Rebuttal to “Delaware Law Permits Companies to Adopt Mandatory Arbitration Clauses”

Delaware Law Does Bar Mandatory Arbitration of Federal Securities Claims

In an earlier post for the Harvard Forum on Corporate Governance, Freshfields lawyers Doru Gavril and Mia Tsui argue that, “contrary to conventional wisdom,” Delaware law permits public companies to adopt mandatory arbitration clauses for federal securities claims in their charters and bylaws. But their hyper-textual reading of DGCL § 115(c) is wrong. It conflicts with the statute’s own legislative synopsis, the parallel architecture between DGCL § 115(a) and (c), and the unanimous reading of the corporate bar. The Federal Arbitration Act preemption argument they advance is not new, and it is not the slam dunk it claims to be.

The Legislative Synopsis Is Dispositive

Gavril and Tsui rest much of their reading on the observation that DGCL § 115(c) does not contain the word “arbitration.” But the legislative synopsis accompanying the August 2025 amendment does, and that synopsis is plain about how § 115(c) operates: “Amended § 115 permits the designation of any judicial or arbitral forum so long as the designation does not prevent a stockholder from bringing claims in a court with jurisdiction in this State.” [1] An exclusive arbitration provision does not permit that. The drafters told us how the statute is supposed to work, and that operation excludes exclusive arbitration of federal securities claims in a corporation’s charter or bylaws.

The 2015 synopsis for the original § 115, now recodified as § 115(a), was even more explicit. Section 115 “invalidates such a provision selecting the courts in a different State, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.” [2] The drafters used the term “arbitral forum” in 2015 to describe what § 115 prohibits.

The Parallel Between DGCL § 115(a) and § 115(c)

Section 115(a) prohibits charter or bylaw provisions that would preclude bringing internal corporate claims in Delaware courts. Section 115(c) requires that any forum-selection provision for non-internal claims allow stockholders to bring those claims in at least one Delaware court with jurisdiction. The framing is negative in one subsection and affirmative in the other; the effect is the same. A Delaware court has to remain available.

The Delaware Supreme Court in Salzberg v. Sciabacucchi read § 115(a) the way its synopsis describes. Addressing in dicta the concern that mandatory arbitration of internal corporate claims might be the “next move” after federal-forum provisions, the court observed that such arbitration provisions would violate § 115. [3] The 2025 synopsis ties § 115(c) back to Salzberg expressly: courts should interpret amended § 115 in the same manner that the Delaware Supreme Court interpreted § 102(b)(1) and § 115 in Salzberg. [4]

Gavril and Tsui read “in their capacity as stockholders” to require current stockholder status at the moment of filing a lawsuit. That reading creates exactly the divide their own piece calls “absurd” — different statutory treatment for current and former stockholders. On their reading, a plaintiff defrauded as a stockholder enjoys § 115(c)’s protection if she files a lawsuit before she exits but loses it if she files after, even though nothing about her claim or injury has changed. A Securities Act § 11 or Exchange Act § 10(b) plaintiff who purchased the corporation’s stock acquired her federal cause of action in the same transaction that made her a stockholder; the wrong, if there was one, accrued in that capacity. Section 115(c)’s reach is quite clearly intended to cover both direct and derivative stockholder claims. The “in their capacity as stockholders” clause covers direct claims; the “in the right of the corporation” clause covers derivative claims (like those at issue in the Seafarers v. Bradway and Lee v. Fisher circuit split).

Gavril and Tsui’s fallback — that federal securities claims can be brought by holders of notes, options, and other non-stock instruments who never became stockholders — is true but inapposite. Delaware corporate law is regulating charters and bylaws, contractual instruments whose binding reach runs to stockholders. It is entirely coherent for § 115(c) to use stockholder-status language to describe its protective scope, leaving non-stockholder federal securities claims to other regimes. Federal securities laws reach the broader universe of securities; Delaware corporate law focuses on the stockholder relationship. Section 115(c)’s coverage of stock-based federal securities claims — the bulk of the public-company class action docket — is exactly what the statute was built for.

Section 122(18) Does Not Open a Back Door for Charters and Bylaws

Gavril and Tsui invoke DGCL § 122(18) as a hedge: even if § 115(c) bars arbitration in charters and bylaws, § 122(18) lets corporations contract around it because § 122(18) is itself carved out from § 115. The argument extends § 122(18) past what it actually authorizes. Section 122(18) was enacted in 2024 in response to the Chancery Court’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., which struck down a private stockholder agreement giving the founder expansive governance rights. The legislative fix for Moelis was to authorize corporations to enter such private contracts with identified stockholders. The fix was not to authorize generic charter or bylaw provisions binding the entire stockholder body.

The § 115 carveout in § 122(18) was specifically drafted to enable contracts under § 122(18). The legislative synopsis accompanying § 122(18) was explicit: “The proviso excludes § 115, so that corporations may enter into contracts under § 122(18) with exclusive forum and arbitration provisions that do not select the courts of this State to adjudicate claims under the contracts.” [5] The carveout speaks to § 122(18) contracts, not to charter or bylaw provisions, which remain governed by § 115. The two are different instruments doing different work.

The Corporate Bar Unanimously Read § 115(c) to Preclude Arbitration

Across the Delaware corporate bar and major law firm commentary published after § 115(c)’s enactment, the consensus reading is that the provision bars mandatory arbitration of federal securities claims in charters and bylaws. Morris Nichols’s August 2025 explainer of the amendment described § 115(c) as requiring Delaware-court access for non-internal claims. Other major firms commenting after the SEC’s September 2025 policy reversal identified § 115(c) as a continuing Delaware law obstacle to mandatory arbitration. SEC Chair Paul Atkins called § 115(c) “a giant step backward” and used his Delaware keynote in October 2025 to urge the state to amend it. That is a complaint about a barrier, not a misreading of one.

