Bus. Roundtable v. Sec., 10–1305.

• Citation: 647 F.3d 1144
• Decision Date: 22 July 2011
• Docket Number: No. 10–1305.,10–1305.
• Parties: BUSINESS ROUNDTABLE and Chamber of Commerce of the United States of America, Petitionersv.SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

647 F.3d 1144

BUSINESS ROUNDTABLE and Chamber of Commerce of the United States of America, Petitioners

v.SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 10–1305.

United States Court of Appeals, District of Columbia Circuit.

Argued April 7, 2011.Decided July 22, 2011.

On Petition for Review of an Order of the Securities & Exchange Commission.Eugene Scalia argued the cause for petitioners. With him on the briefs were Amy Goodman, Daniel J. Davis, and Robin S. Conrad. Amar D. Sarwal entered an appearance.Steven A. Engel, Ruth S. Epstein, and G. Eric Brunstad, Jr. were on the brief for amici curiae Investment Company Institute and Independent Directors Council in support of petitioners.Shannon E. German was on the brief for amicus curiae State of Delaware in support of petitioners.Randall W. Quinn, Assistant General Counsel, Securities and Exchange Commission, argued the cause for respondent. With him on the brief were David M. Becker, General Counsel, Jacob H. Stillman, Solicitor, Michael A. Conley, Deputy Solicitor, Michael L. Post, Senior Litigation Counsel, and Tracey A. Hardin, Senior Counsel.Reuben A. Guttman was on the brief for amici curiae Law Professors in support of respondent.Jeffrey A. Lamken, Christopher J. Wright, Timothy J. Simeone, Peter Mixon, and Robert M. McKenna, Attorney General, Office of the Attorney for the State of Washington, were on the brief for amici curiae Council of Institutional Investors, et al.Before: SENTELLE, Chief Judge, GINSBURG and BROWN, Circuit Judges.Opinion for the Court filed by Circuit Judge GINSBURG.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 board of directors. Typically, 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 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.

To use Rule 14a–11, a shareholder or group of shareholders must have continuously held “at least 3% of the voting power of the company's securities entitled to be voted” for at least three years prior to the date the nominating shareholder or group submits notice of its intent to use the rule, and must continue to own those securities through the date of the annual meeting. Id. at 56,674–75. The nominating shareholder or group must submit the notice, which may include a statement of up to 500 words in support of each of its nominees, to the Commission and to the company. Id. at 56,675–76. A company that receives notice from an eligible shareholder or group must include the proffered information about the shareholder(s) and his nominee(s) in its proxy statement and include the nominee(s) on the proxy voting card. Id. at 56,676/1.

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.” Id. at 56,674/3. Nor may a shareholder use Rule 14a–11 if he is holding the company's securities with the intent of effecting a change of control of the company. Id. at 56,675/1. The company is not required to include in its proxy materials more than one shareholder nominee or the number of nominees, if more than one, equal to 25 percent of the number of directors on the board. Id. at 56,675/2.^*

The Commission concluded that Rule 14a–11 could create “potential benefits of improved board and company performance and shareholder value” sufficient to “justify [its] potential costs.” Id. at 56,761/1. The agency rejected proposals to let each company's board or a majority of its shareholders decide whether to incorporate Rule 14a–11 in its bylaws, saying that “exclusive reliance on private ordering under State law would not be as effective and efficient” in facilitating shareholders' right to nominate and elect directors. Id. at 56,759–60. The Commission also rejected the suggestion it exclude investment companies from Rule 14a–11. Id. at 56,684/1. The two Commissioners voting against the rule faulted the Commission on both theoretical and empirical grounds. See Commissioner Troy A. Paredes, Statement at Open Meeting to Adopt the Final Rule Regarding “Proxy Access” (Aug. 25, 2010), available at http:// www. sec. gov/ news/ speech/ 2010/ spch 082510 tap. htm; Commissioner Kathleen L. Casey, Statement at Open Meeting to Adopt Amendments Regarding “Proxy Access” (Aug. 25, 2010), available at http:// www. sec. gov/ news/ speech/ 2010/ spch 082510 klc. htm (faulting Commission for failing to act “on the basis of empirical data and sound analysis”).

The petitioners sought review in this court in September 2010. The Commission then stayed the final rule, which was to have been effective on November 15, pending the outcome of this case.

II. Analysis

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). We must assure ourselves the agency has “examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choices made.” Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (internal quotation marks omitted). The Commission also has a “statutory obligation to determine as best it can the economic implications of the rule.” Chamber of Commerce v. SEC, 412 F.3d 133, 143 (D.C.Cir.2005).

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. §§ 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 the rule arbitrary and capricious and not in accordance with law. Chamber of Commerce, 412 F.3d at 144; Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1216 (D.C.Cir.2004) (rule was arbitrary and capricious because agency failed to consider a factor required by statute).

The petitioners argue the Commission acted arbitrarily and capriciously here because it neglected its statutory responsibility to determine the likely economic consequences of Rule 14a–11 and to connect those consequences to efficiency, competition, and capital formation. They also maintain the Commission's decision to apply Rule 14a–11 to investment companies is arbitrary and capricious.

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. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters. For these and other reasons, its decision to apply the rule to...