Tag: Business Roundtable v. SEC

Shareholder Proxy Access in Small Publicly Traded Companies

J.W. Verret is an Assistant Professor at George Mason University School of Law.

In Business Roundtable v. SEC, the DC Court of Appeals struck down the proxy access rule giving certain shareholders access to the corporate proxy on the grounds that the SEC failed to adequately fulfill its requirement to consider the impact of new rules on “efficiency, competition, and capital formation.” The Court offered a blistering critique of the SEC’s economic analysis in the rule. Criticism of the opinion followed and also led to a series of Congressional hearings on the SEC’s process for weighing the economic costs and benefits of new rules. Many of the critics of the opinion, and indeed of cost-benefit analysis itself, have argued that it is simply too difficult to guide rulemaking, or that costs are easier to measure than benefits and so the approach trends against the status quo.

I counter that critique of Business Roundtable by way of example in an article co-authored with Thomas Stratmann in the Stanford University Law Review, Does Shareholder Proxy Access Damage Share Value in Small Publicly Traded Companies? We suggest a question the SEC might itself have investigated about its approach, if it had submitted a rule proposal first and if it was committed to economic analysis of its rules. We consider a natural experiment provided by the rule’s differential impact on small and large firms above and below the arbitrary $75 million market capitalization separation. We measure the impact of the market’s frustrated expectation of a permanent exemption for small firms, an expectation stemming from prior SEC implementation of other controversial rules and strong language in the Dodd-Frank Act, against a control group represented by large firms who expected application of the rule and for whom the new rule’s impact was largely capitalized into their value.


Business Roundtable and the Future of SEC Rulemaking

Jill E. Fisch is a Professor of Law at the University of Pennsylvania Law School.

The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. One of the most serious was the DC Circuit’s 2011 decision in Business Roundtable v. SEC, in which the court invalidated the SEC’s proxy access rule, Rule 14a-11, on the basis that the SEC had failed to conduct an adequate cost-benefit analysis. By imposing an onerous, and possibly insurmountable procedural burden, the decision threatens to paralyze rulemaking by the SEC and other administrative agencies. The effect is particularly troubling in light of the heavy rulemaking obligations imposed by Dodd-Frank and the JOBS Act.

In my article, The Long Road Back: Business Roundtable and the Future of SEC Rulemaking (forthcoming in Seattle University Law Review), I critically evaluate the Business Roundtable decision. Specifically, I argue that, although Rule 14a-11 suffered from a number of flaws, flaws I have noted in other work (see Fisch, The Destructive Ambiguity of Federal Proxy Access, 61 Emory L. J. 435 (2012)), the deficiencies in SEC’s rule-making that led to the adoption of Rule 14a-11 cannot accurately be ascribed to inadequate economic analysis. Nor is the demanding standard imposed by DC Circuit’s decision a product of the statutory constraints on SEC rulemaking. Rather it stems from the court’s skepticism about proxy access and the SEC’s policymaking generally.

The SEC’s inability to defend its proxy access rule against attack was, in part, a product of two important constraints on its policy formation – the notice and comment requirements of the Administrative Procedure Act and the Government in the Sunshine Act. Although commentators have defended both these requirements in terms of transparency and democratic values, they sacrifice consensus building as well as decision-making efficiency, and they allow for the increased influence of political forces and interest groups. These sacrifices are of particular concern in the context of SEC rulemaking and, I argue, were at the heart of a problematic Rule 14a-11.


Will the SEC Facilitate Shareholder Access to the Ballot Under Rule 14a-8?

Robert Jackson is associate professor of law at Columbia Law School. This post was coauthored with Gabriella Wertman, member of the Columbia Law School class of 2013. Work from the Program on Corporate Governance about shareholder voting includes Private Ordering and the Proxy Access Debate by Bebchuk and Hirst; a previous post on the SEC staff’s rulings on proxy access proposals under Rule 14a-8 is available here.

