Administrative law - corporate governance regulation - D.C. circuit finds sec proxy access rule arbitrary and capricious for inadequate economic analysis. - Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011)

Harvard Law Review

Volumn 125, Issue 4, 2012, Pages 1088-1095

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EID: 84857243945     PISSN: 0017811X     EISSN: None     Source Type: Journal    
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References (84)

1. Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scattered sections of the U.S. Code).
2. See id. § 971, 124 Stat. at 1915 (codified at 15 U.S.C. § 78n(a) (2006 & Supp. IV 2011)).
3. 647 F.3d 1144 (D.C. Cir. 2011).
4. Id. at 1148.
5. Before its recent rulemaking, the SEC considered but did not adopt proxy access reform in 1942, 1977, 1992, and 2003. Facilitating Shareholder Director Nominations, 74 Fed. Reg. 29,024, 29,029 & n.73 (proposed June 18, 2009).
6. Jeffrey N. Gordon, Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy, 61 VAND. L. REV. 475, 478-479 (2008).
7. Lucian Arye Bebchuk, The Business Roundtable's Untenable Case Against Shareholder Access 1 (Harvard Univ. John M. Olin Ctr. for Law, Econ. & Bus., Discussion Paper No.516, 2005), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=686184.
8. Martin Lipton & William Savitt, The Many Myths of Lucian Bebchuk, 93 VA. L. REV. 733, 743-749 (2007).
9. Reply Brief of Petitioners Business Roundtable and Chamber of Commerce of the United States of America at 16, Bus. Roundtable, 647 F.3d 1144 (No. 10-1305), 2011 WL 2014801, at *16.
10. See Facilitating Shareholder Director Nominations, 74 Fed. Reg. at 29,025.
11. Id. at 29,031.
12. The SEC proposal also included amendments to Rule 14a-8(i)(8) that would have allowed shareholders to change an individual company's proxy procedures by placing reform proposals on proxy ballots.
13. Id. at 29,056.
14. Facilitating Shareholder Director Nominations, 75 Fed. Reg. 56,668, 56,669 n.23 (Sept. 16, 2010).
15. Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scattered sections of the U.S. Code).
16. Id. § 971, 124 Stat. at 1915 (codified at 15 U.S.C. § 78n note (2006 & Supp. IV 2011)).
17. S. REP. NO. 111-176, pt. V, at 146 (2010).
18. Ronald D. Orol, SEC Approves Rule Giving Shareholders New Power, MARKETWATCH (Aug. 25, 2010, 11:19 AM), http://www.marketwatch.com/story/sec-approves-rule-givingshareholders-new-power-2010-08-25.
19. Commissioners Troy Paredes and Kathleen Casey both criticized the theory and the methodology behind the final rule. See Bus. Roundtable, 647 F.3d at 1148.
20. Facilitating Shareholder Director Nominations, 75 Fed. Reg. at 56,753-71.
21. id. at 56,771-776.
22. The SEC conducted this analysis to comply with 15 U.S.C. §§ 78c(f), 78w(a)(2), and 80a-2(c) (2006).
23. Facilitating Shareholder Director Nominations, 75 Fed. Reg. at 56,755, 56,765.
24. Opening Brief of Petitioners Business Roundtable and Chamber of Commerce of the United States of America at 31, Bus. Roundtable, 647 F.3d 1144 (No. 10-1305), 2010 WL 5116461, at *31.
25. Id. at 53-59, 2010 WL 5116461, at *53-59.
26. Order Granting Stay of Effect of Commission's Facilitating Shareholder Director Nominations Rules, Exchange Act Release No. 63,031 (Oct. 4, 2010), available at http://www.sec.gov/rules/other/2010/33-9149.pdf.
27. Bus. Roundtable, 647 F.3d at 1156.
28. Chief Judge Sentelle and Judge Brown joined the opinion.
29. Bus. Roundtable, 647 F.3d at 1148.
30. Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (2006).
31. Bus. Roundtable, 647 F.3d at 1148 (alterations in original) (quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) (internal quotation marks omitted).
32. Id. (quoting 15 U.S.C. §§ 78c(f), 78w(a)(2), 80a-2(c) (2006)) (internal quotation marks omitted). The new language sought to extend SEC consideration to economic efficiency, beyond its traditional focus on investor protection.
33. 15 U.S.C. §§ 78c(f), 80a-2(c).
34. Bus. Roundtable, 647 F.3d at 1148 (quoting Chamber of Commerce v. SEC, 412 F.3d 133, 144 (D.C. Cir. 2005)) (internal quotation marks omitted).
35. 613 F.3d 166, 167-68 (D.C. Cir. 2010) (vacating SEC rule regarding fixed index annuities for failure to consider the rule's economic effects).
36. 412 F.3d 133, 136 (D.C. Cir. 2005) (vacating SEC rule regarding independent directors on investment company boards for failure to consider costs and alternatives).
