Non-Access, the SEC, and the Restrictions on Shareholder Rights (Part 5)

The Commission decided on non-access at an open meeting on November 28.  The accompanying release was only published on December 6.  The adopting release ishere.  We write our final comment on the decision to adopt the non-access proposal, at least for the time being. 

The adopting release contains some questionable reasoning.  We note an example.  The language "relates to the election" of directors made its appearance in 1976.  At the time of the adoption, the Commission explained that the provision was intended to "make clear, with respect to corporate elections, that Rule 14a-8 is not the proper means for conducting campaigns or effecting reforms in elections of that nature, since other proxy rules, including Rule 14a-11, are applicable hereto."  The reference to Rule 14a-11 (now repealed) referred to the rules that applied to contests for the election of directors.  In other words, the quote indicated that the exclusion applied to actual elections, not proposals that might increase the odds of an election.  This position gets support from the actions of the staff.  From 1976 until 1990, the staff of the Commission interpreted the provision to permit access proposals. 

Yet, without analysis, the Commission in the non-access release asserted that in fact non-access was "consistent with the explanation that the Commission gave in 1976."  This would come as a surprise to, among others, the Second Circuit.  According to the court, the non-access "interpretation is plainly at odds with the interpretation the SEC made in 1976."  462 F.3d at 126.  Indeed, the non-access release contends, without any real analysis, that the Second Circuit got it wrong.  "It is the Commission's position that the election exclusion should not be, and was not originally intended to be, limited" in the manner found by the Second Circuit. 

Just saying it doesn't make it so and the position is flatly contradicted by the practice that occurred from 1976 to 1990 at the staff level.  Indeed, the first no action letter permitting access was adopted the same year, in 1976.  So why is the Commission taking this position?  Despite the attempt to argue that the Supreme Court would now, based upon Long Island Care, overturn the Second Circuit's decision in AFSCME, the Commission knows that it is the one taking a position that could be overturned.  Because the release does not justify non-access (certainly when alternatives are considered), the position looks arbitrary, a ground for striking down the rule under the Administrative Procedure's Act. 

To avoid this result, the Commission is trying to say that non-access was in fact what the Commission decided through notice and comment back in 1976.  In other words, the Commission adequately made the case for non-access back then, obviating the need to do so now.  If it were true, it would strengthen the Commission's case for a non-arbitrary rule.   But, unfortunately for the Commission, just saying it doesn't make it so.

Comments

[James McRitchie]

Excellent points, as usual. I urge you to add your voice to those on the Harvard Corporate Governance Blog at
http://blogs.law.harvard.edu/corpgov/2007/12/17/heroes-and-villains/#more-347 or http://blogs.law.harvard.edu/corpgov/2007/12/13/chairman-coxs-statement-on-proxy-access/