Why Mad Shareholders May No Longer Get a Day in Court

U.S. regulators have never allowed a company to go public if it planned to ban shareholders from seeking financial damages through class-action lawsuits. The Securities and Exchange Commission has always maintained that private litigation and enforcement of securities laws must work hand-in-hand to protect investors against fraud. Now, the SEC may be warming up to the idea of forced arbitration, say people familiar with the matter, upending decades of legal precedent and setting up a possible clash with investor advocates.

As the name suggests, it requires shareholders to work out grievances individually through a formalized conciliation process rather than by banding together under a class-action lawsuit in federal court. Such lawsuits can be costly to publicly traded companies, not to mention embarrassing. Arbitration is usually confidential, meaning existing shareholders and potential investors might not know about a case or how it ended.