The issue of shareholder arbitration is in the news again, this time in the form of a long-awaited court decision on Johnson & Johnson’s rejection of a shareholder proposal.
Recall that we reported in SAA 2019-07 (Feb. 13) that then-SEC Chairman Jay Clayton in February 2019 issued a formal Public Statement backing a staff decision to issue a “no-action letter” on Johnson & Johnson’s decision to omit the shareholder proposal on arbitration. J&J had asked SEC staff for informal guidance “on whether, under Rule 14a-8(i)(2), the company may omit from its proxy statement a shareholder proposal relating to mandatory arbitration of shareholder claims arising under the federal securities laws.” We next reported in SAA 2019-13 (Apr. 3) that in March 2019 a shareholder filed The Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson, Inc., No. 3:2019cv08828 (D. N.J. Mar. 21, 2019), a declaratory judgment action alleging that J&J violated federal law by rejecting the proxy proposal. The main argument? The Federal Arbitration Act (“FAA”) and SCOTUS jurisprudence permit arbitration clause use and the SEC is estopped by Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), from ruling otherwise.
The Other Shoe Drops
We reported in #2019-13 that an injunction was also sought, but denied, and that the case in chief was still pending. That’s no longer the status, as the District Court on June 30 in 2021 WL 2722569 (unpublished) granted J&J’s motion to dismiss. The issues before the Court: “The [Trust] seeks a judgment declaring that: (1) Defendant ‘violated [S]ection 14(a) … by excluding the Trust’s proposal from its 2019 proxy materials’; (2) Defendant will not violate federal or New Jersey law ‘if it amends its bylaws in the manner described in the Trust’s proposal’; and (3) ‘any New Jersey law that purports to prevent a company from requiring its shareholders to arbitrate their federal securities law claims is preempted by the Federal Arbitration Act ….’ In a thoughtful Opinion, District Judge Michael A. Shipp considers and rejects each challenge.
Rule 14(a) Claim is Moot
“In moving to dismiss, Defendant argues that Plaintiffs’ request is moot because it seeks a declaratory judgment regarding past conduct only…. Despite Plaintiffs’ suggestion to the contrary, the [Trust] plainly states that it seeks a declaration regarding past conduct — that Defendant ‘violated [S]ection 14(a) … by excluding the Trust’s proposal from its 2019 proxy materials’ …. This request, however, ‘is [ ] moot because declaratory relief cannot be obtained for alleged past wrongs, given that “‘[t]he remedy is … by definition prospective in nature’” (citations omitted).
Claims for Prospective Federal and State Law Violations are Not Ripe
“Defendants argue that Plaintiffs’ second request for declaratory relief should be dismissed as not ripe because any controversy with respect to a proposal that the Trust might submit in connection with future shareholder meetings is entirely hypothetical at this juncture and contingent on future events…. On these facts, the Court agrees that Plaintiffs’ request is not ripe because any controversy with respect to a proposal that the Trust might submit in connection with future shareholder meetings is hypothetical at this juncture and contingent on future events, including this Court issuing a declaration that the proposal is legal under both federal and state law” (emphasis in original).
FAA Preemption Assertion Seeks an Impermissible Advisory Opinion
Last, the Court declines to engage the FAA preemption issue: “[Courts] ‘may not decide questions that cannot affect the rights of litigants in the case before them or give opinions advising what the law would be upon a hypothetical state of facts’ …. That is precisely what Plaintiffs’ request in this case: a declaration that ‘any New Jersey law that purports to prevent a company from requiring its shareholders to arbitrate their federal securities law claims is preempted by the Federal Arbitration Act’ …. Thus, the Court denies Plaintiff’s final request because the requested declaratory relief would amount to an advisory opinion” (citations omitted).
(ed: *Maybe it’s our natural skepticism, but we suspect this is not the last we’ve heard of this issue. **The long delay in getting a final ruling was the result of the parties’ stipulating to await the Delaware Supreme Court’s ruling in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020). The case was reopened following the March 2020 decision in Salzberg. As reported in SAA 2020-12 (Mar. 25), the Delaware Supreme Court in Salzberg upheld unanimously use of a corporate charter’s forum selection clause mandating that stockholder 1933 Securities Act claims be brought in federal district court.)
This post first appeared on the Securities Arbitration Alert blog. The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.