The SEC will not challenge the decision of the U.S. Court of Appeals for the District of Columbia Circuit, No. 10-1305, which struck down the agency’s rule to make it easier for shareowners to nominate directors to corporate boards.
The announcement, made late on Tuesday by SEC Chairman Mary Schapiro, marks a major blow to large investor advocacy groups. In a statement, Schapiro said the SEC has no plans to seek a rehearing before the appeals court or a Supreme Court review. But she said she remains “committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.” (SEC will not seek rehearing on proxy access rule, 9/6/2011)
Given the composition of the DC Circuit and the Supreme Court, perhaps such an appeal would have had little chance. However, by letting the decision stand the SEC now faces a bad precedent. As a letter from the Council of Institutional Investors pointed out:
It is well-settled “that ‘a court is not to substitute its judgment for that of the agency.’” That is “‘especially true when the agency is called upon to weigh the costs and benefits of alternative polices.’” “[C]ost-benefit analyses epitomize the types of decisions that are most appropriately entrusted to the expertise of an agency.” An agency need only “consider relevant factors” and “articulate a reasoned basis for its conclusion.” Unfortunately, the panel ignored these well established principles.
J Robert Brown Jr. has a multi-part series reviewing the decision at theRacetotheBottom.org. I’ll summarize just a few of his points here.
- In adopting Section 3(f), Congress had this to say: “The new section makes clear that matters relating to efficiency, competition, and capital formation are only part of the public interest determination, which also includes, among other things, consideration of the protection of investors. For 62 years, the foremost mission of the Commission has been investor protection, and this section does not alter the Commission’s mission.” Congress left open the possibility that the goals of investor protection could sometimes override the results of the economic analysis.
- Of the thousands of opinions on the subject they relied on three DC appellate cases. The three decisions have two things in common. They all involve the SEC and they were all written by judges on the panel inBusiness Roundtable
- Because the legislative history indicates that Congress intended to benefit Congress and not the private sector, Business Roundtable does not fall within the “zone of interest” protected by the statute. Therefore, they didn’t have standing to bring the case in the first place.
- The court suggested that the board had a duty to resist [proxy access initiatives]. The court characterized such fiduciary obligations as substantive. In fact, the duty of care is process driven. As long as the process is proper, the board can decide to resist or not resist an access challenge.
- The Commission considered both sides of the argument, looked at both sets of studies, analyzed the data and came up with a reasoned conclusion. While it is clear that some disagree with the analysis, the legal standard is irrationality. The analysis employed by the Commission is not even remotely close to that standard.
In Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC, Brown discusses some of the ramifications. From his abstract:
The DC Circuit struck down the rule, imposing a “nigh impossible” standard with respect to the applicable economic analysis. The decision far exceeded the standards set out by Congress and the courts with respect to cost/benefit analysis. Moreover, in making its decision, the panel relied on mistaken interpretations of the fiduciary obligations of both boards and pension plans. The short term impact of the decision is to make more difficult the implementation of a shareholder access rule. The long term implications are more severe. The decision effectively discourages the SEC from using rulemaking as a means of establishing legal requirements and instead encourages the use of more informal and less uniform methods such as no action letters and enforcement proceedings.
Changes to Rule 14a-8 were not challenged but remain stayed by the SEC because related disclosure amendments were “entangled with” Rule 14a-11. The petition filed with the Court addressed Rule 14a-11 “and associated amendments to the Commission’s rules,” which “include new Schedule 14N, new Rule 14a-18, and amendments to Rule 14a-2, among others.”
The Council of Institutional Investors urged the SEC retain the stay of Rule 14a-8 “while the Commission considers the procedural issues raised by the Court.” The Federal Securities Regulation Committee of the American Bar Association also urged the SEC to retain the stay and “either repropose the amendments to Rule 14a-8 or reopen the comment period relating to those amendments, in order to more fully consider the implications of the amendments in the absence of Rule 14a-11.”