Rule 14a-11 required companies to include in their proxy statement and card certain nominees for the board submitted by shareholders. To qualify, the proposing shareholder, or group of shareholders, must have owned at least 3% of the company’s voting rights for at least 3 years and the shareholder(s) must have held that power through the company’s annual meeting.
Business Roundtable, a group of publically traded companies, brought suit against the SEC to vacate rule 14a-11. The plaintiff alleged that the SEC did not consider the financial burdens the rule would place on publically traded companies. The SEC claimed it created the rule to improve the board and thus shareholder value, which it found outweighed the potential costs associated with the rule.
The DC Circuit agreed with Business Roundtable and found that SEC Rule 14a-11 was arbitrary and capricious. It found the SEC’s analysis of the economic consequences of the rule was deficient. Specifically, the court found that “the Commission inconsistently and opportunistically framed the costs and benefits of the rule…” and “failed to respond to substantial problems raised by commenters.” The court held that the SEC predicted benefits that it could not quantify and predicted costs that were too low given the evidence submitted by commentators.
The court also addressed concerns raised by petitioners relating to special investment companies where the rule could be utilized by subsections of shareholders for their benefit, but to the detriment of others. It stated that the SEC did not sufficiently analyze these potential costs.
Because the court found the SEC acted arbitrarily and capriciously in promulgating SEC Rule 14a-11, it vacated the rule.
This case has been discussed in previous posts beginning here.
The primary materials for this case may be found on the DU Corporate Governance website.
]]>The Iowa Legislature recently passed a law mandating staggered boards for certain public companies. The terms of the provision suggest that it was designed to benefit a specific company or companies, currently incorporated in Iowa. The requirement applies only to public companies on the effective date (so not companies that become public afterwards) and is temporary (it expires in 2014).
The provision extends to public companies which is defined as any exchange traded company or one with "more than 2000 shareholders." In counting the number of shareholders, the statute specifically references record rather than beneficial owners. The provision does not, therefore, coincide with the definition of public company under the securities laws which requires only 500 shareholders of record. See Section 12(g), 15 USC 78l(g). As a result, it does not apply to smaller public companies unless they are also listed on an exchange.
The provision also provides that in electing each class, the "shareholders’ meeting shall be conducted not less than eleven months following the last annual shareholders’ meeting conducted before the public corporation became subject to this subsection." This is likely designed to (and in any event does) avoid the problem in Airgas where the insurgents took the position that an election for classes did not have to wait a temporal year of approximately 12 months but could occur in the next calendar year, even if the meetings were only a few months apart. The management friendly decision by Delaware Supreme Court predictably provided that the reference to year in the staggered board provision referred to temporal rather than calendar years. The Iowa provision makes the matter absolutely clear by adopting the Delaware approach.
To ensure implementation of a staggered board without the need for shareholder approval (something that might not be given), the statute significantly changes the traditional balance of rights between management and shareholders. The statute mandates that the staggered board provision be enshrined in the articles. Traditionally, amendments could only be adopted with shareholder approval (blank check stock provisions are a bit of an exception but at least the authority to adopt new classes of stock must be in the articles).
The provision, however, gives the board unilateral authority to unilaterally amend the articles. As the statute states: "The board of directors of a public corporation subject to this subsection shall adopt an amendment to its articles of incorporation". To make the import of this provision absolutely clear, the statute provides: "Any amendment to the articles of incorporation as provided in subsection 1 of this section shall be made without shareholder approval."
The provision also deprives shareholders of the traditional authority to change the size of the board or to fill a vacancy. As the statute notes: "For a public corporation subject to section 490.806A, subsection 1, a vacancy on the board of directors, including but not limited to a vacancy resulting from an increase in the number of directors, shall be filled solely by the affirmative vote of a majority of the remaining directors, even though less than a quorum of the board.".
The provision is likely to have modest impact. According to ISS, Iowa has 13 public companies that fall with the parameters of the new provision. In addition, ISS had this to say:
The provision was opposed by some in Iowa. The Iowa State Bar Association's Business Law Section Council objected. Amusingly, the memorandum gave as one reason for opposition that "the bill sends a signal of management protectionism that may discourage other public companies from locating or incorporating" in Iowa. In fact, the reverse is true. Reincorporations can only be initiated by management. Thus, management is only likely to go to states that are management friendly. The Iowa provision is certainly that.