In the wake of Business Roundtable v. SEC, public company shareholders and boards have, for the first time, been using Rule 14a-8 to propose, and defend against, proxy access proposals. Earlier this month, the SEC staff released a series of no-action letters  addressing management requests to exclude shareholders’ proxy access proposals from the ballot. The staff has based these early rulings on their longstanding 14a-8 precedents, which were originally crafted to address proposals outside the proxy access context. The staff’s approach leaves open the possibility that management will be able to use these rules to exclude proxy access proposals in the future, endangering the viability of Rule 14a-8 as a means of facilitating private ordering in proxy access. Before next proxy season, the SEC should make clear that it will apply Rule 14a-8 in a way that will give investors a meaningful opportunity to adopt the proxy access rules that shareholders prefer.

Although the staff’s initial rulings addressed important preliminary questions raised by the use of Rule 14a-8 for facilitating proxy access, they were much more notable for their adherence to the staff’s existing precedents for evaluating shareholder proposals outside the proxy access context. This approach has convinced corporate counsel and their clients that the SEC will allow management to use these precedents to exclude proxy access proposals from the ballot. Unless the SEC reverses course, this approach will give management a systematic advantage that will prevent shareholders from adopting their preferred approach to proxy access.


SEC to Allow Shareholders to Submit Proxy Access Proposals for 2012 Season

James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is based on a Sullivan & Cromwell client memorandum. More posts about proxy access, including several from the Program on Corporate Governance, are available here.

The Securities and Exchange Commission has announced that its revisions to the proxy rules to allow shareholders to propose proxy access bylaws and other election or nomination procedures will become effective shortly. The SEC had stayed the effectiveness of these changes to Rule 14a-8 pending the outcome of a judicial review of its mandatory proxy access rule, Rule 14a-11. On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11, but the Rule 14a-8 changes were not litigated. The SEC’s stay order will automatically expire when the court decision is finalized, which is expected to occur on September 13, and the Rule 14a-8 changes will therefore become effective at that time absent further SEC action. The SEC stated that a notice of effective date will be published.

The SEC also confirmed that it will not seek a rehearing of or appeal the decision vacating Rule 14a-11. A statement by the SEC Chairman indicated that she remains committed to facilitating shareholder nominations of directors and that the SEC will continue to review the court decision and the comments received on their proposed rules in order to “determine the best path forward” on mandatory proxy access.


Implications of the Proxy Access Case

The following post comes to us from David B.H. Martin, co-head of the securities practice at Covington & Burling LLP, and is based on a Covington advisory memorandum by Mr. Martin and Keir D. Gumbs. Other posts related to proxy access, including a number by Lucian Bebchuk and Scott Hirst of the Program on Corporate Governance, are available here.

On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit issued a long-awaited decision in the case of Business Roundtable and Chamber of Commerce v. Securities and Exchange Commission, No. 10-1305 slip op. (D.C. Cir. Jul. 22, 2011), which vacated Rule 14a-11, the SEC’s shareholder access rule. By vacating the rule, the D.C. Circuit has dealt a significant blow to the SEC’s longstanding efforts to adopt a rule that would require, under certain circumstances, that public companies include in their proxy materials shareholder-proposed nominees to the board of directors. The decision also has import that goes significantly beyond shareholder access, as it will challenge the SEC (and, likely, other agencies) in assessing the economic consequences of future rulemakings. Nevertheless, the court’s decision does not end the shareholder access debate. Under an amendment to the shareholder proposal rule (Rule 14a-8) that was adopted last year at the same time as the shareholder access rule and voluntarily stayed by the SEC pending the outcome of the shareholder access rule litigation, shareholders may yet be able to submit shareholder proposals that seek to establish shareholder access regimes in 2012. The SEC has not yet indicated whether it will lift this stay, but there is no legal reason why it could not do so.


What Now For Proxy Access?

Stanley Keller is a partner at Edwards Angell Palmer Dodge LLP. Other posts related to proxy access, including a number by Lucian Bebchuk and Scott Hirst of the Program on Corporate Governance, are available here.

With the United States Court of Appeals for the District of Columbia Circuit having struck down Rule 14a-11 in Business Roundtable et al v. Securities and Exchange Commission (No. 10-1305, July 22, 2011), the question is where does proxy access now stand and what can now be expected?

