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Business Roundtable v. S.E.C., 647 F.3d 1144, 396 U.S.App.D.C. 259, Fed. Sec. L. Rep. P 96,358

Facts

Organizations with corporate members that issue publicly traded securities petitioned for review of SEC Rule 14a-11, which mandated that public companies allow shareholders to nominate candidates for the board of directors. The SEC had proposed this rule to facilitate shareholder participation in corporate governance, arguing it would improve board performance and increase shareholder value. However, the petitioners contended that the SEC failed to consider the rule's impact on efficiency, competition, and capital formation, leading to the legal challenge.

The Commission did place certain limitations upon the application of Rule 14a–11. The rule does not apply if applicable state law or a company's governing documents 'prohibit shareholders from nominating a candidate for election as a director.'

Issue

Did the SEC act arbitrarily and capriciously in promulgating Rule 14a-11 without adequately assessing its economic implications and potential costs?

Did the SEC act arbitrarily and capriciously in promulgating Rule 14a-11 without adequately assessing its economic implications and potential costs?

Rule

Under the Administrative Procedure Act, agency actions can be set aside if they are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. The SEC has a statutory obligation to evaluate the economic implications of new rules, particularly regarding efficiency, competition, and capital formation.

Under the APA, we will set aside agency action that is 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.' 5 U.S.C. § 706(2)(A).

Analysis

The court determined that the SEC failed to make necessary evaluations regarding the economic consequences of Rule 14a-11. It noted that the SEC did not adequately quantify the costs associated with the rule or justify its predictions about the benefits. The court criticized the SEC for relying on insufficient empirical data and for inconsistencies in its reasoning, particularly regarding the potential frequency of shareholder nominations and the costs companies would incur in opposing such nominations.

We agree with the petitioners and hold the Commission acted arbitrarily and capriciously for having failed once again—as it did most recently in American Equity Investment Life Insurance Company v. SEC, 613 F.3d 166, 167–68 (D.C.Cir.2010), and before that in Chamber of Commerce, 412 F.3d at 136—adequately to assess the economic effects of a new rule.

Conclusion

The court concluded that the SEC acted arbitrarily and capriciously in adopting Rule 14a-11 and vacated the rule, emphasizing the need for a more thorough analysis of its economic impact.

Because we conclude the Commission failed to justify Rule 14a–11, we need not address the petitioners' additional argument the Commission arbitrarily rejected proposed alternatives that would have allowed shareholders of each company to decide for that company whether to adopt a mechanism for shareholders' nominees to get access to proxy materials.

Who won?

The petitioners, including the Business Roundtable and the Chamber of Commerce, prevailed because the court found that the SEC failed to fulfill its statutory obligations in evaluating the rule's economic consequences.

The petitioners prevailed because the court found that the SEC failed to fulfill its statutory obligations in evaluating the rule's economic consequences.

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