The Iowa provision illustrates the practical weakness in the use of private ordering. What ever the theoretical benefits, shareholders are for the most part disadvantaged under any system of private ordering in the governance context. They cannot initiate amendments to the articles and incur significant limits on the subject matter that can be addressed in bylaws.
Despite these limits, shareholders sometimes succeed in pressuring management to reform its system of governance. Yet when they succeed, states can intervene and cut off the avenue of influence. With respect to staggered boards, that is what seems to be taking place.
]]>Staggered boards typically appear in the articles or charter and divide the board into two, three or even four classes, with one class elected each year. See N.Y. BUS. CORP. LAW § 704(a) (permitting staggered boards with four classes). The effect of a staggered board is that shareholders cannot vote out a majority of directors in a single year. This discourages takeovers and insulates poorly performing boards from removal. Staggered boards are also negatively correlated with firm value.
Perhaps unsurprisingly, shareholders, as a general matter, do not like staggered boards. This can be seen from voting patterns on provisions calling for the repeal of staggered boards. As Ted Allen has noted on the ISS Corporate Governance Blog:
Yet in the so called universe of private ordering, shareholders have no actual authority to repeal staggered boards. To the extent appearing in the articles, only directors may initiate an amendment.
Shareholders are, therefore, left with pressure and persuasion as a means of eliminating staggered boards. In applying pressure, shareholders make considerable use of the bully pulpit provided by Rule 14a-8. The rule allows shareholders to make precatory proposals calling for the repeal and include them in the company's proxy statement. The mechanism provides management with some sense of the aggregate support among shareholders for repeal. When these proposals pass overwhelmingly, which they often do, management is left trying to justify something that is unsupported by most shareholders.
The result has been a decline in the use of staggered boards among larger public companies. See Gregory T. Carrott, The Case For and Against Staggered Boards, Directorship, Sept. 22, 2009 (“So, perhaps not surprisingly, under pressure from institutional investors, there has been a tremendous decrease in the percentage of companies with staggered boards. Among the Standard & Poor’s 500, for example, only 34 percent have a classified board. According to RiskMetrics, 79 publicly traded companies themselves placed declassification resolutions on their ballots in 2008. There were 54 company-sponsored proposals in 2007 and 72 in 2006.”).
Yet two developments have made shareholder pressure increasingly unlikely to succeed. For one thing, the poison pill cases out of Delaware have raised the value of staggered boards to management. Delaware courts in Selectica and Yucaipa affirmed poison pills that, when used in conjunction with staggered boards, frequently bar insurgents from entering into agreements with other shareholders on a common strategy or the sharing of expenses associated with a proxy contest. As Airgas showed, a poison pill combined with a staggered board can make a proxy contest almost impossible to win. Given this new found benefit, management will likely be less likely to accede to shareholder pressure and propose the necessary amendments that will result in repeal.
The other development has been under state law. States have begun to adopt statutes that require staggered boards. By requiring staggered boards, proposals under Rule 14a-8 calling for repeal can be excluded from the proxy statement. Thus, these mandatory staggered board provisions eliminate the bully pulpit.
We have done posts on one of these statutes, the one adopted in Oklahoma. Iowa has become the latest to adopt a mandatory staggered board provision. We will discuss the statute in the next post.
]]>As a theoretical idea, private ordering has much to offer. The theory, however, often fails when translated into practice. Private ordering is often a synonym for a categorical rule that favors management.
Thus, waiver of liability provisions are supposed to be an example of private ordering. Companies can, in their articles, decide to waive liability by directors for breach of the duty of care. Private ordering would suggest that some companies will opt for full waiver of liability, some for partial waiver and some for no waiver at all. The choice will depend upon efficiency.
In fact, nothing of the sort has happened. Empirical evidence indicates that all large companies (Pepsi the inexplicable exception) waive liability to the fullest extent possible. In other words, private ordering with respect to waiver of liability for breach of the duty of care is not private ordering at all. It has resulted in a categorical rule in favor of waiver. This is all discussed at length in Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.
