Delaware's Newest Dilemma: Mandatory Arbitration and State Competition for Corporate Charters

     Mandatory arbitration of shareholder claims is poised to reshape corporate litigation and interstate competition for corporate charters. SEC Chair Paul Atkins has led the SEC to reverse its long-standing policy against mandatory arbitration of federal securities claims. SpaceX's bylaws, which conditionally require arbitration of internal corporate and federal securities disputes, bring longstanding debates over arbitrability, shareholder consent, and corporate governance to the forefront. This Article examines the complex legal status of arbitration provisions under state and federal law and their implications for state competition for corporate charters.

     We argue that, under current law, most derivative corporate and securities claims already can be subjected to arbitration through contracts binding the corporation. Mandating arbitration of direct shareholder claims in public corporations through contracts presents greater legal and practical difficulties. Subjecting direct claims to arbitration likely requires bylaw or charter provisions but such provisions are, under current law, either invalid or of uncertain validity. In light of firm demand, we expect that some states will revise or clarify their corporate law to permit such mandatory arbitration bylaws.

     The Article then examines mandatory arbitration's appeal to companies (and its downsides). Proponents of mandatory arbitration of shareholder claims have pointed to the possibility of eliminating class actions, of limiting discovery, and of generally reducing lawsuits. Together, they argue, this will reduce wasteful shareholder litigation. Opponents, on the other hand, focus on the reduction of shareholders' litigation rights, and the accompanying reduction in deterrence, as well as on the difficulties that splitting claims among different forums can pose for comprehensive resolution of litigation.

    We then turn to the effects on the interstate competition for corporate charters of a substantial number of companies opting in to arbitration. We show that arbitration poses a serious threat to Delaware's preeminence. If widespread, it will reduce franchise-tax and legal-services revenues and erode the entry barriers in the market for corporate charters that have protected the enormous profits that Delaware' derives from its position as the predominant domicile for large corporations.

     If we are right that the arbitration train is about to leave the station, Delaware will have to respond, even if it would prefer not to. We propose that Delaware amend its law to permit mandatory arbitration but to require that new exclusive forum provisions of all sorts be contained in the charter, not just the bylaws. This approach would preserve corporate choice, mitigate federal preemption risk, and protect shareholders against unilateral, board-imposed changes to their litigation rights.