The Court overturned the SEC’s attempt to give shareholders the right under the federal proxy rules to have their director nominees included in management’s proxy materials because of the SEC’s failure to adequately justify Rule 14a-11 on a cost-benefit basis. The SEC has several alternatives which undoubtedly are being considered. It could seek rehearing either by the panel or en banc or appeal the decision to the U.S. Supreme Court, it could amplify its analysis of the economic justification for Rule 14a-11 and readopt the rule, it could modify Rule 14a-11 and seek to justify the modification in a way that it believes will pass judicial scrutiny, or it could do nothing on Rule 14a-11 and let it disappear. Under any of these alternatives, the question is what will the SEC do about the amendment of Rule 14a-8, which offers another route to proxy access through shareholder proposals. The amendment has been stayed pending resolution of the court action challenging Rule 14a-11 and further notice from the SEC. Again, the SEC has several alternatives – it could lift the stay and let the amendment take effect as adopted or it could revisit the Rule 14a-8 amendment. I will not presume to predict what the SEC will do, or worse, tell it what it should do regarding Rule 14a-11. However, I have some observations regarding a path forward.


Petitioners File Reply Brief in 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 reply brief that was prepared by a Gibson Dunn team representing the Chamber of Commerce and the Business Roundtable; the complete brief is available here. Other posts on the case are available here, and other posts on proxy access, including a number of posts by affiliates of the Program on Corporate Governance, are available here.

On February 25, my colleagues at Gibson Dunn, Gene Scalia, Amy Goodman and Dan Davis, representing petitioners Business Roundtable and the U.S. Chamber of Commerce, filed the petitioners’ reply brief in Business Roundtable v. SEC, a challenge to the Securities and Exchange Commission’s recently promulgated rules providing certain shareholders the right to place board-of-director nominees in company proxy materials.

According to the petitioners, in promulgating the rules the Commission failed to satisfy its statutory duty to assess the rules’ economic consequences. The Commission instead speculated about the rules’ costs, despite record evidence showing that the rules would likely cause expensive election campaigns. The petitioners contend further that the shareholders most likely to use the rules are union and government pension funds, which have a history of using shareholder activism to pursue non-investment-related objectives that depart from other shareholders’ interests. The petitioners fault the Commission for claiming that the rules further shareholder rights, when the mandatory rules instead disenfranchise the vast majority of shareholders, who may wish to avoid the tremendous costs that proxy access would impose on their company.


Law Professors Submit Amicus Brief in Proxy Access Case

Editor’s Note: This post relates to a brief submitted by 36 law professors, including Professor Coates and Professor Victor Brudney, in the case of Business Roundtable and Chamber Of Commerce v. SEC. Boston College Law Professor Kent Greenfield led the organization of the group, and the brief was written by Jay Eisenhofer, Michael Barry and Ananda Chaudhuri of Grant & Eisenhofer P.A. The amicus brief is available here. The brief relies on the recent Harvard Law Review article by Lucian Bebchuk and Robert Jackson, Jr, “Corporate Political Speech: Who Decides?” which is described on the Forum here.

For seven years, the SEC deliberated whether to give shareholders direct access to the proxy statements mandated by federal law. After the Business Roundtable and others raised doubts about the SEC’s authority to adopt proxy access, Congress considered for nearly a year whether to intervene and mandate it by statute. In the end, Congress simply elected in the Dodd-Frank law to remove any doubt as to the SEC’s authority in the area. At long last, the SEC in September adopted Rule 14a-11, which requires public companies to distribute information about candidates nominated by shareholders that have held 3+% of the voting stock for 3+ years.


SEC Submits Brief Supporting Validity of Proxy Access

This post relates to the case of Business Roundtable and Chamber Of Commerce v. SEC; additional posts regarding the case are available here. Additional posts regarding proxy access are available here.

The Securities and Exchange Commission (SEC) yesterday submitted its initial brief in the widely-followed case of Business Roundtable and Chamber Of Commerce v. Securities And Exchange Commission. The litigation was commenced by the Business Roundtable and the Chamber of Commerce to challenge the validity of the proxy access rules adopted by the SEC in August 2010.

The brief of the SEC is available here.

Focus in 2011 Will Remain on Executive Compensation

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal.

This has been an eventful year in corporate governance. As companies prepare for the 2011 proxy season, it is important to review some of the legislative and regulatory events and key trends of 2010 that are expected to have an impact over the next year. Data from the last proxy season and the revised proxy policies of Institutional Shareholder Services (ISS) for 2011 both indicate that executive compensation will continue to be the main focus for shareholders in the New Year.