The other side of the issue is that sometimes shareholders succeed in pressuring management to change its governance structure. Under a private ordering system, this is how things ought to work. But where private ordering seems to work, states at least sometimes step in and eliminate the possibility by imposing a categorical rule that favors management. This is taking place in some states with respect to staggered boards. Shareholders have pressured management of some companies into removing staggered boards. The result is that three states have, by statute, mandated their use. Iowa has become the third entrant into the market for categorical rules concerning staggered boards. We will discuss this new statute in the next few posts.
]]>One way to try to address this concern is to employ an outside economic analysis. In other words, the SEC can contract out the economic analysis. Some have suggested that this is the appropriate solution. As one set of commentators have observed: "Better regulation, able to survive review by the D.C. Circuit Court, will likely require incorporating substantive and independent economic analysis into the development of every rule as standard operating procedure."
This is inconsistent with the legislative history to Section 3(f), adds considerable cost to the rulemaking process, and does not provide any guarantee that a court dissatisfied with the substance of the rule will uphold it.
The tough standard used by the DC Circuit may ultimately prove harmful to the interests of public companies. The DC Circuit struck down efforts by the SEC to impose governance requirements through the use of listing standards back in the 1990s (in a case brought by the Business Roundtable). It was a short term victory for public companies but a long term loss. Depriving the SEC of the authority to act meant that the problems could only be solved through congressional intervention. SOX and Dodd-Frank are to a large degree a legacy of that decision. Opposition to access has already resulted in one example of congressional intervention. Section 971 of Dodd-Frank clarified that the Commission has very broad authority to adopt an access rule.
The approach may also push the Commission to use a regulatory approach less prone to legal challenge. The Commission could for example use its informal authority to impose similar requirements. Thus, for example, the Commission could use the antifraud provisions to require companies to disclose information about shareholder nominees. The Commission has brought these kind of claims before. See The SEC, Corporate Governance, and Shareholder Access to the Board Room.
To the extent companies are seeking proxies for their candidates, shareholders likely have a need to know that in fact there are other candidates that may be nominated at the meeting. To the extent using this type of informal authority, there is no need to conduct an economic analysis of any kind.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>As a benefit, the Commission listed the printing costs avoided through the use of access. The savings would remove a “disincentive” to election contests. In assessing these "benefits," according to the court, the Commission assumed “frequent use” of shareholder access. At the same time, in assessing the costs, the Commission assumed “infrequent use,” thereby demonstrating an internally inconsistent approach.
In fact, the Commission did not state that shareholders would use access on a "frequent" basis, thereby creating the inconsistency that the court concluded was present. Here is what the Commission actually said in the adopting release about the benefits of the cost savings:
In other words, the Commission at most stated that there could be some increase in the number of election contests as a result of shareholder access, a seemingly unassailable proposition.
The court's characterization that access would be used frequently came from the fact that, in making the statement that removal of costs would increase the use of access, the Commission cited a letter written by a commentator. The letter suggested frequent use of access and calculated a frequency. Here is the footnote:
But the conclusions as to the frequency of access suggested by the commentators in the footnote were never adopted by the Commission. Indeed, the SEC actually disagreed with the conclusions. In precisely quantifying the number of access challenges, the SEC came up with a number substantially below what was suggested by the commentators. Id. (“For purposes of this analysis, we estimate that 45 companies other than registered investment companies will receive nominees from shareholders for inclusion in their proxy materials. We further estimate that six registered investment companies will receive nominees from shareholders pursuant to Rule 14a-11 annually.”). The calculation was substantially less than what was described in the footnote.
In other words, in 70 plus pages of economic analysis consisting of 40,000 words, the court found as proof of irrationality the citation to a single commentator in a footnote. To view this as arbitrary, the court first had to assume that the SEC adopted the data in the footnote then had to assume that the SEC did so despite other determinations elsewhere in the release that directly contradicted the data in the footnote. Neither of those assumptions were warranted.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>The court, however, faulted the SEC for failing to determine whether some of the access challenges would replace proxy contests, thereby lowering the total number of challenges/contests. Why was this important? Apparently, the total number of contests were necessary to know “whether the rule will facilitate enough election contests to be of net benefit.” See Id. (anticipating "beneficial effects" because the rule will "mak[e] election contests a more plausible avenue for shareholders to participate in the governance of their company").
What the court didn't explain was why it was material to know the actual number of proxy contests/access challenges given that the maximum number was very small. With the maximum number at 100, it is hard to see the relevance of knowing that in fact the actual number might be 90 (to the extent some shareholders opted for an access challenge in place of a proxy contest). Neither number presents a serious risk that an election contest will occur.
