Written by Chirag Saxena and Shekhar Pathak.

I. Introduction

The US Securities and Exchange Commission (“SEC”) sought to stabilize the regulatory landscape with its Policy Statement on Mandatory Arbitration, offering a seemingly clear federal declaration that the inclusion of such a clause would not impede an issuer’s registration effectiveness. The SEC’s position reaffirmed the Federal Arbitration Act’s (“FAA”) § 2, “liberal federal policy favoring arbitration,” implicitly suggesting a broad federal dominion over dispute resolution mechanisms. However, this federal stance immediately clashes with the recently amended § 115(c) of the Delaware General Corporate Law (“DGCL”), which allows corporate charters and bylaws to designate judicial forums for certain intra-corporate disputes. This direct regulatory tension raises several critical, unresolved questions concerning the boundary between federal statute and state sovereignty. What weight should courts assign to the “national policy favoring arbitration” when assessing the validity of a state corporate governance law, given the FAA’s lack of an explicit preemption clause? Is the Supreme Court’s (“SC”) interpretation in Southland Corp. v. Keating, which deems FAA § 2 substantive federal law applicable in both state and federal courts, truly reconcilable with the presumption against preemption in areas historically reserved to the states, such as corporate governance?

This article first provides background on the issue, then second, critically analyses why preemption of the FAA over the DGCL may not be viable, and finally concludes that § 115(c) represents a legitimate exercise of state authority that preserves judicial access, investor protection, and corporate accountability.

II. SEC Policy on Mandatory Arbitration and DGCL’s Section 115(c) Conflict

The SEC, established in 1934, is charged with protecting investors and maintaining fair, orderly, and efficient markets by enforcing federal securities laws and promoting truthful, fair disclosure. The present statement, released in September 2025, focuses on mandatory arbitration provisions and their effect on the acceleration of a registration statement’s effectiveness. It concludes that mandatory arbitration clauses in investor-issuer agreements would not affect the SEC’s ability to accelerate a registration statement’s effectiveness. By contrast, § 115(c) of the DGCL requires the inclusion of at least one court as a forum for dispute resolution, which effectively precludes mandatory arbitration for corporate disputes headquartered and registered in Delaware. That creates a direct conflict, as a party subject to both the SEC’s position and Delaware’s rule could not comply with both simultaneously. This conflict invokes federal preemption questions under the FAA as developed in Southland Corp., which recognized a broad scope for FAA preemption of state laws that interfere with arbitration.

III. Federalism, State Autonomy, and FAA Preemption

Justice Anthony Kennedy once, writing for the majority, in Alden v. Maine, noted, “Congress has vast power, but not all power.” This statement reflects that a state must possess a substantial degree of law-making autonomy. Otherwise, it would have little meaning if states were merely administrative units of a single national sovereign. This autonomy is essential because, firstly, decentralization allows governance closer to the people; secondly, diversity enables policies tailored to regional differences; and thirdly, experimentation, where states act as “laboratories of democracy” testing policy solutions before national adoption or rejection.

Yet beneath the surface of this doctrine lies a tension that cuts to the very heart of federalism: the question of the preemption doctrine. It creates a significant limitation on this autonomy, as it holds that Congress may nullify state law on any subject within federal legislative jurisdiction, hinging on Congressional intent and requiring interpretation of the language and history of the federal statute. Although the FAA lacks an express preemption clause, the Court’s jurisprudence has implied preemptive effect in certain contexts. However, that inference should not automatically extend to areas traditionally regulated by the states. The preemption by the FAA is primarily based on Southland Corp. However, reliance on the same is problematic on several grounds.

A. The FAA’s Limited Scope and State Authority in Corporate Governance

The original purpose of the FAA conveys a clear legislative intent, supporting a limited and remedial interpretation rather than a broad substantive displacement of state law. When Congress enacted the FAA in 1925, its aim was narrow as to cure courts’ historical refusal, to enforce arbitration clauses using the “ouster doctrine,” treating them as inherently revocable, mutual and at-will, thereby converting arbitration from an unenforceable promise into an enforceable procedure. § 2, therefore, supplies a procedural remedy, no more and no less, it compels enforcement of an agreement to arbitrate.

Moreover, the statutory “savings” clause preserves ordinary contract defenses and, on its face, does not evince any congressional intent to displace state regulatory choices across an entire field. Even when Congress legislates in areas historically occupied by the States, courts do not start with a blank slate. Instead, courts begin with a firm “presumption against preemption” and require a clear and manifest congressional purpose to displace state authority. This binds courts to resist the temptation of imputing broad preemptive effects to federal statutes in the absence of textual clarity. Hence, the principle is simple, silence does not speak; absence is not assertion.

