A division of the United States Securities and Exchange Commission (“SEC”) has issued a no-action letterstating a New Jersey-based company, Johnson & Johnson, may omit a shareholder’s proposal to require mandatory arbitration of shareholder claims and prohibit class arbitration without becoming subject to an Agency enforcement action.  Under Rule 14a-8(i)(2) of the Securities Exchange Act of 1934, a public company may exclude a shareholder proposal that would result in the violation of an applicable state or federal law.  In many cases, however, a company will request a no-action letter from the SEC before doing so in order to guard again an ensuing enforcement action

In a letter dated December 11, 2018, legal counsel for Johnson & Johnson asked the SEC to weigh in regarding whether the company may exclude the shareholder’s arbitration proposal.  According to Johnson & Johnson, the shareholder’s request would require the company to violate both federal and New Jersey law.  In addition, the Attorney General of the State of New Jersey submitted a letter to the SEC’s Division of Corporation Finance in support of Johnson & Johnson’s position.  The New Jersey Attorney General stated “the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law.”

On February 11th, the Division of Corporation Finance issued a no-action letter stating in part:

In light of the submissions before us, including in particular the opinion of the Attorney General of the State of New Jersey that implementation of the Proposal would cause the Company to violate state law, we will not recommend enforcement action to the Commission if the Company omits the Proposal from its proxy materials in reliance on rule 14a-8(i)(2). To conclude otherwise would put the Company in a position of taking actions that the chief legal officer of its state of incorporation has determined to be illegal. In granting the no-action request, the staff is recognizing the legal authority of the Attorney General of the State of New Jersey; it is not expressing its own view on the correct interpretation of New Jersey law. The staff is not “approving” or “disapproving” the substance of the Proposal or opining on the legality of it. Parties could seek a more definitive determination from a court of competent jurisdiction.

The SEC no-action letter closed by specifically stating the Agency was “not expressing a view as to whether the Proposal, if implemented, would cause the Company to violate federal law.”

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