In short, the court was faulting the Commission for failing to calculate a number that was in fact immaterial to the economic analysis.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>The SEC received at least 600 letters. It is not required to discuss every letter or every point, only those necessary to make a rational decision with respect to the rule under consideration.
The contention that unions will use shareholder access to induce wage concessions has no significant empirical support. It is true that those opposing shareholder access have worried that this will occur but there is no meaningful evidence that in fact it has occurred.
This can be seen from the opinion of the DC Circuit. While the court noted that commentators had raised this issue, the only authority cited (beyond the letter making the comment) was a quote from a single law review article written by a Chancellor in the Delaware Chancery court. The quote did not relate to access but was a statement demonstrating that different shareholders had different potential interests. In other words, the opinion contains not one actual example of unions using corporate governance authority as a mechanism to advance wage negotiations.
But there is a far greater problem with the court’s requirement than the entirely speculative nature of the “cost.” The court is presupposing that unions (and to a lesser extent public pension plans) will violate their fiduciary obligations to their pension plan beneficiaries. The assumption is that unions will use the threat of access not to act in the best interests of their beneficiaries but to benefit union members to obtain wage concessions.
Presumably this means that at least sometimes unions are expected to forego access when it is in the best interests of beneficiaries in order to benefit its membership. In other words, the court faulted the SEC for not assuming that unions would violate the law and assessing the costs associated with the violation.
The court cited no authority for the proposition that an agency, in adopting a rule, must assess speculative costs that depend upon a violation of the law. To describe the SEC as irrational for not having done so is a legal principle too far.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>In drawing the conclusion, the court made it sound as if the SEC looked at only two sets of studies, those showing that the presence of dissident directors harmed firms and those showing that their presence benefited them. The court then characterized the SEC’s approach as unprincipled. The negative studies were “entirely” discounted while the SEC relied “exclusively and heavily” upon the positive studies, despite the presence of methodological flaws. See Id. (“Indeed, the Commission ‘recognize[d] the limitations of the Cernich (2009) study,’ and noted ‘its long-term findings on shareholder value creation are difficult to interpret.’").
This does not accurately capture the discussion of the data contained in the SEC’s release. First, the Commission was up front about the division in the evidence. Id. (“The comments reflect the sharp divide on the question of whether facilitating shareholders' ability to exercise their rights to nominate and elect directors would lead to the benefit of improved board and company performance.”).
Second, the Commission did not rely “exclusively” on the positive studies. The Commission relied on numerous studies that showed that that “facilitating shareholders' rights and voice may result in better company performance.”
Third, with respect to a study on hybrid boards that showed positive performance, the Commission noted the methodological limitations and characterized its value not as definitive but as “relevant.” Moreover, the Commission pointed to other studies that supported the conclusions. See Id. at n. 922 (“Other commenters adduce evidence that boards with a minority of dissident directors produce positive changes in corporate governance structures and strategy and result in increased shareholder value measured in both absolute returns and relative to peers.”).
Finally, as to "entirely" discounting the negative studies, the Commission mentioned at least seven studies by name (see n. 926) and discussed the reasons why the conclusions were not sufficient to change its views with respect to access.
In other words, the Commission considered both sides of the argument, looked at both sets of studies, analyzed the data and came up with a reasoned conclusion. While it is clear that some disagree with the analysis, the legal standard is irrationality. The analysis employed by the Commission is not even remotely close to that standard.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>The point is an interesting one that would ultimately backfire on most boards. The duty suggests that if shareholders submit nominees who are superior to the board's nominees, the board has a fiduciary obligation to support the shareholder nominees.
While as a practical matter, the board will always take the position that its candidates are superior, there are likely to be instances when this will be objectively untrue. Boards can include actors or sports figures or family members. It would not be particularly difficult for shareholders to nominate candidates that are more qualified than some of these nominees.
