The Politics of the DC Circuit: Business Roundtable v. SEC

The opinion from the DC Circuit finally came out and as suggested in the oral argument the three judge panel (a particularly bad draw for the SEC) struck down shareholder access.  The opinion is here.  The court concluded that the SEC had acted in an arbitrary and capricious fashion by not considering all of the economic consequences of the rule.

Given that the adopting release had something like 50 pages on the economic consequences, the court had to strain to come up with an example of arbitrary behavior by the Commission.  The court for example noted that the SEC had concluded that sometimes management would not resist access candidates and, as a result, would not incur significant costs.  The court viewed this as an arbitrary conclusion.  As the opinion noted:

• We agree with the petitioners that the Commission’s prediction directors might choose not to oppose shareholder nominees had no basis beyond mere speculation. Although it is possible that a board, consistent with its fiduciary duties, might forgo expending resources to oppose a shareholder nominee — for example, if 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 — the Commission has presented no evidence that such forbearance is ever seen in practice.

There was no evidence because there have yet to be access candidates since, aside from a few companies, the right does not exist.  The only support for the proposition that the SEC was wrong was a quote from a comment letter submitted by the ABA.  According to the letter:

• 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 we have noted, the board could easily determine that its candidate and the shareholder's candidate were equally qualified.  More importantly, even if opposing the shareholder's candidate, that is not the same thing as saying the board must expend a material amount of funds to defeat the candidate.  As we have noted: 

• even if the board opposes access nominees, it does not mean that it will expend funds opposing them.  A board may size up the situation and realize that the access candidates have little or no chance of winning.  In those circumstances it would arguably violate the board's fiduciary duties to expend funds to oppose the nominees. 

In other words, the court's argument is very weak.  It has no real authority.  The analysis reflects less a view on the law and more a use of the law to invalidate a rule that the panel does not like. 

Comments

[Former Law Student]

The only economic consequence the SEC needs to consider is the economic collapse of 2008 resulting from a lack of accountability by directors and officers. As for the "use of the law to invalidate a rule that the panel does not like"... Well, this court is just following the example of the US Supreme Court. It's no secret that at such a high level courts tend to make result oriented decisions, and then struggle to find a way to justify their decision. Shame on them for claiming to be unbiased justices.