The Gavril and Tsui post is the first practitioner publication I have seen to argue the contrary, and it appears nine months after the enactment of § 115(c). The contemporaneous reading is meaningful evidence of how the statute was understood by the lawyers who drafted it and advised on it.

The FAA Argument Is Not a Slam Dunk

Even if § 115(c) bars mandatory arbitration of federal securities claims, Gavril and Tsui argue in the alternative, the Federal Arbitration Act (FAA) would preempt the bar. The FAA preemption argument is the harder one to dismiss, but it is not the slam dunk Gavril and Tsui suggest.

In coauthored work, I argue that the FAA does not preempt § 115 for reasons the Freshfields post never engages. The FAA presupposes consent. Supreme Court precedents like Concepcion, which Gavril and Tsui invoke, struck down state laws purporting to limit the freedom to contract for arbitration in private commercial contracts.

A corporate charter is not an ordinary private commercial contract. It is the constitutive instrument of a state-created entity whose very existence is contingent on the assent of its chartering state. Delaware, as a party to the corporate contract, has the authority through its state law to define what terms the corporate contract may contain. To interpret the federal statute differently — to interpret the FAA to preempt DGCL § 115 — would contradict “the first principle that underscores all of [the Court’s] arbitration decisions” — that “[a]rbitration is a matter of consent, not coercion.” [6] FAA preemption of DGCL § 115 would coerce Delaware to grant corporate charters permitting shareholder arbitration when Delaware has, in fact, objected to it.

Gavril and Tsui invoke Concepcion as if it ends the analysis. But it does not. Concepcion and its ilk presuppose an underlying agreement to arbitrate. But if the chartering state withholds its assent to arbitration, an agreement to arbitrate never exists. This reading is consistent with both the Court’s arbitration precedents and its longstanding deference to state law in the regulation of internal corporate affairs. [7]

Why the Market Has Been Skeptical

Gavril and Tsui close by predicting that “more Delaware companies” will adopt mandatory arbitration provisions. But the data do not point in that direction. Since the SEC cleared the path in September 2025, only one publicly traded company has actually adopted such a clause: Zion Oil & Gas, a Texas corporation. SpaceX, also a Texas corporation, is reportedly planning to follow. Both adopters left Delaware before doing so. This empirical record is consistent with the reading that Delaware law bars arbitration provisions in charters and bylaws.

The historical point is even sharper: in the decades before the enactment of DGCL § 115, when no clear legal barrier to shareholder arbitration existed, no public company judged it sufficiently worthwhile to adopt one. Boards of directors have repeatedly opposed shareholder proposals that would have imposed arbitration even after legal obstacles fell. Every shareholder vote on arbitration in the past fifteen years has failed by overwhelming margins, including at Google in 2012, Frontier Communications in 2012, and Intuit in 2020. CalPERS, the Council of Institutional Investors, and the International Corporate Governance Network all categorically oppose mandatory shareholder arbitration. And Glass Lewis has signaled it will recommend against directors who adopt such provisions.

This skepticism reflects more than investor preferences. As I have argued in a forthcoming article, arbitration is “essentially lawless.” Shareholder arbitration removes the procedural filters of the Private Securities Litigation Reform Act, eliminates class-wide finality, exposes companies to mass arbitration, and substitutes opaque arbitral discretion for a developed body of judicial precedent. In short, corporate defendants have far less to gain from these provisions than what arbitration enthusiasts have promised.

The SpaceX IPO

SpaceX is incorporated in Texas, not Delaware. Elon Musk reincorporated in 2024 after the Chancery Court’s Tornetta decision, before § 115(c) was enacted. SpaceX’s planned mandatory arbitration provision is therefore a Texas-law product. It is not a test of whether § 115(c) bars arbitration. Instead, it is a test of whether the market, and institutional investors in particular, will accept arbitration when the potential upside is large enough.

If SpaceX gains early inclusion in major indices, passive funds will be forced to buy shares regardless of governance concerns. Active managers face a similar dynamic: an IPO of SpaceX’s expected scale could move benchmark returns enough that not owning risks underperforming the market. Some of the institutional investors who have voted against shareholder arbitration proposals for decades may swallow it for SpaceX. If they do, the taboo breaks, and other high-demand IPO-stage issuers, namely OpenAI and Anthropic, may follow.

But SpaceX is also sui generis. Its scale and Musk’s celebrity do not transfer to ordinary issuers, and the precedent value of any institutional concession made there is uncertain. Outside the IPO context, the institutional opposition to mandatory arbitration has been remarkably consistent.

Can versus Should

Whether companies can adopt mandatory shareholder arbitration of federal securities claims in their charters and bylaws is a contested legal question, but the contest is narrower than the Freshfields attorneys suggest. The Delaware statute, its accompanying synopses, the Delaware Supreme Court, the corporate bar, and the SEC chairman read Delaware law to bar shareholder arbitration. The FAA remains a risk, but Delaware has a strong basis, and every reason, to defend Section 115 against FAA preemption.

Whether companies should adopt mandatory arbitration is an entirely separate question, and the market has been answering it: through successive failed shareholder votes, eight months of SEC-cleared regulatory space with no Delaware adopter, and the considered judgment of nearly every public-company board that has rejected the option.

1 See S.B. 95 (Del. 2025) Synopsis (emphasis added). (go back)