On September 17, 2025, the U.S. Securities and Exchange Commission, after a 3–1 internal vote, issued a press release and a policy statement which removed some impediments to companies inserting mandatory arbitration provisions into by-laws and/or articles/certificates of incorporation and/or corporate charters in advance of a public offering of stock. In reaching this decision, the SEC gave substantial effect to the Federal Arbitration Act of 1925 (the FAA), a statute with broadly preemptive effect which predated all of the federal securities laws and which “establish[ed] a liberal Federal policy favoring arbitration agreements.”
In this article, we’ll consider what this announcement means, what it doesn’t mean and what are the many questions raised and yet to be answered. We’ll also discuss how should companies react to this development and how insurers will react to their reactions.
The only direct impact of the policy statement is to inform the public that the SEC will no longer prevent an IPO or other public stock offering from having its registration become effective merely because the company in question has a mandatory arbitration provision in its by-laws and/or articles/certificates of incorporation. The reason this statement is significant is that in the past, the SEC had on a few occasions blocked companies with such provisions from proceeding to issuance. This change in approach is justified in the policy statement by a discussion of decisions relating to federal securities law, which concludes that mandatory arbitration provisions (evidently even ones which ban class-wide relief) do not violate such federal laws.
After stating that “the potential for an issuer-investor mandatory arbitration provision to diminish, or even eliminate, the economic incentive for some investors to bring private claims under the federal securities laws is not a sufficient basis to conclude that the federal securities statutes displace the Arbitration Act’s mandate.,” the SEC determined that, “[a]pplying current and relevant Supreme Court precedent, there is no basis to conclude that either the anti-waiver provisions or any other provision of the federal securities statutes displaces the primacy of the Arbitration Act in the context of issuer-investor mandatory arbitration provisions.”
The press release quotes SEC Chairman Atkins as saying, "While many people will express views on whether a company should adopt a mandatory arbitration provision, the Commission’s role in this debate is to provide clarity that such provisions are not inconsistent with the federal securities laws. We have fulfilled that role through the issuance of this policy statement.” The policy statement noted, “This statement does not impose any new rules, regulations, or other requirements on issuers, but could influence issuer behavior to the extent that an issuer did not previously have an issuer-investor mandatory arbitration provision.”
Besides not taking a position “on whether a company should adopt a mandatory arbitration provision,” the SEC further states, “Accordingly, we do not consider it within the Commission’s purview to conclude whether any particular issuer-investor mandatory arbitration provision is enforceable for purposes of the [Federal Arbitration Act of 1925].”
By way of limited guidance, the SEC says that “whether an agreement to arbitrate is valid and enforceable is generally determined based on “the contract law of the state governing the agreement.” However, a state law that “target[s] the enforceability of [mandatory] arbitration agreements either by name or by more subtle methods, such as by ‘interfering with fundamental attributes of arbitration’” may be preempted by the Arbitration Act.”
The policy statement mentions Delaware as an example of a state which appears not to allow mandatory arbitration provisions, subject to the issue of whether such limitations may be preempted by the FAA. “Specifically, new paragraph (c) in section 115 permits the certificate of incorporation or bylaws to prescribe a forum or venue for certain claims that are not internal corporate claims but only if a stockholder may bring such claims in at least one court in the State of Delaware that has jurisdiction over such claims. This statement expresses no view on whether this or any other state law provision is consistent with the FAA.”
Note that for the last several years, Delaware has passed a series of corporate law amendments designed to maintain its position as desirable state of incorporation in the face of competition from states such as Texas and Nevada (which don’t currently seem to prohibit mandatory arbitration) (see, for example, Changes in Corporate Law). Consequently, it is possible that Delaware could choose to adopt an arbitration-friendly provision. However, unless and until that happens, and/or a court decides that Delaware law is preempted by the FAA, this could be a major dampening factor on adoption of mandatory arbitration provisions.
It seems that the SEC intends the policy statement to be relevant only to public offerings of stock, such as IPOs. In the policy statement, it notes that “A number of other issuers may have no plans to register an offering or class of securities, and thus would not be affected by this statement.” It would seem that there could be additional notice-related hurdles to enforcing mandatory arbitration provisions as valid and enforceable to the extent that they were not in place prior to the issuance of the relevant securities (the policy statement provides that “[w]hether the FAA may apply to an issuer-investor mandatory arbitration provision turns in the first instance on whether there is a valid and enforceable written agreement to arbitrate. Assuming it is written, whether an agreement to arbitrate is valid and enforceable is generally determined based on the contract law of the state governing the agreement.”)
