Business Roundtable v. SEC: The Battle for Access (Assessing the Costs) (Part 5A)

In challenged the SEC's calculation of costs, Petitioners assert that the SEC understated the anticipated number of access challenges.  The Commission estimated the number at 51.  See Release ("For purposes of this analysis, we estimate that 45 companies other than registered investment companies will receive nominees from shareholders n805 for inclusion in their proxy materials.  We further estimate that six registered investment companies will receive nominees from shareholders pursuant to Rule 14a-11 annually.").

This total, according to Petitioners, did not take into account "the extent to which the purportedly high costs of proxy contests had deterred shareholders who would avail themselves of proxy access."  Brief, at 15.  Nor did it take into account the other amendments that "facilitate[d] the formation of groups."  Id.

The argument is unlikely to capture the attention of the court.  Efforts to determine the number of access challenges is at best informed guesswork.  Guesswork by definition can always be challenged.  No matter what number the SEC determined, there would be an argument that it should have selected a different one.  It is not as if the Commission made no effort at all. 

More importantly, the Brief does not make a very strong case that the SEC was mistaken.  As the Brief asserts: 

• The Commission’s estimate of 51 election contests a year also cannot be reconciled with its estimate that shareholders would make 147 proposals a year regarding alternative proxy access mechanisms, under Rule 14a-8. It makes no sense that shareholders would seek to amend a company’s access mechanisms nearly 3 times as often as they would actually use those mechanisms for their intended purposes of nominating directors.

The assertion that "it makes no sense" substitutes assertion for analysis.  There are a number of reasons why it might make sense.  Access nominations are limited to 3% shareholders (or groups) holding shares for at least three years.  Rule 14a-8 is available to any shareholder owning $2000 in shares.  Given the differing size of the eligible pool for each matter, it seems reasonable to assume that there will be more proposals than access challenges. 

It is also possible that eligible shareholders would prefer to modify the access requirements in a bylaw as a prophylactic rather than actually run candidates.  One reason for doing so is cost.  Running access candidates will likely be far more expensive than a shareholder proposal.  All of this is speculation, to be sure.  But it contradicts the argument that the SEC's analysis "makes no sense." 

Moreover, the empirical data if anything suggests infrequent use of access.  At least four companies put in place an access bylaw (Cryo, Apria, RiskMetrics and Comverse) and apparently no access nominees have yet to be submitted.

The DC Circuit will give a close examination to the reasoning used by the Commission.  Some of the judges may well dislike the rule on philosophical grounds, thereby looking for reasons to invalidate it.   (For a discussion of how panels at the DC Circuit are put together and cases assigned, see Neutral Assignment of Judges at the Court of Appeals.).  But it will not be on this basis.

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.