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.
The issue of shareholder arbitration is in the news again, this time another court decision on Johnson & Johnson’s rejection of a shareholder proposal.
This one has quite a history, so we borrow heavily from our past coverage. 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 a 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.”
Recent History
The more recent history can be adduced by quoting the Third Circuit’s Opinion in The Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson, No. 22-1657 (3rd Cir. May 9, 2023).
“Plaintiffs are shareholders of Defendant. In 2019, they submitted a proposal for inclusion in Defendant’s proxy materials that would have directed the board of directors to adopt a bylaw requiring shareholders to arbitrate securities claims against the Defendant or its officers or directors. Concerned that the bylaw would violate federal and New Jersey law, Defendant informed the U.S. Securities and Exchange Commission (SEC) staff that Defendant planned to exclude the proposal and requested a no-action letter. The New Jersey Attorney General urged the SEC staff to grant no-action relief, opining that New Jersey law forbade Plaintiffs’ proposed bylaw. In support of that view, the Attorney General relied on a recent Delaware Court of Chancery decision invalidating a similar bylaw. See App. 76–77 (discussing Sciabacucchi v. Salzberg, No. 2017-0931-JTL, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018)). Treating the Attorney General’s position as authoritative, the SEC staff issued a no-action letter. In reliance on that letter, Defendant omitted Plaintiffs’ proposal from its 2019 proxy materials.
“Plaintiffs then sued Defendant in the District Court, seeking both a declaratory judgment confirming the legality of their proposed bylaw under both New Jersey and federal law and an injunction requiring Defendant to include the proposal in its proxy materials. As the parties litigated this suit, the Delaware Supreme Court reversed the Chancery Court opinion that the New Jersey Attorney General had relied upon before the SEC. See App. 27 (citing Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020)). Following that decision, Defendant relented in its opposition to Plaintiffs’ proposal and agreed to include the proposal in future proxy materials.
“Plaintiffs subsequently resubmitted their proposal twice—once in 2022 and again in 2023. On both occasions, Defendant included the proposal in its proxy materials, but Plaintiffs withdrew their proposal before the shareholder vote.
“Defendant moved to dismiss Plaintiffs’ suit for lack of subject matter jurisdiction. The District Court granted that motion and Plaintiffs timely appealed.”
Third Circuit Affirms
On appeal, a unanimous Third Circuit affirms in The Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson, No. 22-1657 (3rd Cir. May 9, 2023). The Court holds that the Shareholders’ claims are not justiciable because they are not ripe and are moot:
“Plaintiffs argue that Defendant could exclude their proposal again. But Defendant’s repeated inclusion of Plaintiffs’ proposal in its proxy materials belies any reasonable expectation that Defendant will do so. Instead, ‘the inescapable fact is—as [Plaintiffs’] speculation about [Defendant’s] future actions reflects—they cannot make a reasonable showing that they will again be subjected to the alleged illegality’” (brackets in original).
(ed: We suspect this is not the last we’ve heard of this issue.)
