Contrary to conventional wisdom, Delaware law does not prohibit mandatory arbitration clauses for securities claims. Opinions to the contrary appear rushed and unmoored from statutory text, as well as ignoring both the long-standing public policy of Delaware and established principles of federalism.
In September 2025, the Securities and Exchange Commission (SEC) took a significant step by voting to remove restrictions on public companies’ adoption of mandatory arbitration clauses for securities claims. This development holds profound implications, as such clauses possess the potential to drastically reduce the legal expenses associated with defending securities litigation. Furthermore, by mitigating the threat of class actions, companies might be empowered to litigate claims on their merits rather than succumbing to potentially exorbitant settlements negotiated under the pressure of jury trial uncertainty.
The SEC’s decision has ignited a vigorous debate. Proponents view mandatory arbitration as a crucial remedy to perceived systemic abuses within stockholder litigation, potentially leading to more efficient dispute resolution. Conversely, critics express deep concern that these clauses could undermine a well-established system of private securities enforcement, which they argue is vital for deterring corporate misconduct and protecting investor rights. Regardless of one’s normative stance on the merits of arbitration, there is broad consensus that the implementation of mandatory arbitration clauses could be transformative for corporate governance and shareholder dispute resolution.
Despite the SEC’s regulatory shift, the adoption rate of these clauses by public companies has been remarkably low. To date, only one company, Zion Oil & Gas, Inc. (incorporated in Texas), has formally incorporated such a clause into its governing documents, amending its bylaws in December 2025 to include mandatory arbitration for shareholder claims under federal and state securities laws. Reports also indicate that SpaceX, another Texas-based corporation, plans to adopt a similar clause upon its anticipated public offering.
The primary impediment cited for this limited uptake is the widely held belief that Delaware, the jurisdiction where a vast majority of U.S. public companies are incorporated, legally prohibits mandatory arbitration clauses for securities claims. This view has been espoused by various commentators, including academics and former SEC Chairman Paul Atkins, who have pointed to recently enacted legislation in Delaware as the statutory barrier.
However, a comprehensive analysis conducted by Doru Gavril, a Partner, and Mia Tsui, an Associate, in the Securities Litigation practice at Freshfields Bruckhaus Deringer LLP, challenges this prevailing interpretation. Their memorandum, part of the esteemed Harvard Law School Forum on Corporate Governance’s Delaware Law Series, argues forcefully that nothing in Delaware law prohibits mandatory arbitration clauses for securities claims, and indeed, such a prohibition would be legally untenable.
Reinterpreting Delaware General Corporation Law Section 115(c)
The crux of the perceived statutory obstacle lies in Section 115(c) of the Delaware General Corporation Law (DGCL), which was amended and became effective on August 1, 2025. This section states:
"With respect to claims that are not internal corporate claims, the certificate of incorporation or bylaws may require stockholders, when acting in their capacity as stockholders or in the right of the corporation, to bring any or all such claims only in 1 or more prescribed forums or venues, if such claims relate to the business of the corporation, the conduct of its affairs, or the rights or powers of the corporation or its stockholders, directors or officers; provided that such requirement is consistent with applicable jurisdictional requirements and allows a stockholder to bring such claims in at least 1 court in this State that has jurisdiction over such claims."
Critics of mandatory arbitration clauses interpret this provision as a legislative directive against them. However, Gavril and Tsui present a multi-faceted argument refuting this assertion, emphasizing five key points:
1. Facial Silence on Arbitration
The most immediate observation is that the text of Section 115(c) is, on its face, entirely silent regarding arbitration clauses. It does not explicitly mention arbitration, nor does it specifically target federal securities claims. In the absence of clear statutory language prohibiting such clauses, a rigorous textualist interpretation is essential.
2. Textualist Interpretation Reveals No Prohibition
A strict textualist reading of Section 115(c) reveals that it does not, in fact, prohibit mandatory arbitration clauses. The statute’s limitations are expressly confined to "claims that are not internal corporate claims" and require that stockholders bring such claims "only in 1 or more prescribed forums or venues." Crucially, the statute specifies that this applies when stockholders are "acting in their capacity as stockholders or in the right of the corporation."
The Freshfields analysis highlights that private federal securities claims, brought under either the Securities Act of 1933 or the Securities Exchange Act of 1934, do not necessitate the plaintiff being a current stockholder. It is common for plaintiffs to bring such claims after divesting their stock holdings in the defendant company. Therefore, since these claims are not brought "in one’s capacity as a stockholder," and current stock ownership is not a prerequisite, the limitations imposed by Section 115(c) do not extend to them. The statute’s careful wording, limiting its scope to actions taken "in their capacity as stockholders," therefore, does not encompass the broad range of individuals who can bring securities claims.
