Delaware and the SEC – Recent Diverging Policies on Mandatory Arbitration
Recently, Delaware and the federal Securities and Exchange Commission have taken diverging policies toward provisions on mandatory arbitration agreements, which has led to ongoing tension between the State and the federal agency.
Mandatory arbitration provisions are common, although controversial, provisions in contracts that require a company’s customers or other counterparties to agree to forego their right to bring a civil case in court in litigating disputes against the company; instead, the provision provides that disputes are settled by one or more arbiters who are members of a given arbitration organization, with the judgment enforced by the winner’s application to a court. Arbitration is a streamlined, faster form of dispute resolution with different procedural and evidential rules than would be applied in court, but is often viewed as anti-consumer and intended to prevent injured or aggrieved parties from joining to bring a class action lawsuit.
In August 2025, Delaware amended the Delaware General Corporation Law (“DGCL”) to prohibit companies from including mandatory arbitration provisions relating to federal securities law claims in their governing documents. At the same time, the Securities and Exchange Commission (“SEC”) announced an end to its policy opposing initial public offering (“IPO”) registration statements that require mandatory arbitration of such claims; subsequent statements signaled a dramatic shift at the SEC from opposition to quiet support for such provisions. This has created an open tension between the two. For example, in discussing reforms to combat frivolous litigation, SEC Chairman Atkins said Delaware’s policy “suggest[s] that the state (sic) is not only uninterested in reform, but instead, seems to embrace the litigation costs that abusive lawsuits impose on companies franchised in Delaware.”[1] Chairman Atkins further suggests that other states, specifically noting Texas, may adopt different policies on mandatory arbitration, making them potentially more attractive corporate domiciles. These are fighting words for a state that, in 2024, was the corporate home of 66.7% of Fortune 500 companies and 81.4% of companies that held their IPO.[2]
Delaware has long prohibited mandatory arbitration clauses in intra-company affairs, meaning causes of action within the company between its shareholders and management. If such provisions were permitted, companies could effectively circumvent the Court of Chancery in applying Delaware law, leading to a less well-developed case law, potentially improper application of such law, and the inability of shareholders to form groups to pursue litigation. Until the recent amendments, this did not include actions brought under the federal securities laws rather than Delaware law. The amendments add such actions to the mandatory arbitration prohibition, which touches upon the jurisdiction of the SEC in affecting the application of such federal laws.
The federal securities laws are administered and enforced by the SEC, resulting in significant overlap and interaction between Delaware law and SEC regulation and policy positions in certain areas, particularly those involving public companies. This includes IPOs and SEC review of IPOs. The SEC reviews companies’ applications to issue securities to the public for the first time (an “IPO”), which includes a public offering document (a prospectus) and an application providing significant information about the company, its business and operations, and the offering and its terms. Previously, the SEC withheld approval of IPO applications which contained mandatory arbitration provisions applicable to federal securities law claims. As noted above, the SEC recently dropped this policy and appeared to support such provisions as a means for public companies to head off burdensome and frivolous lawsuits. In precluding companies from including mandatory arbitration provisions with respect to federal securities law claims, Delaware is effectively preventing such provisions in roughly 80% of companies engaged in IPOs annually.[3] In touching upon the availability of arbitration in federal law, rather than state corporate law, the SEC no doubt feels Delaware is intruding upon its jurisdiction and indirectly setting de facto federal policy. Thus, Delaware’s preeminence among IPO companies greatly reduces the effect of the SEC’s policy change on mandatory arbitration provisions.
This is a rare open dispute between the SEC and Delaware. They generally maintain a civility and positive working relationship. The Chairman’s remarks are especially cutting given his repeated reference to competitive pressures from other states, naming specific states in some statements.
[1] Speech by SEC Chairman Paul Atkins, Keynote Address at the John L. Weinberg Center for Corporate Governance’s 25th Anniversary Gala (October 9, 2025), available at www.sec.gov.
[3] 80% is a rough approximation of the share of IPO companies domiciled in Delaware annually over recent years after review of Delaware’s annual corporate statistics report.
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