Corporate Governance

Business Roundtable v. SEC: The Battle for Access (The Consequences of a No Prisoners Approach to Access) (Part 10)

By J Robert Brown Jr.

We are done for now discussing the Brief submitted by the Business Roundtable and Chamber of Commerce in the shareholder access case.

The litigation, it seems to us, is a continuation of the "no prisoners" approach to access.

As we noted in a prior post, the "no prisoners" approach has resulted in adamant opposition to all efforts at access.  This could be seen with the emphatic opposition to the Cox Commission's proposal on access bylaws.  In hindsight, as the Brief suggests, the Cox Commission proposal doesn't look so bad.  In other words, one consequence of the "no prisoners" approach is that while it might succeed in the short term, it could result in something worse.   

This seems to be the pattern.  There is no going back to the access bylaw approach.  Shareholder groups want the right to submit nominees to the company and have them included in the company's proxy statement without first adopting an authorizing bylaw.  Given this reality and, frankly the rulemaking authority in Dodd-Frank, direct access is an inevitability.  Opponents, therefore, might benefit more from eschewing a direct challenge to access of any kind and instead seeking a rule that is narrow, restrictive, and unlikely to get much use.

Thus, the "no prisoners" approach of this litigation could, in the end, result, yet again, in something worse.  To the extent that this litigation succeeds in invalidating Rule 14a-11, the set back will only be temporary.  Dodd-Frank eliminates any authority issue.  A finding of arbitrariness is really a finding that the record was inadequate and that the SEC must press the reset button. 

It is true that a procedural victory can sometimes be a permanent one.  For rules that are declared arbitrary, the SEC does not always go back and repropose the rule (the rule increasing the number of independent directors on mutual fund boards never resurfaced).  That will not, however, be the case with access.  Shareholders and shareholder supporters want access and the pressure will continue to build until some form is implemented.

To the extent the SEC goes back to the drawing board, there is a strong possibility that the next version of the rule will be (to the issuer community) even worse.  The 3 year holding period is too long.  Moreover, the 3% ownership threshold may need to be reconsidered in light of the Delaware decisions permitting poison pills with 5% thresholds.  Because they apply to agreements on a common slate of directors, something access encourages, they directly interfere with the rights provided in Rule 14a-11. 

Stay tuned.  We will continue to follow this case.  The next series of posts will examine the amicus brief filed by the State of Delaware.  Assorted briefs and motions in this case can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on January 28, 2011 (boomark / email).