3. Conflict with Other DGCL Provisions
Interpreting Section 115(c) as a ban on mandatory arbitration clauses would create an internal inconsistency within the DGCL. The statute operates as a carve-out from broader corporate powers granted under Sections 102(b)(1) and 109(b), which govern the permissible contents of a corporation’s charter and bylaws. Any carve-out must be specific and limited in scope; what is not expressly prohibited is permitted.
Furthermore, Section 122(18) of the DGCL explicitly permits corporations to "make contracts with 1 or more current or prospective stockholders." While this section contains an exception for contracts that conflict with Delaware law, this exception is, in turn, subject to a further carve-out for Section 115. This structure implies that corporations and shareholders are permitted to contract around certain provisions of Section 115, including potentially those related to arbitration, provided the contract itself is not otherwise prohibited.
4. Contradiction of Delaware’s Public Policy
Delaware has a deeply ingrained public policy favoring freedom of contract and private ordering. Decades of Delaware jurisprudence underscore the state’s commitment to allowing parties to enforce their bargained-for agreements. This principle is particularly salient in the context of "corporate contracts," such as charters and bylaws, which are recognized as agreements among stockholders. Forcing a ban on arbitration clauses would directly contravene this fundamental policy, placing Delaware at a competitive disadvantage compared to other states that robustly uphold contractual freedom.
5. Federal Preemption and Federalism
Even if the Delaware legislature had intended to enact a statutory ban on arbitration clauses for securities claims, such a law would likely be preempted by federal law under the Supremacy Clause of the U.S. Constitution. The Federal Arbitration Act (FAA) unequivocally states that a written provision in a contract involving commerce to settle by arbitration a controversy arising out of such contract "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
The U.S. Supreme Court has consistently held that state laws prohibiting the arbitration of specific types of claims are preempted by the FAA. Delaware law, like that of other states, views corporate governing documents as enforceable contracts between a corporation and its stockholders. Therefore, any attempt by Delaware to prohibit arbitration in these documents would directly conflict with the FAA’s mandate and established Supreme Court precedent. The expertise of Delaware’s legislative body and its adherence to principles of federalism suggest that it would not enact a provision that so directly violates federal law.
Historical Context and Evolving Landscape
The debate surrounding mandatory arbitration in securities litigation is not new. For decades, the SEC has grappled with the implications of these clauses. The SEC’s 2025 policy change represents a culmination of discussions and evolving views on investor protection and dispute resolution mechanisms.
Historically, securities class actions have been a primary avenue for investors to seek redress for alleged fraud and misconduct. These actions play a dual role: providing compensation to defrauded investors and acting as a deterrent to corporate malfeasance. Critics of mandatory arbitration argue that it insulates companies from this crucial form of public accountability, potentially leading to increased fraud and diminished market integrity. They point to the concerns raised by organizations like the Consumer Federation of America and the American Association for Justice, which have voiced worries about the erosion of investor rights and market discipline.
Conversely, proponents argue that the current system of securities litigation is often inefficient, costly, and prone to settlements that do not reflect the true merits of a case. They contend that arbitration offers a more streamlined, cost-effective, and potentially faster resolution mechanism, allowing companies to address claims directly without the specter of protracted and expensive class action lawsuits. The potential for significant cost savings in defending securities claims is a major driver for companies considering such clauses.
Implications and Future Outlook
The Freshfields memorandum suggests that the low adoption rate of mandatory arbitration clauses by Delaware-incorporated companies may soon change. The legal clarity provided by their analysis, coupled with the SEC’s regulatory stance, could embolden more companies to explore and implement these provisions in their governing documents.
The implications of wider adoption could be far-reaching:
- Shift in Dispute Resolution: A significant move towards arbitration could fundamentally alter the landscape of securities litigation, potentially reducing the volume of class action lawsuits filed in federal courts.
- Cost Management for Companies: Public companies may experience substantial reductions in legal defense costs, freeing up resources that can be reinvested in business operations or shareholder returns.
- Investor Access to Recourse: The debate continues regarding whether arbitration provides adequate recourse for individual investors, especially in complex securities disputes. Concerns about fairness, discovery limitations, and the impartiality of arbitrators persist among some investor advocacy groups.
- Competitive Dynamics: As more companies, particularly those incorporated in states with strong pro-arbitration stances like Texas, adopt these clauses, Delaware-incorporated companies may feel increasing pressure to remain competitive by offering similar protections.
The legal interpretation presented by Gavril and Tsui provides a robust argument against the notion that Delaware law inherently prohibits mandatory arbitration clauses for securities claims. This analysis, grounded in statutory text, established legal principles, and Delaware’s long-standing public policy, is likely to inform future corporate decisions and potentially reshape the future of securities dispute resolution in the United States. As more companies assess the legal landscape and the potential benefits of arbitration, the coming years may witness a significant shift in how securities-related disputes are handled.
