President Trump’s SEC to Ban Frivolous Shareholder Litigation
In its determination to reverse a 20 year decline in US stock listings, the SEC may soon offer companies an extreme incentive to go public, and that is the ability to bar “aggrieved” shareholders from suing.
The Securities and Exchange Commission (SEC) in its long history has never allowed companies to sell shares in public markets, while also letting them ban investors from seeking big financial damages through class-action lawsuits.
That is because the agency has considered the right to sue a crucial shareholder protection against fraud and other securities violations.
But, now as US President Donald Trump’s pro-business agenda runs through Washington, the SEC is laying the groundwork for a possible policy shift.
The commission, according to sources, has privately signaled that it is open to considering whether companies should be able to force investors to settle disputes through arbitration, an often closed-door process that can limit the bad publicity and high legal costs triggered by aggressive and often frivolous litigation.
A change to the SEC’s position would be the most significant move yet by Chairman Jay Clayton to make going public more appealing, which he’s laid out as one of his highest priorities since taking over Wall Street’s top regulator last year.
Further it would advance The Trump Administration’s goal of dismantling government policies that it blames for hurting economic growth.
SEC spokeswoman Judith Burns declined to comment.
Chairman Clayton, a former M&A lawyer who worked on Alibaba Group Holding Ltd.’s (NYSE:ABA) record US IPO, is trying to turn around a trend that’s been in place since the early 2000’s.
The best year for US listings was Y 1996 when 949 companies sold shares, according to the data. In Y 2014 just 450 companies went public.
In Y 2017, there were only 237 US IPOs, compared with more than 2,000 on foreign markets.
The SEC staff is said to be encouraging companies to come forward with proposals that would require shareholders to use arbitration to resolve shareholder grievances. That would allow the regulator to review whether the plans pass muster.
This is a Key reversal, as 1 of the major inhibitors that has concerned companies as they think about going public is the risk of frivolous shareholder litigation. The notion that such action could eliminate that risk is significant.
Last October, The Trump Administration weighed in when it recommended that the SEC consider letting companies and shareholders use arbitration to settle disputes.
In a report, US Treasury Secretary Steven Mnuchin and his counselor Craig Phillips said the change could be a way to “reduce costs of securities litigation for issuers in a way that protects investors’ rights and interests.”
Chairman Clayton has notcommented publicly on the matter since taking over SEC last May. He has, however, taken several steps aimed at bolstering the attractiveness of going public.
Last June, he announced that the SEC would let all companies that are preparing to IPO file documents confidentially to the agency laying out the proposed structures of their share sales.
The objective was to let companies work out any kinks without alerting the broader market to their plans to eventually sell shares.
Previously, only small businesses could submit their IPO documents confidentially to the SEC.
Chairman Clayton has tapped William Hinman, a former Simpson Thacher partner based in Silicon Valley who also worked on Alibaba’s share sale, to lead the SEC unit that oversees corporate disclosures. Mr. Hinman’s division, which reviews the filings that companies must submit ahead of IPOs, would play a Key role in deciding whether to allow firms to include mandatory arbitration clauses in their registration documents, according my source.
Notably, if the SEC allowed just company to prohibit lawsuits, all others would follow.
The Council of Institutional Investors warned in Y 2013 that forced arbitration represents “a potential threat to principles of sound corporate governance that balance the rights of share-owners against the responsibility of corporate managers to run the business.”
The US Chamber of Commerce, the nation’s biggest business lobby, has said that class-action lawsuits are devastating for the economy because they impose huge costs on companies. The Chamber also contends that the main beneficiaries are plaintiff’s lawyers, with individual shareholders rarely pocketing much money at all. Those arguments are gaining traction.
Last year, GOP lawmakers killed a regulation that would have restricted companies from including mandatory arbitration clauses in contracts for credit cards and other financial products.
In July, SEC Republican Commissioner Michael Piwowar signaled that the agency’s views on arbitration clauses may be changing.
“For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charter,” he said at an event at the conservative Heritage Foundation in Washington. He added, “I would encourage companies to come and talk to us about that.”
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