Saturday, August 27, 2011
Shareholder Access and Uneconomic Economic Analysis: Business Roundtable V. SEC, by J. Robert Brown Jr., University of Denver Sturm College of Law, was recently posted on SSRN. Here is the abstract:
Business Roundtable v. SEC, arose out of a legal challenge to what is probably the most controversial rule ever adopted by the Securities and Exchange Commission (SEC or Commission). Rule 14a-11 mandated that public companies allow long term shareholders to include nominees for the board of directors in the company’s proxy statement. The rule held out the promise that shareholders would be able to more easily nominate and elect their own candidates to the board. Access was popular among shareholders and strenuously opposed by public companies.
The DC Circuit struck down the rule, imposing a “nigh impossible” standard with respect to the applicable economic analysis. The decision far exceeded the standards set out by Congress and the courts with respect to cost/benefit analysis. Moreover, in making its decision, the panel relied on mistaken interpretations of the fiduciary obligations of both boards and pension plans. The short term impact of the decision is to make more difficult the implementation of a shareholder access rule. The long term implications are more severe. The decision effectively discourages the SEC from using rulemaking as a means of establishing legal requirements and instead encourages the use of more informal and less uniform methods such as no action letters and enforcement proceedings.