The analysis in Business Roundtable suggests that the board had a fiduciary obligation to resist the inferior nominee. To the extent shareholders submit the superior nominee, the board's decision to favor its own candidate would, under the DC Circuit's view, violate the board's fiduciary obligations. This looks like a roadmap for challenges to the board whenever this occurs.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>In incorrectly characterizing the board's fiduciary obligations, the court relied upon a letter submitted by American Bar Association Committee on Federal Regulation of Securities. See Letter from Jeffrey W. Rubin, Chair, Comm. on Fed. Regulation of Secs., Am. Bar Ass'n, to SEC 35 (August 31, 2009), available at http://www.sec.gov/comments/s7-10-09/s71009-456.pdf (ABA Letter). The letter stated that in some cases, the board would be "compelled by its fiduciary duties" to resist access candidates.
In reaching this conclusion, however, the ABA letter made a surprising assertion. The board's fiduciary obligations with respect to access candidates was the same as when the board confronted a proxy contest. As the letter noted: “we believe that the process will be the same as that which is experienced with traditional proxy contests, because the board’s fiduciary duties in each case will be the same.”
This is, however, a questionable assumption. Proxy contests and access challenges raise very different concerns. Those engaging in a proxy contest are likely to be short term investors who believe they have a significant chance of defeating management's slate. Often they seek to take control by electing a majority of directors to the board.
They seek control because proxy contests are often motivated by a desire to change the direction of the company. To accomplish this change, insurgents will frequently expend considerable resources. As the adopting release for Rule 14a-11 noted:
Perhaps unsurprisingly, insurgents frequently win the contests. In 2008, there were 50 proxy contests, with shareholders winning about half of them.
Those shareholders submitting nominees under the SEC's access rule pose very different concerns. For one thing, they cannot be short term investors. For another, they cannot seek control but are limited to no more than 25% of the positions on the board. Finally, as the SEC noted, these investors will be far less likely to incur the expenses typically associated with a proxy contest.
In considering the response to an access challenge, management does not have to worry that a defeat will result in the implementation of a damaging vision of the company. Moreover, boards could easily decide that the access nominees are as qualified as those nominated by the board and allow shareholders to decide on board composition. Finally, they could decide that management's candidates are superior but, given the low level of expenditures by the nominating shareholders, there was little chance the access candidates would actually win.
In all of these circumstances, the board could decide not to resist an access challenge. In short, unlike a proxy contest, resistance by the board was not compelled by its fiduciary obligations. In other words, the SEC's conclusion that sometimes the board might resist access and sometimes it might not is eminantly consistent with the fiduciary obliation of the board.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>As part of the cost analysis, the Commission examined the likelihood that the board would expend resources to resist access nominees. The SEC conceded that boards would often resist.
But the Commission then went on to note that these costs would be limited by two factors. First, the board was not required by its fiduciary obligations to expend such amounts. As a result:
In other words, companies would often resist access nominees but not always.
The court found fault with this analysis. The court concluded that the “Commission's prediction directors might choose not to oppose shareholder nominees had no basis beyond mere speculation.” Instead, the court suggested that the board had a duty to resist. Thus, it would only not do so where “it believes the cost of opposition would exceed the cost to the company of the board's preferred candidate losing the election, discounted by the probability of that happening”.
As support for this duty to resist, the court cited a letter from the American Bar Association Committee on Federal Regulation of Securities. In the letter, the Committed stated that:
Letter from Jeffrey W. Rubin, Chair, Comm. on Fed. Regulation of Secs., Am. Bar Ass'n, to SEC 35 (August 31, 2009), available at http://www.sec.gov/comments/s7-10-09/s71009-456.pdf.
There are two significant problems with the court's analysis. First, the approach ignores the process nature of the duty of care. See Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000) (“As for the plaintiffs' contention that the directors failed to exercise "substantive due care," we should note that such a concept is foreign to the business judgment rule. Courts do not measure, weigh or quantify directors' judgments. We do not even decide if they are reasonable in this context. Due care in the decision making context is process due care only.”).
In other words, the board can decide to resist or not resist access candidates and the decision will be upheld if the process is proper. The SEC does not need to justify, under a process standard, the possibility that the board may decide not to resist.
But there is another problem with the court's analysis. Even if the duty of care could be said to include a substantive component, it does not mandate, as the court seems to suggest, a presumption that the board must resist access challenges.
