The SEC’s recent policy change on issuer-investor mandatory arbitration provisions has prompted quick reactions from proxy advisors and early adopters in the market—setting the stage for renewed debate over whether companies should consider arbitration requirements in their governing documents. Mandatory arbitration provisions require investors to arbitrate, rather than litigate, disputes involving the company in which they have invested. Although the adoption of mandatory arbitration provisions is generally viewed as adverse to shareholder rights, mandatory arbitration of securities law and other claims is appealing to companies, because it is a non-public forum and potentially reduces litigation costs.
SEC Reverses Longstanding Position
On September 17, 2025, the SEC issued a policy statement reversing staff practice that treated mandatory arbitration provisions as a barrier to accelerating the effectiveness of registration statements. Under the new approach, the SEC staff will no longer view the existence of a mandatory arbitration clause as grounds to refuse acceleration. Instead, staff will focus on whether the registration statement contains adequate disclosure about the provision and its implications. Importantly, the SEC emphasized it is not taking a position on potential conflicts of state and federal law—an issue that remains unsettled, particularly in light of Delaware’s 2025 amendments to Section 115 of the Delaware General Corporation Law (“DGCL”) that may prohibit such provisions.
Glass Lewis Reaction
In its 2026 U.S. Benchmark Voting Policy Guidelines, Glass Lewis announced that it may recommend voting against governance committee members of newly public companies whose governing documents contain mandatory arbitration provisions.
Glass Lewis will also generally recommend voting against any charter or bylaw amendment adopting such provisions unless the company demonstrates:
- a compelling shareholder benefit,
- evidence of litigation abuse,
- narrowly tailored terms, and
- a strong governance track record.
Glass Lewis reiterated longstanding concerns that mandatory arbitration can restrict shareholder rights and reduce transparency.
ISS
ISS did not issue new guidance in response to the SEC policy statement in its Proxy Voting Guidelines, but the firm’s existing policies already flag mandatory shareholder arbitration as a provision that may be “materially adverse to shareholder rights,” triggering recommendations against directors.
First Mover: Zion Oil & Gas
On December 1, 2025, Zion Oil & Gas became the first public company to adopt a mandatory arbitration provision following the SEC’s policy shift. The amendment to the company’s bylaws—enacted solely by board approval under Texas law—did not require a shareholder vote.
Key Practical Considerations for Companies
Companies evaluating whether to include mandatory arbitration provisions should consider:
- Acceleration of the Effectiveness of Registration Statements Is Now Available
The presence of a mandatory arbitration clause will no longer prevent the SEC staff from declaring a registration statement effective—representing a notable change from prior staff practice. - Disclosure Will Be Scrutinized
Because the SEC has shifted the focus to disclosure adequacy, companies must prepare balanced and thorough disclosures, especially given legal uncertainties under state law and ongoing Federal Arbitration Act and DGCL considerations. - State Law Still Governs Permissibility
Revised Section 115 of the DGCL, effective August 1, 2025, may bar the inclusion of issuer-investor mandatory arbitration provisions in certificates of incorporation or bylaws. Other states may take different approaches. It is important to consult local counsel in a company’s jurisdiction of organization to understand any potential risks. - Expect Investor and Proxy Advisory Firm Resistance
Provisions adopted without shareholder approval may be viewed as restricting shareholder rights. Companies should assess the policies of ISS, Glass Lewis and its major institutional investors—such as BlackRock and CalPERS—before proceeding.
Looking Ahead
The SEC’s policy shift removes a procedural obstacle, but it does not resolve the legal or policy debate surrounding mandatory arbitration. Companies considering adoption—particularly those planning an IPO—should carefully weigh state law constraints, investor expectations, proxy advisory firm positions, and the need for robust disclosure when mandatory arbitration provisions are implemented.
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