In Business Roundtable v. SEC, No. 10-1305 (D.C. Cir. 2011), the United States Court of Appeals for the District of Columbia vacated rule 14a-11 under the Administrative Procedure Act (“APA”), 5 U.S.C. §551. The court found that the Securities Exchange Commission (“SEC”) acted in an arbitrary and capricious manner by failing to fully assess the rule’s economic effect.
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.