Business Roundtable v. SEC: The Battle for Access (The "Uneasy Relationship" with State Law) (Part 8B)

In arguing that the Commission should not have adopted access, Petitioners take issue with the Commission's claim that access will "effectuate state law rights for director elections."  Instead, the provision will "nullify them, establishing a federal proxy access regime by fiat regardless what access mechanism an issuer’s shareholders would adopt under the law of Delaware or another State." (emphasis added). 

This is a common but odd argument.  There is little doubt that access reduces management's discretion.  But it is not, apparently, a sufficiently sympathetic point.  Thus, the interference with state law is pitched as a restriction on the rights of shareholders. 

Certainly any categorical rule reduces discretion.  In this case, the rule permits companies to put in place bylaws that reduce the requirements in Rule 14a-11.  The loss of flexibility, therefore, is only in the ability to put in place provisions that restrict access beyond what is included in Rule 14a-11.  Under Delaware law (Section 112), companies could, for example, raise the percentage required to submit nominees or, in fact, ban access altogether.  Under Rule 14a-11, this is not allowed.  See Brief, at p. 48 (noting that rule "nullifies the right that shareholders currently enjoy at the majority of public companies to adopt an access regime more restrictive than the Commissions."). 

There is no evidence that shareholders in any meaningful numbers want to preserve the right to restrict access.  Indeed, the outpouring from the investor community suggests that shareholders (at least the largest ones) are quite content with the restrictions on their ability to adopt a more restrictive bylaw. 

But even assuming that some would, that does not resolve the issue.  On the one hand, access prevents shareholders from adopting a more restrictive alternative.  On the other, it facilitates the franchise by facilitating the nomination and election of directors and prohibits management from adopting bylaws that restrict these rights.  In other words, the impact of access on the franchise cannot be examined solely on the basis of the effect on shareholder rights under Section 112 of the DGCL.  In this context, the SEC did an extensive analysis of the pros and cons of access v. private ordering. 

Perhaps recognizing this, the Brief hints that the rule is not just about more restrictive provisions but about the limit on the right of shareholders to adopt alternative access mechanisms.  In other words, shareholders want access but want to accomplish it in another manner.  This idea is not explained but does come out in other briefs (the one submitted by the State of Delaware for example).  Apparently, the suggestion is that shareholders might prefer to guarantee an access like right through, for example, bylaws that provide for mandatory reimbursement of proxy expenses, something now permitted under Delaware law.  See DGCL Section 113. 

Access does not prevent the adoption of alternatives nor make them irrelevant.  Because access is limited to 3%/three year shareholders, the alternative mechanisms could be used to empower those groups of shareholders not covered by the rule. 

Moreover, it does not explain how shareholders would succeed in obtaining this right given, as the Brief pointed out, the sixty year opposition of management to access.  In addition to management opposition, shareholders have to confront serious restrictions on the right to adopt bylaws.  See The Limits of Private Ordering(noting that in Russell 3000, 4% of companies prohibited shareholders from adopting bylaws and 39% imposed supermajority requirement).  There are any number of other problems confronted by shareholders, including, to the extent the relevant provision is in the articles, a legal prohibition in initiating amendments.  For a discussion of these limits, see Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom. 

The "interference" with state law also ignores the reality that Rule 14a-11 is really about the content of the proxy statement, a federally mandated document.  The SEC can essentially require whatever information it wants within the four corners.  Petitioners acknowledge that the SEC lacks the substantive authority to determine who gets elected to the board.  See Brief ("the Rules require companies to place access nominees on the ballot who fail to satisfy the company’s reasonable director qualification standards, and who therefore would not be seated if elected."). 

In other words, access merely reduces a federal impediment (the requirement of a proxy statement) to a state law right (the right of all shareholders to nominate directors).  The only state law restriction is on the right to limit access.  It is a balance to be sure but a balance that Congress, in Dodd-Frank, left to the Commission to determine.

Assorted briefs and motions in this case can be found at the DU Corporate Governance web site.