On September 17, 2025, the Securities and Exchange Commission (SEC) issued a policy statement that clarified its position on mandatory arbitration provisions in public company bylaws.  For some time, the Commission has scrutinized such provisions and refused to accelerate registration statements if they were present.  This created a de facto barrier for companies seeking to go public that chose to include mandatory arbitration provisions. 

Historically, the Commission’s scrutiny stemmed from concerns that mandatory arbitration might violate anti-waiver provisions of federal securities laws and potentially foreclose shareholder class actions.  But this was never codified in any formal rulemaking or policy statement, leaving companies to interpret SEC staff actions and informal guidance as the Commission’s official stance. 

Now, the Commission has clarified its stance: “the presence of an issuer-investor mandatory arbitration provision will not impact decisions regarding whether to accelerate the effectiveness of a registration statement.” The Commission explained that, based on the Supreme Court’s current interpretation of the Federal Arbitration Act (FAA),[1] such provisions are not inconsistent with federal securities laws.[2] Thus, moving forward, the Commission will simply assess whether these provisions are adequately disclosed.

So what does this all mean?  Companies seeking to go public can include mandatory arbitration provisions in their bylaws without any pushback from the SEC, provided the provision is adequately disclosed. 

While some critics have raised concerns that the SEC’s policy shift could undermine shareholder rights—particularly by limiting access to class actions—the practical implications remain uncertain.  It’s not yet clear how many companies seeking to go public will choose to adopt mandatory arbitration provisions, nor how courts will interpret and enforce them in light of existing state laws foreclosing or limiting the use of such provisions. 

Importantly, the SEC’s policy statement does not guarantee the enforceability of these provisions. Companies must still navigate a patchwork of state corporate laws, which may restrict or condition the use of mandatory arbitration. For instance, Delaware’s Section 115(c) requires that shareholders retain access to at least one Delaware court for their claims, raising doubt as to the ability of companies incorporated in Delaware to adopt mandatory arbitration provisions.  See Del. Code. tit. 8, § 115.   Moreover, the broader issue of whether the FAA preempts such state restrictions remains unresolved and is likely to be the subject of future litigation.  The SEC’s policy statement takes no position on these issues—and SEC Chairman Atkins acknowledged that “[n]either the Commission nor its staff has the expertise” to weigh in.  

But regardless of the technically unresolved preemption questions, some scholars still believe that, notwithstanding the FAA and current Supreme Court precedent, it will “be trivially easy for courts to conclude that an arbitration provision set forth in the charter or bylaws of a public corporation is unenforceable against shareholders,” because corporations are “a creation of state law” and this issue “it is a matter of equity and the integral role that a state plays in chartering corporations.”[3]  

Beyond the legal uncertainties, arbitration may offer practical benefits. For both companies and shareholders, arbitration can be a more efficient and cost-effective forum than traditional litigation. It can reduce the burden of protracted class action lawsuits, which often result in high legal fees and settlements that disproportionately benefit plaintiffs’ attorneys.  Moreover, “a substantial body of common law regulation has been built up by courts to ensure the [arbitration processes] are fair and effective alternatives to lawsuits.”[4]

Still, shareholders will be watching closely to see whether these provisions are implemented in ways that preserve meaningful avenues for redress. Transparency in disclosure, procedural fairness in arbitration, and the ability to challenge misconduct remain critical concerns.

Ultimately, while the SEC’s policy statement only removes a regulatory barrier. It does not mandate or endorse mandatory arbitration. Companies must weigh the legal risks, investor sentiment, and reputational considerations before proceeding. All the Commission has clarified is that it will not block registration statements solely because they contain mandatory arbitration provisions, provided those provisions are adequately disclosed. As early adopters test the waters, we’ll begin to see how this policy plays out in practice—and whether it truly reshapes the landscape of shareholder litigation (and potential arbitration).