JNJ Johnson and Johnson

At issue is how much freedom shareholders have to file lawsuits against companies

By Dave Michaels 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 14, 2018).

WASHINGTON -- Johnson & Johnson Inc. is being drawn into a battle over how much freedom shareholders have to sue companies, in a bid by lawsuit opponents to force regulators to pick sides over investors' access to the courts.

Hal Scott, a Harvard University professor who represents a trust that owns J&J shares, filed a shareholder proposal with the company that would push shareholder disputes into private arbitration hearings, instead of federal court. J&J doesn't want to bring the proposal up for a shareholder vote, and this week the health-care products company asked the Securities and Exchange Commission for permission to reject it.

Supporters of mandatory arbitration say it would save companies money and time, arguing arbitration would be faster and less expensive than grinding out federal lawsuits involving thousands of investors. Proponents argue that class-action access to the courts is vital for holding corporations and executives accountable to shareholders.

"This is an important issue for the capital markets," Mr. Scott said in an interview. "It affects whether private companies want to go public, and whether foreign companies want to list [here]."

About 8.5% of all U.S. exchange-listed companies are projected to be targets of class-action lawsuits in 2018, according to Cornerstone Research, a litigation and economic consulting firm. That is well above the 20-year average of 2.9%, Cornerstone said.

Securities class-action lawsuits typically focus on claims that public companies either misled investors about important facts or events, or failed to disclose important information that would have altered shareholders' investment decisions.

Much of the expense is born by existing shareholders, with other shareholders sometimes benefiting from a settlement or judgment. Research into whether such judgments deter future wrongdoing has been inconclusive, said Donald Langevoort, a securities-law expert at Georgetown University.

Mr. Scott is seeking to list his proposal for a bylaw change that would require mandatory arbitration on J&J's 2019 proxy statement. J&J shareholders would vote on the measure next year.

J&J wrote the SEC this week asking permission to exclude the proposal from its ballot. Forcing investors into arbitration would violate parts of federal law that forbid asking investors to waive their legal rights, J&J's attorneys wrote. The SEC rules every year on whether companies can omit different shareholder proposals. While public companies could benefit from arbitration, some fear it would offend investors if they were to push too aggressively for it.

A J&J spokesman declined comment beyond the company's letter.

SEC Chairman Jay Clayton has said he wants to avoid a brawl over mandatory arbitration that would pit business groups against investors and likely splinter the five-member commission along party lines.

Some Republican commissioners say arbitration should be given a shot if stockholders agree with it.

"As far as I can see, the SEC does not have statutory grounds to substitute its judgment for that of shareholders and the companies they own," Commissioner Hester Peirce, a Republican member, said in September.

Robert Jackson Jr., a Democratic commissioner, said in February that curbs on shareholder lawsuits should be debated only through a federal rulemaking process. That would allow for analysis by the agency's economists and lawyers as well as public comments from investors and companies.

The speedy nature of arbitration probably isn't well suited to sorting out allegations of market fraud, Mr. Langevoort said. Federal courts allow both sides to take depositions, determine witnesses' credibility, and draw on outside experts. "Arbitration is not really meant for that," he said.

Another downside is that arbitration is private, said Hillary Sale, also a law professor at Georgetown University.

"We won't have a good understanding of when companies are committing fraud or in fact behaving in an above-board manner," Ms. Sale said.

Mr. Scott said mandatory arbitration wouldn't dilute shareholders' rights, and would only affect where a dispute is heard, and not whether shareholders can mount a claim.

"All the SEC should decide is the legality of doing this under federal law," he said.

If the commission decides the proposal can go before J&J's stockholders, "the roadblock has been lifted," Mr. Scott added. "Then a number of companies could do this."

Write to Dave Michaels at dave.michaels@wsj.com

(END) Dow Jones Newswires

December 14, 2018 02:47 ET (07:47 GMT)

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