One of the concerns raised by the court was the SEC's failure to adequately assess the costs associated with the rule. In doing so, however, the court relied upon a mistaken view of the board's fiduciary obligations.
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.
- “as a practical matter, it can reasonably be expected that the boards of some companies likely would oppose the election of shareholder director nominees. If the incumbent board members incur large expenditures to defeat shareholder director nominees, those expenditures will represent a cost to the company and, indirectly, all shareholders. It is also possible that some shareholders may perceive the use of corporate funds to oppose the election of nominees submitted by shareholders as having a negative effect on the value of their investments.”
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:
- “the costs for companies may be less to the extent that directors determine not to expend such resources to oppose the election of the shareholder director nominees and simply include the shareholder director nominees and the related disclosure in the company's proxy materials.”
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:
- If the [shareholder] nominee is determined [by the board] not to be as appropriate a candidate as those to be nominated by the board's independent nominating committee ..., then the board will be compelled by its fiduciary duty to make an appropriate effort to oppose the nominee, as boards now do in traditional proxy contests.
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.