Business Roundtable v. SEC

Business Roundtable v. SEC

Opinion

 [*1146]   [**261]  Ginsburg, Circuit Judge: The Business Roundtable and the Chamber of Commerce of the United States, each of which has corporate members that issue publicly traded securities, petition for review of Exchange Act Rule 14a-11. The rule requires public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors. The petitioners argue the Securities and Exchange Commission promulgated the rule in violation of the Administrative Procedure Act, 5 U.S.C. § 551 et seq., because, among other reasons, the Commission failed adequately to consider the rule's effect upon efficiency, competition, and capital formation, as required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940, codified at 15 U.S.C. §§ 78c(f) and 80a-2(c), respectively. For these reasons and more, we grant the petition for review and vacate the rule.

I. Background

The proxy process is the principal means by which shareholders of a publicly traded corporation elect the company's  [*1147]   [**262]  board of directors. Typically,  [***3] incumbent directors nominate a candidate for each vacancy prior to the election, which is held at the company's annual meeting. Before the meeting the company puts information about each nominee in the set of "proxy materials" — usually comprising a proxy voting card and a proxy statement — it distributes to all shareholders. The proxy statement concerns voting procedures and background information about the board's nominee(s); the proxy card enables shareholders to vote for or against the nominee(s) without attending the meeting. A shareholder who wishes to nominate a different candidate may separately file his own proxy statement and solicit votes from shareholders, thereby initiating a "proxy contest."

Rule 14a-11 provides shareholders an alternative path for nominating and electing directors. Concerned the current process impedes the expression of shareholders' right under state corporation laws to nominate and elect directors, the Commission proposed the rule, see Facilitating Shareholder Director Nominations, 74 Fed. Reg. 29,024, 29,025-26 (2009) (hereinafter Proposing Release), and adopted it with the goal of ensuring "the proxy process functions, as nearly as possible, as a  [***4] replacement for an actual in-person meeting of shareholders," 75 Fed. Reg. 56,668, 56,670 (2010) (hereinafter Adopting Release). After responding to public comments, the Commission amended the proposed rule and, by a vote of three to two, adopted Rule 14a-11. Id. at 56,677. The rule requires a company subject to the Exchange Act proxy rules, including an investment company (such as a mutual fund) registered under the Investment Company Act of 1940 (ICA), to include in its proxy materials "the name of a person or persons nominated by a [qualifying] shareholder or group of shareholders for election to the board of directors." Id. at 56,682-83, 56,782/3.

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