For decades, mandatory arbitration provisions covering shareholder claims were largely absent from the governance documents of public companies. Their absence was largely the consequence of two institutional forces. At the federal level, the Securities and Exchange Commission maintained an informal but highly effective practice of opposing arbitration provisions in the corporate charters or bylaws of companies going public. Issuers understood that including such a provision could jeopardize or delay the acceleration of a registration statement. At the state level, Delaware law preserved judicial adjudication for internal corporate claims and federal securities claims through Section 115 of the Delaware General Corporation Law.
Together, these constraints created a stable, litigation-centered equilibrium. Arbitration was not necessarily prohibited by any single rule. It was simply not a viable governance option.
The Disruption of the Dual-Constraint Regime
The SEC’s 2025 policy change disrupted that equilibrium. The Commission announced that a mandatory arbitration provision would no longer affect its decision whether to accelerate a registration statement. Rather than assess whether arbitration was substantively desirable, the SEC would focus on whether the provision and its consequences were adequately disclosed.
This change removed the federal administrative barrier that had long discouraged issuers from experimenting with shareholder arbitration. It also reflected a broader shift in regulatory philosophy—from substantive gatekeeping to disclosure and market choice. The SEC does not endorse arbitration, but neither does it prevent companies and investors from testing it where state corporate law permits.
The shift should not be understood simply as a retreat from investor protection. Shareholder litigation can promote compensation, deterrence, and information disclosure, but it can also impose substantial costs, encourage weak claims, and generate settlements with uncertain benefits for shareholders. The Commission’s decision instead allows companies and investors to test whether arbitration may sometimes offer a more efficient means of resolving shareholder disputes.
Yet removing the SEC constraint does not mean that mandatory shareholder arbitration will become common. The important question is no longer simply whether arbitration is legally permissible, but whether it can become institutionally viable.
That distinction gives rise to what we call the “adoption puzzle”: Why might corporations decline to adopt a legally available mechanism that could reduce their exposure to costly shareholder litigation?
The Case for—and Limits of—Arbitration
For corporate managers, arbitration may offer meaningful advantages. It may reduce litigation costs, discourage weak claims, accelerate resolution, and provide greater procedural flexibility and confidentiality. These potential benefits matter in a system in which even unsuccessful securities claims can create substantial settlement pressure.
Securities class actions may take years to resolve, impose significant discovery and insurance expenses, distract management, and transfer value among shareholders after legal fees have been deducted. Because the corporation typically pays the settlement, recovery may function partly as a transfer from current shareholders to former shareholders rather than as a penalty borne by those responsible for the alleged misconduct.
At the same time, arbitration is not necessarily a less expensive substitute. Federal securities litigation already includes mechanisms designed to screen weak claims, including heightened pleading standards and a stay of discovery while a motion to dismiss is pending.
Class actions also offer a degree of finality that arbitration may not: A single settlement can resolve the claims of an entire class, whereas individual or mass arbitration may expose corporations to multiple proceedings arising from the same conduct, recreating collective pressure in a less predictable and potentially more burdensome form.
The relevant choice is not between a perfect system and a flawed one. The question is whether particular forms of arbitration can improve dispute resolution without unduly weakening enforcement or creating new inefficiencies.
The Political Economy of Mandatory Shareholder Arbitration
The answer will depend on the incentives of the institutions and market participants affected by the current system.
Delaware has especially strong reasons to resist widespread shareholder arbitration. Its corporate law model depends not only on statutory rules but also on continuous judicial lawmaking. The Court of Chancery resolves disputes while producing the precedents that define fiduciary duties, guide transactional planning, and give Delaware law much of its predictability.
Widespread mandatory arbitration could place pressure on that model because arbitration is ordinarily private, and its decisions do not create legal precedent. If significant numbers of corporate disputes were diverted from courts, fewer cases would generate publicly available decisions, potentially weakening the process through which Delaware law develops.
Delaware’s resistance should therefore not be understood merely as doctrinal conservatism. It also reflects institutional self-preservation. Delaware courts produce precedent; precedent attracts corporations; corporations generate disputes; and those disputes produce further precedent. Arbitration interrupts that cycle.
The SEC’s policy change may also intensify competition among states for corporate charters. Texas and Nevada do not appear to impose restrictions equivalent to Delaware’s. Firms that place a high value on arbitration may therefore consider incorporating—or reincorporating—in jurisdictions offering greater contractual flexibility.
This adds shareholder arbitration to the broader debate over “DExit.” If competing states permit arbitration, and corporations begin to use it, Delaware may face pressure to reconsider its position. But that pressure will depend on actual corporate demand, not merely theoretical differences among jurisdictions.
Institutional investors represent another important constraint. Many regard mandatory arbitration, particularly when combined with class-action waivers, as a limitation on shareholder rights. Class actions allow dispersed investors to aggregate claims they could not afford to bring otherwise and may also generate information and supplement public enforcement.
A company’s adoption of an arbitration provision may therefore prompt institutional investors and proxy advisers to, for example, oppose the company’s proposals, vote against its board candidates, and damage its reputation.
Investor resistance, however, may not be decisive. History suggests that investors often tolerate arrangements they publicly criticize when the companies adopting them deliver superior financial performance. Dual-class stock provides a useful analogy. Although institutional investors have long objected to unequal voting structures, successful founder-led technology companies helped transform dual-class governance from an exception into an accepted market feature.
Mandatory arbitration may follow a similar path. If prominent, high-performing firms adopt it without suffering meaningful market penalties, they may reduce its reputational cost for later adopters. Conversely, unsuccessful early experiments could reinforce the perception that arbitration principally insulates management from accountability.
The plaintiffs’ bar will also play a central role. Shareholder litigation relies on a system of plaintiffs’ firms, contingency fees, and institutional plaintiffs. Mandatory individual arbitration threatens that model by preventing claim aggregation and reducing the potential fees from collective recoveries. Plaintiffs’ firms therefore have strong incentives to challenge arbitration provisions in court and oppose them before regulators and legislatures. Their resistance may help sustain the litigation-centered equilibrium even as legal barriers weaken.
The Adoption Puzzle
The SEC’s policy change has reopened the debate over shareholder arbitration, but it has not resolved it. Legal doctrine defines the range of available governance arrangements. Institutional incentives determine which are adopted and sustained.
Mandatory shareholder arbitration may now be conceivable in new ways. Its future, however, will depend on whether corporations adopt it, investors tolerate it, courts enforce it, competing states facilitate it, and successful early adopters alter market expectations.
The central lesson extends beyond arbitration. Corporate governance is not simply a collection of legally permissible contractual provisions. It is an institutional equilibrium supported by regulators, courts, investors, managers, and litigation intermediaries.
Changing one legal rule may destabilize that equilibrium. It does not necessarily replace it.
David J. Berger is a partner at Wilson Sonsini Goodrich & Rosati, president of the American College of Governance Counsel, a fellow at the Rock Center for Corporate Governance at Stanford University, and a senior fellow at the NYU Institute for Corporate Governance & Finance Pierluigi Matera is a co-managing partner at Libra Legal Partners, a professor of comparative law at LCU of Rome, and a visiting professor at Boston University School of Law. This post is based on their recent paper, “The Political Economy of Mandatory Shareholder Arbitration,” available here.