The Business Roundtable v. Securities and Exchange Commission

Court of Appeals for the D.C. Circuit
905 F.2d 406, 1990 U.S. App. LEXIS 9357, 284 U.S. App. D.C. 301 (1990)

ELI5:

Sections

Rule of Law:

The Securities and Exchange Commission lacks the statutory authority under Section 19(c) of the Securities Exchange Act of 1934 to promulgate rules that regulate substantive corporate governance standards, specifically shareholder voting rights, as these matters are traditionally reserved for state law.

Facts:

In 1984, General Motors announced a plan to issue a second class of common stock that carried only one-half vote per share.
This proposal conflicted with a longstanding rule of the New York Stock Exchange (NYSE) that required listed companies to maintain a 'one share, one vote' standard.
The NYSE hesitated to enforce its rule against GM and subsequently filed a proposal with the SEC to relax its own listing standards regarding voting rights.
The SEC declined to approve the NYSE's specific proposal and instead initiated its own rulemaking process.
On July 7, 1988, the SEC adopted Rule 19c-4, which barred national securities exchanges and associations from listing the stock of any corporation that took action to nullify, restrict, or disparately reduce the voting rights of existing shareholders.
The new rule effectively prohibited 'disenfranchisement' even if such actions were approved by a shareholder vote conducted with full disclosure.

Procedural Posture:

The Securities and Exchange Commission adopted Rule 19c-4 regulating shareholder voting rights.
The Business Roundtable filed a petition for review in the United States Court of Appeals for the District of Columbia Circuit challenging the validity of the rule.

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Issue:

Does the Securities Exchange Act of 1934 authorize the SEC to adopt rules prohibiting stock exchanges from listing the securities of companies that restrict or disparately reduce per-share voting rights?

Opinions:

Majority - Stephen F. Williams

No, the Commission exceeded its authority because the Exchange Act cannot be understood to include regulation of corporate governance issues traditionally left to the states. The court reasoned that while Section 19(c) allows the SEC to amend SRO rules to further the 'purposes' of the Act, these purposes are bounded. The Commission relied primarily on Section 14 (proxy regulation) to justify Rule 19c-4, claiming it ensured 'fair corporate suffrage.' However, the court determined that Section 14 and the legislative history of the Act focus almost exclusively on disclosure and the procedures of voting, not the substantive allocation of voting power. The court applied the principle that without a 'clear indication of congressional intent,' federal courts should not interpret statutes in a way that federalizes corporate law, which is the domain of the states. Additionally, the court rejected arguments based on the 'public interest' or the goal of a 'national market system,' noting that these provisions were not intended to turn the SEC into an 'economic czar' or override state corporate governance policies.

Analysis:

This decision is a seminal administrative law case that establishes a significant boundary on the SEC's rulemaking power. It draws a hard line between 'disclosure' (federal domain) and 'substantive corporate governance' (state domain). The ruling prevents the SEC from using its oversight of stock exchange listing standards as a 'back door' to create a federal corporations code. It reinforces the 'internal affairs doctrine,' which dictates that the relationships between a corporation and its shareholders are governed by the law of the state of incorporation. Future attempts by the SEC to regulate internal corporate structures (like board composition or dual-class stock) face a high hurdle of proving explicit congressional authorization.

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