fair and economically rational option for investors.
Read Allowing Forced Arbitration Clauses in IPOs Would Lead to End of Securities Law Remedies.