37. Bus. Roundtable, 647 F.3d at 1148-49.
38. Id. at 1149-1151.
39. Id. at 1150.
40. The SEC "did nothing to estimate and quantify the costs it expected companies to incur" even though "empirical evidence about expenditures in traditional proxy contests was readily available."
41. Id. at 1150-1151.
42. Id. at 1151.
43. Id. at 1151-1152.
44. Id. at 1152.
45. Id. at 1152-1154.
46. Final Brief of the Securities and Exchange Commission at 42-43, Bus. Roundtable, 647 F.3d 1144 (No. 10-1305), 2011 WL 2014799, at *42-43 (claiming that estimates for the Paperwork Reduction Act, 44 U.S.C. §§ 3501-3521 (2006 & Supp. IV 2011), designed to assess the burden of collecting and reporting information, did not have wide implications);
47. cf. Balt. Gas & Elec. Co. v. Natural Res. Def. Council, Inc., 462 U.S. 87, 105 (1983) (suggesting a faulty projection was not necessarily arbitrary and capricious if it was made for a limited purpose).
48. Bus. Roundtable, 647 F.3d at 1153.
49. Id. at 1156.
50. The SEC claimed that costs for investment companies would be incurred only if shareholder nominees won elections, an argument the court faulted as undercutting the rule's basic rationale.
51. Id. at 1155-1156.
52. Id. at 1156.
53. See 15 U.S.C. §§ 78c(f), 78w(a)(2), 80a-2(c) (2006).
54. In previous decisions, the D.C. Circuit has recognized expertise as a reason for deference. See, e.g., Milk Indus. Found. v. Glickman, 132 F.3d 1467, 1478 (D.C. Cir. 1998) ("Under the arbitrary and capricious standard of review, 'an agency's predictive judgments about areas that are within the agency's field of discretion and expertise' are entitled to 'particularly deferential' review, as long as they are reasonable." (citations omitted) (quoting Int'l Ladies' Garment Workers' Union v. Donovan, 722 F.2d 795, 821 (D.C. Cir. 1983))).
55. See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 599 (1993) (Rehnquist, C.J., concurring in part and dissenting in part) ("[The briefs here] deal with definitions of scientific knowledge, scientific method, scientific validity, and peer review - in short, matters far afield from the expertise of judges.... [T]he unusual subject matter should cause us to proceed with great caution in deciding more than we have to, because our reach can so easily exceed our grasp.").
56. Patricia M. Wald, Judicial Review: Talking Points, 48 ADMIN. L. REV. 350, 352 (1996) ("[Q]uestions have been raised about whether we in the courts are competent to review the minutiae of risk or cost-benefit analysis. For most of us, the answer is no.").
57. Patricia M. Wald, Limits on the Use of Economic Analysis in Judicial Decisionmaking, LAW & CONTEMP. PROBS., Autumn 1987, at 225.
58. JOSHUA D. ANGRIST & JÖRN-STEFFEN PISCHKE, MOSTLY HARMLESS ECONOMETRICS 4-7 (2009) (explaining the limits of econometric experimental design).
59. Yair Listokin, Interpreting Empirical Estimates of the Effect of Corporate Governance, 10 AM. L. & ECON. REV. 90 (2008) (explaining the confounding effect of endogeneity problems on corporate governance analyses).
60. Jerome Culp, Judex Economicus, 50 LAW & CONTEMP. PROBS., Autumn 1987, at 95, 96-100 (exploring the assumptions behind Judge Posner's law and economics analysis).
61. Kenneth G. Dau-Schmidt, Relaxing Traditional Economic Assumptions and Values: Toward a New Multidisciplinary Discourse on Law, 42 SYRACUSE L. REV. 181 (1991) (examining assumptions underlying "neoclassical efficiency analysis," id. at 182).
62. Joseph A. Grundfest, The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law, 65 BUS. LAW 361, 378 (2010) ("The proxy access debate is not an abstract academic controversy.... It is a knockdown, drag-out political brawl.").
63. Cf. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 865 (1984) ("Judges are not experts in the field.... Courts must [not]... reconcile competing political interests... on the basis of the judges' personal policy preferences."); id. (holding that the judiciary should defer to an agency interpretation because "the regulatory scheme is technical and complex, the agency considered the matter in a detailed and reasoned fashion, and the decision involves reconciling conflicting policies");
64. Thomas J. Miles & Cass R. Sunstein, The Real World of Arbitrariness Review, 75 U. CHI. L. REV. 761, 814 (2008) (presenting empirical findings "that in important domains, the hard look is hardened, or softened, by the political predilections of federal judges").
65. Bus. Roundtable, 647 F.3d at 1150.
66. J. Robert Brown Jr., Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC 3-4 (Univ. of Denver Legal Studies Research Paper Series, Working Paper No. 11-14, 2011), available at http://ssrn.com/abstract=1917451 ("The approach used by the court... incorrectly interpreted the board's fiduciary obligations... [and relied on a comment letter that] was based upon a faulty premise.").
