The SEC’s Pivot on Mandatory Arbitration Clauses: What Public Companies Need to Know

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The Change

On September 17, 2025, and effective September 19, 2025, the Securities and Exchange Commission (the “SEC”) announced two significant updates affecting its long-standing policy prohibiting certain mandatory arbitration provisions in a company’s governing documents.

First, the SEC issued a policy statement (the “Policy Statement”) stating the presence of a provision in an issuer’s organizational documents that mandates the arbitration of shareholder claims arising under the federal securities laws will not impact the SEC’s decision to accelerate the effectiveness of the issuer’s registration statement. The SEC based its decision upon the United States Supreme Court’s jurisprudence related to Federal Arbitration Act (“FAA”), concluding that, pursuant to the FAA’s policy favoring the enforcement of arbitration clauses, claims arising under the federal securities laws should be arbitrated where such clauses are present.

In explaining this change, SEC Chairman Paul Atkins noted that the SEC “is not a merit regulator that decides whether a company’s particular method of resolving disputes with its shareholders is ‘good’ or ‘bad.’” Rather, the SEC’s goal is to promote adequate disclosure, including the existence and details of any mandatory arbitration clauses.

The SEC’s pivot marks a stark departure from its previous policy, which discouraged mandatory arbitration clauses covering shareholder claims under the federal securities laws. Previously, issuers pursuing initial public offerings had to remove such prohibitions before the SEC would declare their registration statement effective.

Second, together with the Policy Statement, the SEC amended Rule 431 of its Rules of Practice (“Amended Rule 431”), providing that third-party challenges to the SEC staff’s acceleration decisions will no longer automatically stay the effectiveness of those decisions. Amended Rule 431 applies to decisions regarding the effectiveness of registration statements as well as qualifications to offering statements and post-qualification amendments under Regulation A. Amended Rule 431 is designed to minimize interruptions to and uncertainty in the offering process. Thus, for issuers that include mandatory arbitration provisions in their governing documents, these issuers should face fewer objections to their mandatory arbitration provisions from third parties, at least after the SEC staff’s decision to accelerate the effective date of the registration statement.

State Law Implications

The Policy Statement does not answer the question of whether mandatory arbitration clauses are permissible under state law; as a result, state law may still prohibit a company from including a mandatory arbitration clause in its governing documents. Delaware, for example, precludes these mandatory arbitration clauses. On June 30, 2025, Delaware amended § 115(c) of the Delaware General Corporate Law (“DGCL”) to emphasize that Delaware companies must allow shareholders to bring certain claims, which would include claims under federal securities laws, in at least one Delaware court. Chairman Paul Atkins addressed this Delaware amendment in his October 9, 2025 speech at the John L. Weinberg Center for Corporate Governance’s 25th Anniversary Gala: “[u]nfortunately, for public companies that consider mandatory arbitration to be a vital aspect of their dispute resolution strategy, [this amendment] has effectively eliminated Delaware as an option for incorporation.”

The recently amended DGCL § 115(c) could provide more kindling for the “DExit” fire (i.e., the trend, or at least perceived trend, of companies departing from Delaware as their state of domicile), perhaps leading more companies to consider looking for alternative states of incorporation. Nevada and Texas, two surging alternatives, do not appear to impose the same statutory barriers to mandatory arbitration clauses. Nevada statutory law explains that internal governing documents containing forum and venue selection provisions for “internal actions” must include a Nevada court yet emphasizes that it “must not be interpreted as prohibiting any corporation from consenting . . . to any alternative forum in any instance,” suggesting that Nevada likely permits mandatory arbitration provisions.^[i] Texas statutory law provides that governing documents “may require” claims to be brought exclusively in a Texas court but is otherwise silent as to any prohibition on alternative forums.^[ii]  

Weighing Arbitration and Litigation

Assuming that a company is permitted to include mandatory arbitration provisions under both federal and applicable state law, the company must still analyze if a mandatory arbitration provision is a good idea.

