A fresh governance row appears to be brewing in the US, this time over the ability of shareholders to launch lawsuits again company boards.

The Securities and Exchange Commission (SEC) is expected to discuss limiting the way lawsuits can be issued, but high-profile Democrat senator Elizabeth Warren (pictured) has issued a warning contained in a letter sent to watchdogs.

Co-signed by Warren’s fellow Democrat senator Jack Reed, the letter, according to the Financial Times, says they are concerned the SEC will force shareholders into “mandatory arbitration” rather than suing boards.

“This would be a significant mistake,” write Warren and Reed, “putting investors and markets at risk …”. They add: “Shareholders would be subjected to a regime where facts of the case are hidden behind closed doors and participants are subject to confidentiality obligations, bad actors are not accountable to the public and there are no legal precedents to guide future conduct.”

The SEC was due to discuss the issue today as one of only three items on the agenda of an open meeting.

Lawsuits against US companies make headlines around the world. Notable among them is the lawsuit that saw Delaware courts twice find against Elon Musk and his $56bn pay package as chief executive of Tesla.

The ruling caused Musk to move registration of Tesla away from Delaware to Texas, while Delaware state law makers chose to reform corporate law.

‘Detrimental effects’

Harvard law professor Lucian Bebchuk argued the reforms would have “considerable detrimental effects on public company shareholders”.

Mandatory arbitration has come before the SEC previously, most notably in 2018-2019, when there was an ongoing debate about the inclusion of arbitration clauses in company bylaws.

Rick Fleming, then an investor advocate at the SEC, argued in a speech that lawsuits filled a role that watchdogs could not, and allowed shareholders to claim for “full restitution” of losses. Lawsuits could also deal with highly complex matters, such as accounting irregularities, that are difficult to address during arbitration.

Fleming wrote that “stripping away the right of shareholders to bring a class action lawsuit seems to me draconian and, with respect to promoting capital formation, counterproductive”.

A year later, Jeff Mahoney, general counsel for the Council of Institutional Shareholders, wrote that “disputes that go to arbitration rather than the court system generally do not become part of the public record and, thereby, may lose their deterrent effect.”

Quashing shareholders’ ability to launch a lawsuit would be a major change in US corporate governance. A decision rests with the SEC.