Why CalPERS and Colorado PERA Moved to Intervene in the Johnson & Johnson Mandatory Arbitration Case

Matthew Jacobs is General Counsel for CalPERS; Adam Franklin is General Counsel at Colorado PERA; and Megan Peitzmeier is Senior Staff Attorney at Colorado PERA. This post is based on their joint CalPERS and Colorado PERA memorandum.

Several commentators have pointed out that a shareholder’s lawsuit demanding that Johnson & Johnson permit a shareholder vote on a proposal to amend J&J’s bylaws to mandate arbitration of federal securities claims has come to the court in a strange posture. In Cydney Posner’s earlier article about this case, she makes note of the “odd role reversal” of “a Harvard professor and shareholder of Johnson & Johnson submitted a proposal requesting that the board adopt a mandatory arbitration bylaw”. In press coverage relating to the recent motion of CalPERS and Colorado PERA, Alison Frankel characterizes this as a case with “a weird posture”.

What’s going on in The Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson that caused CalPERS and Colorado PERA to seek intervention? The case pits a small shareholder seeking a bylaw amendment that would eliminate shareholders’ right to sue against a large corporation that is defending the right of its shareholders to sue. As mentioned in Ms. Posner’s article, the plaintiff-shareholder happens to be a Harvard law professor; and this professor is a long-time opponent of securities class actions. Because neither the plaintiff nor J&J share the interests of institutional investors like CalPERS and Colorado PERA, the two funds have jointly moved to intervene in the case.

That CalPERS and Colorado PERA would move to protect shareholders’ right to sue should come as no surprise. CalPERS is the nation’s largest public pension fund, and holds over eight million shares of J&J stock; Colorado PERA is the twenty-fourth largest pension plan in the United States and holds over 1.9 million shares of J&J stock. Both funds participate in securities fraud class action lawsuits and have been appointed as class representative in such suits to defend their and other shareholders’ interests. CalPERS has long advocated against forcing shareholders to arbitrate securities claims, most recently by filing a letter with the SEC in 2018 cautioning the agency against adopting a favorable view of such arbitration clauses. Colorado PERA similarly sent a letter to the SEC Chair on the same issue. And both funds engage in a robust corporate governance program: see, for example, CalPERS Governance and Sustainability Principles and the Colorado PERA Stewardship Report.

So while the J&J case may be the first test of the legality of mandatory shareholder arbitration, neither party to the case represents the interests of institutional investors. As we said in our motion to intervene, “the litigation presents a truly anomalous scenario: Johnson & Johnson is the only party defending shareholders’ right to bring a class action against Johnson & Johnson. Meanwhile, the only shareholder party—a trust that owns 1,050 Johnson & Johnson shares—has chosen to advocate a position that is contrary to other shareholders’ interests.”

A bit of background on the case—in late 2018, Professor Hal Scott proposed an amendment to J&J’s bylaws that would require shareholders’ federal securities claims to “be exclusively and finally settled by arbitration” and provides “that any disputes subject to arbitration may not be brought as a class and may not be consolidated or joined.” In response, J&J asked the SEC to issue a no-action letter, which it did on February 11, 2019. J&J then excluded the proposal from its 2019 proxy materials.

Professor Scott vehemently disagreed with the SEC’s position on the issue. On March 21, 2019, Professor Scott’s trust filed a complaint in federal court in New Jersey seeking a declaration that its proposal is legal and an order compelling J&J to include it in its 2019 proxy materials.

On April 8, 2019, the Court denied the trust’s motion for a preliminary injunction, holding that the trust couldn’t show irreparable harm if its proposal were delayed until a future J&J annual meeting.

On May 23, 2019, CalPERS and Colorado PERA moved to intervene in the case to protect their interest as shareholders in the availability of class-action securities litigation against Johnson & Johnson. As we argue in the motion, it makes no sense to leave J&J as the only party tasked with protecting shareholders’ interest in policing J&J’s conduct through class-action litigation against J&J. And what if the district court rules against J&J? If institutional investors like CalPERS and Colorado PERA aren’t parties to the case, they couldn’t appeal such a decision if J&J chose not to. See, e.g., U.S. House of Representatives v. Price, 2017 WL 3271445, at *2 (D.C. Cir. Aug. 1, 2017) (per curiam) (holding that representation was inadequate where there was “equivocation” about whether the present party would appeal an adverse ruling).

In short, and as we explained in our motion to intervene, “the best representatives of the shareholders’ interests are the shareholders. These shareholders should not be forced to rely on a corporation to defend the shareholders’ right to sue that corporation. Johnson & Johnson simply cannot share the proposed intervenors’ interest in protecting that right, and accordingly, no matter how ably its lawyers litigate the case, Johnson & Johnson cannot adequately protect the interests of shareholders like Colorado PERA and CalPERS.”

The Motion to Intervene is available here.

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