67. Bus. Roundtable, 647 F.3d at 1152 ("[S]tate governments and labor unions... often appear to be driven by concerns other than a desire to increase the economic performance of the companies in which they invest." (alteration in original) (quoting Leo E. Strine, Jr., Toward a True Corporate Republic: A Traditionalist Response to Bebchuk's Solution for Improving Corporate America, 119 HARV. L. REV. 1759, 1765 (2006)) (internal quotation marks omitted));
68. Brown, supra note 56, at 5.
69. Bus. Roundtable, 647 F.3d at 1150-51.
70. Theoretical models relating proxy access to board performance are especially unscientific.
71. Bo Becker, et al., Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge 12 (Harvard Bus. Sch., Working Paper No. 11-052, 2010) ("[Boards' endogeneity] makes the effect of any board characteristic ... impossible to identify based only on the observed correlation between that characteristic and firm performance." (citing Benjamin E. Hermalin & Michael S. Weisbach, Endogenously Chosen Boards of Directors and Their Monitoring of the CEO, 88 AM. ECON. REV. 96 (1998))), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1695666.
72. Becker et al., supra note 58, at 4 ("Using a 1-day event window around October 4, 2010, we find that share prices of companies that would have been most exposed to shareholder access declined significantly compared to share prices of companies that would have been most insulated from the rule.").
73. Peter L. Strauss, Changing Times: The APA at Fifty, 63 U. CHI. L. REV. 1389, 1407-1409 (1996).
74. The D.C. Circuit's strict standards persist despite past corrections from the Supreme Court. See, e.g., Balt. Gas & Elec. Co. v. Natural Res. Def. Council, Inc., 462 U.S. 87, 108 (1983) (finding the court's scrutiny of a "minor ambiguity" to be "totally inappropriate"); Vt. Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 525 (1978) (concluding that the court "improperly intruded into the agency's decisionmaking process");
75. Stephen Breyer, Vermont Yankee and the Courts' Role in the Nuclear Energy Controversy, 91 HARV. L. REV. 1833, 1833 (1978) ("In the Vermont Yankee case, the Court of Appeals for the District of Columbia Circuit sought to require additional agency procedures [when dealing with a complex and important scientific or technical issue].... The Supreme Court has reversed that approach, correctly so in my view...." (footnotes omitted)).
76. Dodd-Frank Act, Pub. L. No. 111-203 § 971(b), 124 Stat. 1376, 1915 (2010) (codified at 15 U.S.C. § 78n(a) (2006 & Supp. IV 2011)) (providing that the SEC "may" issue a proxy rule, but not requiring that it shall do so).
77. Thomas Quaadman, Dodd-Frank: Governance Issues Galore and Not Limited to Financial Institutions, METROPOLITAN CORP. COUNS., Aug. 2010, at 18 ("Some have speculated that [Dodd-Frank's] legislative grant of authority was given to try and inoculate the SEC rom a legal challenge.");
78. Becker et al., supra note 58, at 11 ("Congress's authorization to the SEC under Section 971 of the Dodd-Frank was intended to largely shut down [the] kind of challenge [brought in Business Roundtable].").
79. See 156 CONG. REC. S5916 (daily ed. July 15, 2010) (statement of Sen. Jack Reed) ("[A]fter much dispute, the bill makes it clear that the SEC has the authority to grant shareholders proxy access to nominate directors.");
80. 156 CONG. REC. H5237 (daily ed. June 30, 2010) (statement of Rep. Paul Kanjorski) ("[The Dodd-Frank Act] clarifies the ability of the SEC to issue rules regarding the nomination by shareholders of individuals to serve on the boards of public companies. These provisions regarding proxy access will enhance democratic participation in corporate governance and give investors a greater voice in the companies that they own.").
81. Facilitating Shareholder Director Nominations, 74 Fed. Reg. 29,024, 29,025 (proposed June 18, 2009) ("Regulation of the proxy process and disclosure is a core function of the Commission.... Section 14(a) of the Exchange Act stemmed from a Congressional belief that '[f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange.'" (second alteration in original) (footnote omitted) (quoting H.R. REP. NO. 73-1383, at 14 (1934))).
82. Ben Protess, Court Ruling Offers Path to Challenge Dodd-Frank, N.Y. TIMES DEALBOOK, Aug. 17, 2011, http://dealbook.nytimes.com/2011/08/17/court-ruling-offers-path-tochallenge-dodd-frank.
83. Kathryn A. Watts, Proposing a Place for Politics in Arbitrary and Capricious Review, 119 YALE L.J. 2, 41 (2009) (arguing that considering political factors during arbitrary and capricious review would help to mitigate the "ossification" problem);
84. Mark Seidenfeld, Demystifying Deossification: Rethinking Recent Proposals to Modify Judicial Review of Notice and Comment Rulemaking, 75 TEX. L. REV. 483, 492 (1997) ("From the agency's perspective, hard look review has become an icy stare that freezes action; no matter how much care the agency believes it has given to a decision, the agency faces uncertainty about whether the reviewing court will find that the agency performed its decisionmaking task adequately.").