Unlike courts, arbitrators are not bound by legal precedent and often do not have to explain their decisions. Arbitration also does not provide companies with the protections of the Private Securities Litigation Reform Act (“PSLRA”), such as heightened pleading requirements that may allow for early dismissal of shareholder claims. Further, when it comes to appealing an arbitration decision, parties typically have less opportunities to do so than they otherwise would with a trial court’s decision.

On the other hand, arbitration enables a company to avoid facing class-action suits and often provides a more limited discovery period. Arbitration may also be a more expedient and cost-effective process for companies. However, arbitrations are not always cheaper, as costs can be unpredictable and often higher than in litigation; for example, DoorDash paid over $9.5 million in arbitration fees across a series of employment disputes, paying $1,900 per valid pleading. As the DoorDash example illustrates, even though class-action suits are not available in arbitration, mass arbitration strategies could still bring large numbers of plaintiffs to the table and expose public companies to high-dollar amounts through mandatory arbitration fees. Ultimately, the choice between litigation and arbitration depends on company-specific factors and is not a one-size-fits-all decision.

Other Possible Ramifications of Adopting Mandatory Arbitration Clauses

Companies should also assess whether proxy advisory firms, such as Glass Lewis and ISS, support mandatory arbitration clauses. Glass Lewis’s 2025 U.S. Benchmark Policy Guidelines (the “Glass Lewis Guidelines”) state that Glass Lewis may recommend voting against the chair of the governance committee (or the entire committee) if a company seeks to adopt clauses that limit shareholders’ ability to pursue full legal recourse, including mandatory arbitration clauses. ISS does not have an explicit policy mirroring the Glass Lewis Guidelines. Nevertheless, according to the ISS’s Proxy Voting Guidelines Benchmark Policy Changes for 2025 (the “ISS Guidelines”), ISS may not support bylaw amendments that introduce an “exclusive forum provision without compelling rationale and without evidence of past harm due to shareholder legal proceedings outside of the jurisdiction of incorporation,” suggesting that ISS may oppose mandatory arbitration provisions as well.

Institutional investors have also voiced opposition to mandatory arbitration provisions. For example, the Council of Institutional Investors (“CII”) maintains that mandatory arbitration clauses “undermine shareholder rights by restricting access to judicial forums.” On September 16, 2025, the day before the SEC’s release of the Policy Statement, California Public Employees’ Retirement System (“CalPERS”), the largest U.S. public pension fund, sent a letter to Chairman Atkins similarly opposing mandatory arbitration clauses: “Forced arbitration would prevent investors from joining together to hold companies accountable for securities fraud and other misconduct. This would not only reduce recoveries for harmed investors but also diminish the deterrent effect that class actions provide.” If the positions of CII and CalPERS are indicative of the general institutional shareholder stance, companies should anticipate considerable pushback from institutional shareholders when adopting mandatory arbitration clauses.

Proxy advisory firms and institutional investors are not the only ones that oppose the SEC’s change in policy. Some plaintiff firms have warned that adoption may prompt litigation (e.g., potential lawsuits challenging a corporation’s ability to prohibit shareholder class actions under federal law), cautioning that companies may be “buying a lawsuit” by adopting mandatory arbitration. Although the Policy Statement cites precedent that supports allowing mandatory arbitration provisions in the context of the federal securities laws, plaintiffs may directly test the relationship of the FAA and the federal securities laws. Therefore, companies contemplating adopting mandatory arbitration provisions should also monitor plaintiff firms’ responses in the aftermath of the Policy Statement.

Takeaways for Public Companies

For public companies considering the adoption of mandatory arbitration clauses, the SEC’s Policy Statement represents only one piece of the puzzle, and its ultimate impact remains uncertain. Before proceeding with bylaw amendments, companies should carefully assess state law viability and the potential for opposition from key stakeholders, ranging from negative proxy advisor recommendations and institutional investor objections to possible litigation—ironically, the very outcome these clauses are designed to avoid. The effectiveness and practical consequences of mandatory arbitration clauses will become more apparent as regulatory, market, and legal challenge

^{[i] See Nev. Rev. Stat. § 78.046(1) (2025).
[ii] See Tex. Bus. Orgs. Code § 2.115 (2025).}