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
]]>The Business Roundtable challenged the SEC for failing to adequately conduct the “economic” analysis of the rule. The court described the SEC as having a “unique obligation” to analyze the impact of a rule on "efficiency, competition, and capital formation." See 15 U.S.C. §§ 78c(f), 78w(a)(2). Indeed, this was the basis for the court's ultimate decision to invalidate the rule. See Business Roundtable (failure of SEC to "’apprise itself—and hence the public and the Congress—of the economic consequences of a proposed regulation’ makes promulgation of the rule arbitrary and capricious and not in accordance with law.”).
But in fact, the legislative history to Section 3(f) indicates that the economic analysis required by Section 3(f) was designed to assist Congress not the private sector. Congress adopted Section 3(f) in 1996. Pub. L. No. 104-290, § 106(a), 110 Stat. 3416, 3424) (codified at 15 U.S.C. § 77b(b)). In requiring the economic analysis, Congress noted that it did not override the SEC’s “foremost obligation” to protect investors. See H. Rep. 104-622, 104th Cong., 2nd Sess., at 39 (June 17, 1996) (“The new section makes clear that matters relating to efficiency, competition, and capital formation are only part of the public interest determination, which also includes, among other things, consideration of the protection of investors. For 62 years, the foremost mission of the Commission has been investor protection, and this section does not alter the Commission’s mission.”).
In other words, the SEC was required to produce the relevant economic analysis but it did not control whether the rule was or was not necessary to protect investors. Instead, Congress commanded the use of the analysis so that it could intervene and overturn agency rules where necessary. See H. Rep. 104-622, 104th Cong., 2nd Sess., at 39 (June 17, 1996) ("Such analysis will be necessary to the Congress in connection with the Congress' review of major rules pursuant to the terms of the Small Business Regulatory Enforcement Fairness Act of 1996.").
The required analysis was, therefore, designed to benefit Congress, not the private sector. Because the legislative history indicates that Congress intended to benefit Congress and not the private sector, Business Roundtable does not fall within the “zone of interest” protected by the statute. See Thompson v. N. Am. Stainless, LP, 131 S. Ct. 863 (2011) (“We have held that this language establishes a regime under which a plaintiff may not sue unless he ‘falls within the “zone of interest” sought to be protected by the statutory provision whose violation forms the legal basis for his complaint.’ We have described the ‘zone of interests’ test as denying a right of review ‘if the plaintiff's interests are so marginally related to or inconsistent with the purposes implicit in the statute that it cannot reasonably be assumed that Congress intended to permit the suit.’”).
Business Roundtable, it would seem, does not have standing to challenge errors in the analysis under Section 3(f).
For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site.
Paredes, at 725 (“McKinsey & Company recently surveyed 150 directors who serve on the boards of more than 300 public companies. 209 The study reported that approximately 56% of the directors polled said that they only "moderately" know what is going on at the companies where they serve, while 14% of the directors polled responded "partially" when asked to what degree they really know what is going on at their companies. Of the directors McKinsey & Company surveyed, 76% said that the CEO "largely" "controls and shapes what directors learn about the company."
http://www.kslaw.com/imageserver/KSPublic/library/publication/2011articles/8-11LDNViewPoints.pdf (“Only 21% of the directors McKinsey surveyed felt they had a thorough understanding of their company’s current strategy, which leaves plenty of room for the lead director to help.
http://www.kslaw.com/imageserver/KSPublic/library/publication/2011articles/8-11LDNViewPoints.pdf (“Many members said that their primary source of information regarding global corporate strategy comes from management.
The DC Circuit's job in all of this is not to substitute its views on the wisdom of the policy but to largely determine whether the SEC used proper process in making the decision. The standard for review -- arbitrary and capricious -- provides an agency considerable room. The agency need not be perfect; it can even be sloppy. What it can't be is irrational.
In examining the decision in Business Roundtable, the decision contains a dearth of law to support the panel's decision that the Commission acted in an arbitrary manner. See Section 706 of the APA. The arbitrary and capricious standard is probably the most litigated issue in administrative law. A quick search through the Supreme Court file of Lexis-Nexis showed that there were 294 cases using the phrase “arbitrary and capricious.” A search through the appellate court file came up with almost 3000 references to arbitrary and capricious in just the last ten years. In short, there is plenty of law on the applicable standard.
DC Circuit cited almost none of it. The opinion contained only one cite to a Supreme Court decision. It referenced Motor Vehicle Mfrs. Ass'n v. State Farm, 463 US 29 (1983) for the broad proposition that an agency must have "examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choices made." In other words, it stands for the proposition that an agency cannot act in an irrational manner in adopting a rule.
