Challenge to SEC Proxy Access Rules

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on an Opening Brief that was prepared by a Gibson Dunn team representing the Chamber of Commerce and the Business Roundtable. The team is led by Amy Goodman, Eugene Scalia and Daniel Davis. The complete brief is available here. More details about the case can be found here.

Business Roundtable and the Chamber of Commerce have challenged SEC rules requiring public companies in certain circumstances to include shareholder nominees for director in the company’s proxy materials.  The final rules comprise two main rules: (1) Rule 14a-11, which would require a publicly-traded company to include in its proxy materials a candidate nominated by shareholders that have held shares representing at least 3 percent of the voting power of the company’s stock for the past 3 years; and (2) amendments to Rule 14a-8(i)(8), which would require companies in certain circumstances to include in their proxy materials shareholder proposals regarding director nomination procedures.  The Business Roundtable and Chamber of Commerce have challenged Rule 14a-11 and its related amendments, but not amended Rule 14a-8(i)(8).  The Summary of Argument from the Business Roundtable and Chamber of Commerce Opening Brief appears below.

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The Rule 14a-11 and its related amendments should be vacated because the Commission has forced public companies to include the director nominees of a select group of investors in company proxy materials on the basis of shifting, inconsistent, and unsubstantiated assertions that are the hallmark of an agency that has not reached a cohesive understanding of its action, nor “consider[ed] . . . important aspect[s] of the  problem.” State Farm, 463 U.S. at 43. The Rules violate the Administrative Procedure Act, the Commission’s statutory duty to consider effects on efficiency, competition, and capital formation, and corporations’ First Amendment rights. Each of the following reasons justifies vacatur of the rules:

  • 1. In three recent decisions, this Court has admonished the Commission to “apprise itself . . . of the economic consequences of a proposed regulation.” See, e.g., Chamber of Commerce, 412 F.3d at 144. The Commission failed that responsibility by repeatedly blaming state law for costs it was imposing. It neglected to provide any estimate for the campaign costs that record evidence showed would be the most costly element of the Rules and—after initially predicting that election contests under the Rules would occur 5 times as frequently as traditional proxy contests—shifted ground without explanation and asserted that the contests would occur 25 percent less frequently than proxy contests, even though a central premise of the Rules was that election contests would be initiated “more easily” than supposedly “prohibitively expensive” proxy contests.
  • 2. The Commission also based its assessment of the Rules’ costs on willful ignorance toward the agenda and practices of activist institutional investors, and the conduct of directors and corporations. Commenters warned that special interest investors would use proxy access as leverage to obtain concessions from companies; as a “soap box” to voice disagreements with company policy; and to seek the election of candidates favorable to the special interests of labor unions or the political officials in charge of government pension funds. The Commission failed to even discuss the first two concerns, and its 126-page Adopting Release did not even mention union or government pension plans and their unique and divergent interests. The Commission compounded its error by suggesting that corporations might not oppose the election of access candidates, even though all record evidence was to the contrary, and although elsewhere the Commission relied on anticipated corporate opposition in positing that the Rules would function effectively.
  • 3. The Commission claimed to be empowering shareholders, yet prohibited them from voting to bar or limit proxy access to avoid the costs the Commission admitted might occur. In similar fashion, the Commission abrogated state laws that it claimed to be effectuating.
  • 4. The Commission applied its ill-founded rule to investment companies (e.g., mutual funds) despite conclusive evidence that the asserted need for proxy access at investment companies is even less, and that some of the costs would be higher.
  • 5. By forcing public companies to carry campaign speech of certain activist investors, the Commission violated the First Amendment.

The complete brief can be found here.

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  1. By Proxy access: The free-speech edition… | on Saturday, February 12, 2011 at 12:28 am

    […] can read the full Chamber/Roundtable argument here (and a summary here). They list multiple grievances; among them: The plaintiffs say that the SEC ignored evidence that […]

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