SEC Files Brief in Proxy Access Challenge

The SEC submitted its initial brief in the case of Business Roundtable and Chamber Of Commerce v. Securities And Exchange Commission. The litigation was commenced by the Business Roundtable and the Chamber of Commerce to challenge the validity of the proxy access rules adopted by the SEC in August 2010. (SEC Submits Brief Supporting Validity of Proxy Access, Harvard CorpGov Forum, 1/20/2010) Below is a summary of the SEC’s argument:


1. Rule 14a-11 requires companies, under certain circumstances, to include shareholder nominations for director in the company’s proxy materials. The Commission adopted this rule to ensure that, to the extent practicable, shareholders can use the federal proxy process to meaningfully exercise the rights they have under state law to nominate and elect directors at an in-person shareholders’ meeting. There is nothing inconsistent or arbitrary about the Commission’s decision to allow shareholders to submit proposals to expand the proxy access provided by the rule but to preclude companies and shareholders from opting out of Rule 14a-11 in favor of a more restrictive access regime. Allowing shareholders to expand the proxy access provided by Rule 14a-11 furthers the purpose of that rule: advancing the federal interest in shareholders’ being able to exercise their ownership rights through the proxy process as effectively as they might have by attending a shareholder meeting. Allowing companies or shareholders to diminish the minimum level of access provided by the rule, in contrast, undermines the rule’s purpose.

2. 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 did not evade its responsibility to assess the rule’s potential costs by ignoring them or “blaming” such costs on state law. Rather, the Commission correctly recognized that the potential for some costs identified by petitioners and other commenters would exist whenever a shareholder nominee is nominated or elected—irrespective of Rule 14a-11—and then went on to thoroughly consider all of those potential costs. 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.

3. Investment companies are generally subject to the federal proxy rules and were properly included in Rule 14a-11. The Commission carefully considered differences in the regulation and governance structure of investment companies and reasonably concluded that these differences did not justify depriving investment-company shareholders of the proxy access rights provided by the rule.

4. 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. In any event, strict scrutiny does not apply to disclosures under the securities laws, and Rule 14a-11 withstands scrutiny under any lower standard.

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