Business Roundtable v. SEC: The Battle for Access (The Source of Data) (Part 3)

The Business Roundtable and Chamber of Commerce have filed an opening brief in the challenge to the Commission's access rule, Rule 14a-11.  Noticeably absent is any challenge to the Commission's regulatory authority to adopt an access rule.  Dodd-Frank put paid to that argument. 

We note initially that the Brief makes extensive use of a report by NERA to support a number of factual assertions, citing it at least nine times.  The Report has a very clear view point.  The opening line notes that "[s]hareholders already possess means to address problems with management and boards of directors."  

The sentence was written before the adoption of Dodd-Frank and the decision to give the SEC control over the compensation committee, shareholders the right to an advisory vote on compensation, and the SEC the clear regulatory authority to adopt an access rule. In other words, Congress apparently did not agree that the mechanisms available to shareholders were adequate.   

The Report does argue that shareholders have adequate means to influence management.  It relies, however, on some very old data to make the case.  For example, the Report represents that takeovers "also serve to change management."  This is a return to the disciplinary mechanism favored by the law and economics movement.  Whatever validity the idea ever had, those days are long over, as some former proponents have more or less acknowledged.

The State of Delaware effectively did away hostile tender offers by giving management the right to use poison pills to "just say no."  As a result, a market for hostile tender offers hardly exists.  This is apparent from the data used by the Report.  It relies on a study published in 1992 of takeovers that occurred between 1980 and 1990.  Moreover, as we have noted on this Blog, the use of poison pills with low thresholds (5%) and that apply to agreement among shareholders on a common slate of directors is likely to reduce the number of proxy contests. 

The Report concedes "[t]he low frequency of proxy contests and activist campaigns" and the "frequent success of company/board slates against dissidents".  The Report explains that this data "suggest[s] that shareholder dissatisfaction with outside directors is rare and that finding superior substitutes for incumbents is more difficult than generally is assumed."  Of course, the alternative suggestion is that shareholders are unable to engage in proxy contests because of the assorted barriers imposed by management and the federal securities laws. 

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.