The Securities and Exchange Commission has a statutory obligation to determine as best it can the economic implications of a new rule. Indeed, the Commission has a unique obligation to consider the effect of a new rule upon efficiency, competition, and capital formation, 15 U.S.C.S. §§ 78c(f), 78w(a)(2), 80a-2(c), and its failure to apprise itself—and hence the public and the Congress—of the economic consequences of a proposed regulation makes promulgation of a rule arbitrary and capricious and not in accordance with law.
The Business Roundtable and the Chamber of Commerce of the United States, each of which has corporate members that issue publicly traded securities, petitioned the United States Court of Appeals 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.
Should the United States Court of Appeals grant the petition for review--and subsequent vacation for arbitrariness--of Exchange Act Rule 14a-11, which requires public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors?
The United States Court of Appeals granted the petition and vacated Rule 14a-11. The Court agreed with the petitioners that the Commission acted arbitrarily and capriciously in adopting Rule 14a-11 because it failed to adequately assess the economic effects of the rule, as required by 15 U.S.C.S. §§ 78c(f), 78w(a)(2), and 80a-2(c). The Commission failed to estimate the costs that companies were expected to incur to oppose shareholder nominees and did not sufficiently support its conclusion that increasing the potential for election of shareholder nominees would result in improved company performance. The Commission failed to seriously evaluate the costs that could be imposed on companies from use of the Rule by shareholders representing special interests, such as union and government pension funds. Estimates of frequency of use of the Rule were internally inconsistent. The Commission also did not adequately address whether the Investment Company Act of 1940 reduced the need for proxy access by investment company shareholders. Accordingly, the Commission's decision to apply the Rule to investment companies was also arbitrary. The Court concluded that the Commission failed to justify Rule 14a-11.