Shareholder Access and the "Law of the Jungle" (Part 3)

Last week, Chairman Cox testified about shareholder access before the Senate Banking Committee.  An audio of the testimony ishere. 

In both his oral and written comments, Chairman Cox emphasized the need to act in the short term.  He raised the specter that the antifraud provisions did not apply to solicitations for nominees submitted under an access proposal.  He also raised the specter that the Second Circuit's seemingly clear decision was rendered doubtful by a subsequent Supreme Court decision in Long Island Care v. Coke, 127 S.Ct. 2339 (2007).  When questioned by Senator Reed on the topic, Chairman Cox insisted that the Supreme Court decision likely dictated a different outcome in AFSCME.  Chairman Cox was wrong on the antifraud provisions; he is likewise wrong on the meaning of the Supreme Court's decision in Long Island Care. 

First, the Supreme Court is notoriously inconsistent in the application of administrative law doctrines so predictions from one case and its application to another are often ill advised.  Second,Long Island Care involved a set of facts completely different from those in AFSCME.  Indeed, it is hard to see how the cases are even related. 

In Long Island Care, the Department of Labor adopted a rule pursuant to notice and comment.  While the law in this area is undergoing development (the Supreme Court's decision in Mead altered the existing analytical framework), in general Chevron style deference applies to agency positions promulgated through notice and comment.  The Supreme Court, therefore, reversed a decision by the Second Circuit striking down the DoL rule, concluding that it was entitled to deference. 

The situation in AFSME is markedly different.  First, the Commission adopted amendments to Rule 14a-8 through notice and comment, and as part of that process announced (in the adopting release) an interpretation that would allow for shareholder access proposals.  See AFSCME, at 128 ("The 1976 Statement clearly reflects the view that the election exclusion is limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election and rejects the somewhat broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely.").  To the extent Mead would dicate deference, it would be to this interpretation, which arose out of the notice and comment process.

The staff, however, changed its interpretation over time, not through notice and comment, but inconsistently through no action letters, without "reasoned analysis."  See AFSCME, at 129 ("In its amicus submission, the SEC fails to so much as acknowledge a changed position, let alone offer a reasoned analysis of the change.").  There is nothing in Long Island Care that suggests a position adopted by an agency in this fashion is entitled to Chevron style deference.  Long Island Care is an inapposite case that does not support the position claimed by Chairman Cox. 

In other words, Chairman Cox is stretching to create the impression that a "law of the jungle" exists with respect to access proposals.  He needs to do this in order to justify an interim policy that would prohibit access.  But his position is belied by practice.  In the first proxy season, access reigned and the experience was not a law of the jungle.  His efforts to find uncertainty in the law (since it doesn't exist in the practice) as a source of the "law of the jungle" has resulted in a series of interpretations that, to say the least, are questionable if not wrong.  In short, there is no serious threat of a "law of the jungle" that would justify an interim rule prohibiting access.