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SEC once again dragged into fight over mandatory arbitration

Joe Mont | February 14, 2019

Weighing in on what has been a heated debate—and one drawing out some strange bedfellows—on Feb. 11, the Securities and Exchange Commission issued a “no action” letter to Johnson & Johnson stating that it will not intervene if the company excludes from its proxy materials a shareholder proposal that would force investor disputes into mandatory arbitration.

Mandatory binding arbitration is a contract provision that requires the parties to resolve contract disputes before an arbitrator rather than through the legal system. The proposed bylaw would also prohibit class actions and included a five-year sunset provision unless reapproved by shareholders.

A key to the SEC staff determination was New Jersey Attorney General Gurbir Grewal’s assertion that—as claimed by Johnson & Johnson—the arbitration proposal would violate state law, specifically the New Jersey Business Corporation Act.

“The proposal, if adopted, would cause Johnson & Johnson to violate...

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