Business Roundtable v. SEC: The Battle for Access (Introduction) (Part 1)

In August of 2010, the SEC adopted Rule 14a-11, requiring public companies to provide shareholders with access to the proxy statement for there nominees.  See Exchange Act Release No. 62764 (August 25, 2010).  For a letter written by this Blog supporting the adoption of the access rule, go here. 

The rule was a long time coming.  An access proposal had been made almost with the advent of the change in administration and the ascension of Mary Schapiro as chair.  See Exchange Act Release No. 60089 (June 10, 2009).  The proposal generated enormous controversy and sat fallow until Congress intervened and gave the SEC express authority to adopt an access rule.

The final rule was simultaneously bold and timid.  On the bold side, it applied to all public companies, exempting no particular class (including mutual funds).  Moreover, state law was expressly overridden, depriving companies of their ability to circumvent or eliminate the requirement (that is, until the Delaware courts provided a legal roadmap to the use of poison pills to prevent access). 

On the timid side, the rule contained a three year holding period for shares to count towards the access threshold.  The holding period was far longer than had been anticipated or suggested.  The requirement, when coupled with the decision in Selectica allowing for poison pills with 5% thresholds, legally or practically reduced the number of shareholders prepared to take advantage of their right to access. 

Nonetheless, after sixty years of proposals (the SEC proposed the right to access as early as the 1940s, see The SEC, Corporate Governance, and Shareholder Access to the Board Room), an access proposal was finally in place and shareholders had a meaningful mechanism to force directors to focus on the interests of shareholders rather than management. 

Opponents of access were not content, notwithstanding the restrictions in Rule 14a-11 that sharply limited its use and effectiveness.   The Business Roundtable and/or Chamber had, at the time of the proposal, suggested that any rule might have to be tested by the fire of litigation.  The main basis for challenging the rule was the lack of rulemaking authority, harking back to the halcyon days of Business Roundtable v. SEC, when the DC Circuit struck down the Commission's attempt to impose one share, one vote. 

The focus on rulemaking was always a thin reed.  The abrogated Rule 19c-4 was a substantive corporate governance requirement.  Rule 14a-11 was largely a matter of disclosure.  Moreover, the Rule gave states and companies a way out.  See Adopting Release ("if State law or a provision of the company's governing documents were ever to prohibit a shareholder from making a nomination (as opposed to including a validly nominated individual in the company's proxy materials), Rule 14a-11 would not require the company to include in its proxy materials information about, and the ability to vote for, any such nominee. The rule defers entirely to State law as to whether shareholders have the right to nominate directors and what voting rights shareholders have in the election of directors.").  Nonetheless, the threat held up matters but only long enough for the SEC to receive emphatic confirmation of its rulemaking authority in Dodd-Frank. 

Litigation has, nevertheless, ensued, with a legal challenge filed by the Business Roundtable and Chamber of Commerce in the DC Circuit.  The DC Circuit has not looked kindly on a number of SEC rulemaking initiatives and can, therefore, be viewed as a favorable jurisdiction for a rule challenge.  In an unusual move, the Commission agreed to a stay of the effectiveness of Rule 14a-11, apparently in return for an accelerated briefing schedule.  The vote for a stay came just before the November elections. 

We will over the next series of posts look at the status of the litigation.  The amicus briefs are already lining up.  Assorted briefs and motions in this case, including the brief filed by the Business Roundtable, can be found at the DU Corporate Governance web site.