Companies considering whether they want to adopt mandatory arbitration provisions have a lot of factors to weigh.
It is important to take into account that there can be drawbacks to arbitration, especially if the company has agreed to pay related expenses, as has historically been common when companies mandate arbitration — it can cost millions of dollars in administrative costs. If dispositive motions are allowed, they are less likely to be granted than in litigation (in some years motion to dismiss success rates have been as high as 50%). There is generally no right of appeal.
Also, in arbitrations, there are no automatic stays on discovery (the automatic discovery stay in securities class actions during the pendency of a motion to dismiss is a particularly important advantage for defendants given the previously mentioned high dismissal rates), as opposed to the potentially high volume of duplicative discovery associated with numerous arbitration actions. With individual arbitrations, there is a possibility of conflicting outcomes, whereas a successful defense of a certified class action can grant defendants a res-judicata effect which precludes further claims. Similarly, an approved class action settlement precludes further claims, whereas in a mandatory arbitration situation it may not be possible to reach a single unified resolution.
In light of the above, the threshold question is whether a company believes that all of the above listed potential downsides to arbitration will be outweighed by the potential to remove most of the incentive for any claims to be brought in the first instance.
Early adopters need to consider that they are likely to attract litigation, as did companies that adopted choice of venue provisions. The SEC policy statement doesn’t give much comfort. At best, due to the many disclaimers (discussed above) and the impact of the U.S. Supreme Court’s decision in the Loper Bright case (which overruled Chevron deference to government agency legal interpretations), the positive statements in the SEC policy statement might have persuasive value. The risk of unenforceability will be greater in states like Delaware that currently don’t seem to allow mandatory provisions (although it is possible that a court could rule that the FAA preempts Delaware law on the subject).
It should also be borne in mind that future administrations could take a different approach (the SEC internal vote was not unanimous), so adopting companies will need to stay abreast of any relevant changes in law or government policy.
It is possible that some potential shareholders might disapprove of such provisions, although it may be equally possible that a potential investor with the opportunity to invest in an exciting IPO will not be dissuaded, particularly if and when mandatory arbitration provisions become common. Some proxy advisors and other corporate governance experts may disapprove. It’s difficult to guess the extent to which institutional investors may weigh in for or against such provisions.
If you are going to do this, you should probably include within the provision’s ambit other parties who might be sued and to whom you have an indemnification obligation, or else you are unlikely to achieve your goals of avoiding getting involved in litigation. Note that the SEC, in its third footnote, mentions the possibility that issuers may also seek to include related third parties in the scope of the mandatory arbitration and does not seem to take issue with that possibility.
You should be thoughtful in deciding on your arbitration provider, considering issues such as available locations for proceedings and/or virtual options, ability to make dispositive motions, possibility of appeal, etc.
Most importantly, if your company is going to adopt a mandatory arbitration provision, you need to disclose information about it fully and clearly. In the policy statement, the SEC stated: “We believe that any relevant issues concerning an issuer-investor mandatory arbitration provision are best addressed through complete and adequate disclosure of material information in the registration statement. Accordingly, when considering acceleration requests pursuant to section 8(a) and Rule 461, the staff will focus on the adequacy of the registration statement’s disclosures, including disclosure regarding issuer-investor mandatory arbitration provisions.”
Might companies that adopt mandatory arbitration provisions get rewarded with lower premiums? Probably not at first, particularly since (as discussed above) early adopters could be lightning rods for litigation testing the enforceability of their provision. Also, insurers are notoriously risk-averse and tend to take a “wait and see” attitude toward new developments and innovations. It is likely that the situation could stabilize in the near future, however. Companies that are considering this step should consult with their insurance brokers about how best to communicate what they are doing to the insurance markets.
It is likely that many companies will consider the adoption of such mandatory arbitration provisions, but it is possible that only a small percentage will actually adopt them in the short run. The measure will probably be more attractive and more likely to be adopted by companies approaching an IPO, especially companies that have managed to generate substantial buzz.
As discussed above, companies that are considering adopting mandatory arbitration provisions have many issues to think about and should conduct thorough analyses before proceeding. Then, if a company decides that it wants to go ahead, it should coordinate with its broker on how to prepare to address potential questions from the insurance market.
WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