The stated purpose of the DGCL is instructive. The regulation of corporate governance, especially the allocation of internal forums for disputes over a corporation’s affairs and the authority to define the permissible procedural terms of shareholder litigation, represents a state responsibility. States define the corporate form itself, prescribe fiduciary duties for directors and officers, authorize bylaws and charter provisions, regulate shareholder remedies, and decide the territorial and forum-allocation rules that give meaning to corporate rights. Even the Delaware Supreme Court in Salzberg v. Sciabacucchi reaffirmed this principle of state autonomy over corporate structure, where the court upheld corporate charter provisions mandating that claims under the federal Securities Act of 1933 be brought exclusively in federal court. By recognizing the power of the corporate “contract” to govern “intra-corporate affairs”, even those involving federal law, Delaware asserted its sovereign right to define the adjudicative architecture of its chartered entities.

Thus, § 115(c) derives directly from this regulatory authority. It should not be construed as an anti-arbitration provision; rather, it embodies a deliberate and substantive policy determination concerning the core attributes of the corporate form. Substituting this carefully designed governance framework with a remedial federal statute such as the FAA would “defy logic” and disregard the deliberate policy determinations made by the sovereign state.

B. § 115(c) as a Substantive Corporate Rule Beyond FAA Preemption

§115(c) yields two interrelated conclusions that shield the provision from FAA preemption and operate as safeguards against unwarranted federal encroachment. First, it does not “target” arbitration agreements for disfavored treatment. While it allows for forum specification regarding non-internal claims and affirmatively guarantees access to at least one state court with jurisdiction, it does not aim to single out arbitration to frustrate the FAA’s remedial goals. Instead, it views arbitration agreements and state forum requirements as coexisting, not competing.

Second, § 115(c) embodies a substantive policy determination by the state regarding the appropriate forum and procedure for litigating shareholder-level claims pertaining to corporate affairs and governance. When a state opts to require certain shareholder suits to be brought in a prescribed state forum, while reserving internal corporate claims for fora like chancery, the state is regulating the organization and adjudicative structure of corporate governance rather than invalidating private agreements to arbitrate as such. This falls squarely within the state’s prerogative as the chartering sovereign.

Third, the court’s decision in AT&T Mobility LLC v. Concepcion must be distinguished. That case struck down a state contract defense, mainly unconscionability, because it acted as a direct obstacle to arbitration’s efficiency by mandating a class-wide procedure. As such, that state law was applied to invalidate an arbitration agreement. By contrast, §115(c) does not invalidate a contract. It merely defines the scope of the corporate contract at the time of its formation by the sovereign chartering state, ensuring a mandatory judicial forum for core state claims. Therefore, it is a legitimate, non-discriminatory substantive rule that controls the content of corporate bylaws, not a general law applying to all contracts to disfavor arbitration.

C. Reconciling § 115(c) with the Federal Policy Favoring Arbitration

The SC emphasis on a “national policy favoring arbitration” as held in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., reflects judicially developed federal common-law policy. This policy properly guides federal forum practice by emphasizing the enforcement of arbitration agreements and the duty of federal courts to stay proceedings where arbitration is appropriate.

However, this policy should not be read to nullify Congress’s silence about field preemption and does not answer the separate question of whether the FAA displaces a state’s considered choice about where corporate claims may be litigated in state courts as part of its substantive corporate governance regulation. The former addresses judicial procedure; the latter addresses substantive state law. Even under a regime that gives § 2 of the FAA substantial force, preemption requires an actual conflict between federal law and state law, which means either an impossibility of compliance with both laws or an obstacle to the accomplishment of federal objectives.

If properly interpreted, § 115(c) does not create this conflict. First, there is no impossibility or frustration as it does not make arbitration impossible, nor does it irrationally frustrate the FAA’s enforcement mechanism. Second, it authorizes prescribed forums while reserving at least one state court forum, thereby co-existing seamlessly with private arbitration agreements. Arbitration agreements valid under state contract law can still be enforced in the fora § 115(c) contemplates. Third, there is no mandatory exclusion, as if an issuer chooses to put an arbitration clause in its charter or bylaws, § 115(c) does not mandate the exclusion of arbitration in all cases; it merely ensures that state courts remain available for certain shareholder claims. Fourth, § 115(c) is a regulation of corporate governance by insisting that state court access remain available for claims that touch the business and governance of the corporation. This accommodation avoids the sort of direct conflict that would justify preemption, demonstrating that § 115(c) and the FAA can flourish together rather than stand opposed.

IV. Conclusion

Permitting states to condition corporate bylaws and charters to preserve at least one state forum enhances confidence in the corporate form by ensuring investor access to courts that apply local fiduciary standards and public-regulatory norms. This structure also preserves democratic accountability, as state legislatures set corporate default rules that shareholders and markets can respond to, and it enables beneficial regulatory experimentation across states. These fundamental values, investor protection, state autonomy, and regulatory innovation, are precisely what the SC’s clear-statement principle and the presumption against preemption are designed to safeguard. Therefore, § 115(c) represents a legitimate, non-discriminatory exercise of state sovereignty over corporate governance, avoiding any conflict that would warrant preemption by the FAA.