For the first time since the U.S. Chamber of Commerce and the Business Roundtable filed their lawsuit in September, the SEC has officially lodged its counterargument with the court. The suit was filed about a month after the commission adopted Rule 14a-11, which allows shareholders with at least 3 percent of ownership for at least three years the right to have their own director candidates added to the proxy ballot alongside management’s without having to engage in an expensive proxy fight. The SEC issued a stay in the implementation of the rule in October until the matter is resolved by the court.
In its Jan. 19 brief, the SEC disputes all the charges made by the Chamber of Business Roundtable, stating: “…the Act provides that the SEC may adopt a proxy access rule ‘under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors.’ …Petitioners also claim that rule 14a-11 is based on ‘sheer guesswork’ and is ‘the product of an agency that does not know what it has wrought.’ But the specific charges they lodge in support of this overheated rhetoric fail to account for the Commission’s detailed and comprehensive analysis in support of its conclusion that the collective benefits of Rule 14a-11 justify its costs.”
In my Sept. 29 blog post
, I spelled out the charges made in the suit. I thought the best way to show how the SEC answered each charge was to include them side by side with the charges. Here they are with the SEC’s answer in italics:
- The rule exceeds the commission’s authority. Congress passed Section 971 of the Dodd-Frank Act (Pub. L. 111-203 § 971, 124 Stat. 1376 (2010)), which expressly confirms the Commission’s authority to adopt such rules.
- The rule violates the issuers’ [public companies] rights under the First and Fifth amendments. Rule 14a-11 does not violate the First Amendment because the rule governs only internal communications—neither requiring companies to disseminate or subsidize the speech of third parties nor speak to the public at large.
- The SEC erred in appraising the costs that proxy access would impose on American corporations, shareholders, and workers at a time our economy can least afford it. The Commission carefully considered the likely economic effects of Rule 14a-11 and reasonably concluded that the rule’s potential benefits— including improved board performance and enhanced shareholder value—justify its potential costs. By thoroughly analyzing the record evidence and making informed predictive judgments where appropriate, the Commission fully complied with its obligations under statute and this Court’s precedent to apprise itself of the potential economic consequences of its rules.
- The commission ignored evidence and studies highlighting the adverse consequences of proxy access, including that activist shareholders would use the rule as leverage to further their special interest agendas. The Commission, however, carefully considered this concern (although not using petitioners’ preferred terminology [“union” or “leverage”]) and concluded that “the totality of the evidence and economic theory” supported the view that the rule “has the potential of creating the benefit of improved board performance and enhanced shareholder value * * * in companies that react to shareholders’ concerns because of the possibility of [shareholder-nominated] directors being elected.”
- The SEC claimed to be empowering shareholders, but actually restricted shareholders’ ability to prevent special interest shareholders from triggering costly election contests. In particular, the Commission carefully considered (although not using the precise language petitioners prefer) the concern that government and union pension funds may use Rule 14a-11 as leverage to obtain concessions from companies unrelated to shareholder value, and concluded that the potential benefits from increased responsiveness of boards to shareholders justified these potential costs.
- The agency claimed to be effectuating state law rights, but gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process. The rationale underlying Rule 14a-11, however, is to more closely approximate the shareholders’ meeting by facilitating the specific state-law rights to nominate and elect directors. Those rights are indeed furthered through the rule and, rather than “nullify” state law, the rule defers to the state law that creates those rights.
The case that could decide the legality of the shareholder proxy access rules adopted by the SEC will be heard by the U.S. Court of Appeals for the D.C. Circuit April 7 now that the commission filed its