Mandatory Securities Arbitration’s Impermissibility Under State Corporate Law: An Analysis of the Johnson & Johnson Shareholder Proposal

Abstract

Under New Jersey corporate law, may a corporation adopt a mandatory arbitration provision in its bylaws that would require shareholders to bring federal securities law claims via separate individual arbitration? The issue is squarely raised by a recent shareholder proposal at Johnson & Johnson, a New Jersey corporation, that asks the board to adopt such a bylaw for “disputes between a stockholder and the Corporation and/or its directors, officers or controlling persons relating to claims under federal securities laws.” This whitepaper, which has been signed on to by 26 professors of securities and business law, explains why such a bylaw would violate the New Jersey Business Corporation Act, the relevant provisions of which are similar to those in the Delaware General Corporation Law. Although bylaws may be used to modify the “corporate contract” with shareholders, that authority is not unlimited. Under New Jersey law, as in Delaware, a corporation’s bylaws may only include provisions relating to internal corporate affairs. Because a mandatory securities arbitration provision purports to govern matters that are not internal affairs of the corporation, it is not an allowable subject for corporate bylaws.