Business Roundtable v. Securities and Exchange Commission
Argued April 7, 2011; Decided July 22, 2011 (2011)
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Rule of Law:
Under the Administrative Procedure Act, a federal agency's promulgation of a rule is arbitrary and capricious when the agency fails to adequately assess the rule's economic consequences, as required by its governing statutes, by inconsistently framing costs and benefits, failing to quantify known costs, and neglecting to support its predictive judgments with sufficient empirical data.
Facts:
- The traditional corporate proxy process involves a company's incumbent board nominating candidates for director elections and distributing proxy materials to shareholders.
- Shareholders wishing to nominate their own candidate historically had to initiate a separate and expensive 'proxy contest,' filing their own proxy statements and soliciting votes independently.
- The Securities and Exchange Commission (SEC) adopted Exchange Act Rule 14a-11 to create an alternative 'proxy access' path for shareholders.
- Rule 14a-11 requires public companies to include qualified shareholder-nominated candidates for the board of directors directly within the company's own proxy materials.
- To qualify, a nominating shareholder or group must have continuously held at least 3% of the company's voting securities for at least three years.
- The rule limits the number of shareholder nominees a company must include to the greater of one nominee or 25% of the board's size.
- The rule does not apply if a shareholder is nominating a director with the intent to effect a change of control of the company.
Procedural Posture:
- The Securities and Exchange Commission (SEC), by a three-to-two vote, promulgated Exchange Act Rule 14a-11.
- The Business Roundtable and the Chamber of Commerce of the United States filed a petition for review of the final rule in the U.S. Court of Appeals for the D.C. Circuit.
- Following the petition, the SEC stayed the final rule pending the outcome of the litigation.
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Issue:
Does the Securities and Exchange Commission's promulgation of Exchange Act Rule 14a-11, which requires public companies to include shareholder-nominated director candidates in their proxy materials, violate the Administrative Procedure Act because the Commission failed to adequately consider the rule’s economic effects on efficiency, competition, and capital formation?
Opinions:
Majority - Ginsburg
Yes. The SEC's promulgation of Rule 14a-11 was arbitrary and capricious because the Commission failed to meet its statutory obligation to adequately determine and consider the economic implications of the rule. The court found the SEC's economic analysis was deeply flawed for several reasons. First, the Commission failed to quantify the significant costs companies would incur opposing shareholder nominees, dismissing them with mere speculation that boards might not oppose such nominees, despite evidence to the contrary. Second, the SEC relied on two unpersuasive studies to support the rule's supposed benefits while discounting numerous empirical studies submitted by commenters that predicted negative effects on company performance. Third, the Commission inconsistently analyzed costs and benefits, attributing the potential costs of the rule to pre-existing state law rights while not doing the same for the rule's benefits. Finally, the Commission anticipated frequent use of the rule when calculating its benefits (e.g., shareholder cost savings) but assumed infrequent use when assessing its costs (e.g., campaign expenses), an internal contradiction that undermines its entire analysis.
Analysis:
This decision reinforces the stringency of the 'arbitrary and capricious' standard of review under the Administrative Procedure Act, particularly for agencies like the SEC that have a specific statutory mandate to conduct economic analysis. The court's holding signals that an agency cannot simply pay lip service to its obligation to consider efficiency, competition, and capital formation. The ruling requires a robust, consistent, and empirically-grounded assessment of a rule's costs and benefits, and it demonstrates that courts will closely scrutinize an agency's use of data, its response to contrary evidence, and the internal logic of its economic predictions. This case serves as a major precedent holding the SEC accountable for the quality and integrity of its economic rulemaking process.
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