A reading of the case itself does not help the court's analysis in Business Roundtable. As Justice Rehnquist put it in his concurring opinion, this was not a case involving the failure to adequately explain a study or reconcile purported inconsistencies in 73 pages of analysis. It was a case where the agency "gave no explanation at all."
The remaining authority used by the DC Circuit? Of the thousands of opinions on the subject they relied on three DC appellate cases: Chamber of Commerce v. SEC, 412 F.3d 133 (DC Cir. 2005); Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209 (DC Cir. 2004); and American Equity Investment Life Insurance Co. v. SEC, 613 F.3d 166 (DC Cir. 2010). The three decisions have two things in common. They all involve the SEC and they were all written by judges on the panel in Business Roundtable.
Judge Ginsburg wrote Chamber of Commerce, Judge Sentelle wrote American Equity (with Judge Ginsburg on the panel) and Public Citizen. In other words, they found no judicial authority for their opinion in Business Roundtable beyond their own opinions.
Moreover, the primary decision relied upon by the panel -- Chamber of Commerce -- does not really support its analysis. First, Chamber of Commerce contains a detailed review of the law and includes about 20 citations to other decisions. Second, it declined to accept arguments that entailed a second guessing of the SEC's analysis of data submitted during the comment process. See Id. ("Although a more detailed discussion of the study might have been useful, the Commission made clear enough the limitations of the study, and we have no cause to disturb its ultimate judgment that the study was 'unpersuasive evidence.'").
The court invalidated the rule not because the economic analysis could have been better but because the economic analysis was entirely absent. The SEC in the rule under consideration in Chamber of Commerce had proposed three methods of conforming to the new requirements but entirely omitted any discussion of the costs of the different methods. See Id. ("That particular difficulty may mean the Commission can determine only the range within which a fund's cost of compliance will fall, depending upon how it responds to the condition but, as the Chamber contends, it does not excuse the Commission from its statutory obligation to determine as best it can the economic implications of the rule it has proposed.").
Business Roundtable uses a very different analysis as we will discuss. It did fault the SEC for not adequately discussing the limitations of various studies. Nor did it find a complete absence of costs but instead found that the SEC's 73 page assessment was not thorough enough. In doing so, the court chided the SEC for failing to assess costs that largely presupposed a breach of fiduciary obligations.
To find the Commission irrational in this case, given the sweeping nature of the court's analysis, one would expect to find greater reliance on judicial precedent than what occurred in the opinion.
Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site. For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC.
]]>Before we get into the heart of the opinion, though, we should provide some background. This is the third attempt at access in the new millennium. See Security Holder Director Nominations, Exchange Act Release No. 48626 (Oct. 14, 2003); Shareholder Proposals, Exchange Act Release No. 56160 (July 27, 2007).
The rule has been nothing but controversial. The versions circulated in 2003 generated 13,000 or so comments. In connection with the most recent effort, at least 600 comments, many lengthy, were submitted. The Commission considered all of this information in taking action with respect to the access rule. See Exchange Act Release No. 62764 (August 25, 2010) (“the final rules include features from the proposals on this topic in 2003 and 2007, and reflect much of what we learned through the public comment that the Commission has received concerning this topic over the past seven years.”).
Congress to some degree also participated in access. After concerns were raised about the SEC's authority to adopt an access rule, Congress included in Dodd-Frank a provision that gave very broad rulemaking with respect to an access rule. See Section 971 of Dodd-Frank. An access rule could be adopted "under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors." Last minute efforts from the Senate to restrict access to 5% shareholders and imposed a two year holding period were defeated.
The human costs in adopting the rule were also significant. According to the chairman of the SEC, the staff put in 21,000 hours on the rule, an amount of time equal to $2.2 million. The final release also included a lengthy cost-benefit analysis for the rule. The analysis consisted of 73 pages in the release (26 pages in the Federal Register) and almost 40,000 words. The staff’s analysis was long and thorough.
It is with this background that we examine the analysis used by the DC Circuit in striking down Rule 14a-11, the shareholder access rule.
Primary materials on the case, including the relevant briefs, can be found at the DU Corporate Governance web site. For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC.
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