The sitting directors of publicly traded corporations normally nominate the candidates for directorships and solicit votes for their election by preparing a proxy statement describing the nominees and proxy cards. They file these materials with the Securities and Exchange Commission (SEC) and send them to the shareholders.
By signing a proxy card, a shareholder can vote without physically attending the meeting. Shareholders cannot nominate their own candidates for director without filing and distributing their own proxy statement and proxy cards in a very expensive endeavor called a "proxy contest." In 2010, the SEC adopted Rule 14a-11 (the so-called proxy access rule). This rule required "public companies to provide their shareholders with information about, and their ability to vote for, [certain] shareholder-nominated candidates for the board of directors." The rule was proposed in response to concerns that the current process
"impedes the expression of shareholders' right[s]." To be eligible to have a candidate included in the corporation's proxy materials, the nominating 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 and must continue to own those securities through the date of the annual meeting. Once a company receives the required information from an eligible shareholder or group, it must include information about the shareholder nominee in its proxy statement and include the names of the nominees on its proxy voting card.
The Business Roundtable and the U.S. Chamber of Commerce, both of which have members that issue publicly traded securities, challenged the rule, claiming that it violated the Administrative Procedure Act (APA) because the SEC had failed to adequately consider the rule’s effect on “efficiency, competition, and capital formation” as required by section 3(f) of the Securities Exchange Act of 1934. The SEC had concluded that the rule could create “potential benefits of improved board and company performance and shareholder value” sufficient to “justify [its] potential costs.”
What factors does a court review to determine whether an agency rule is arbitrary and capricious? How detailed a record must the SEC create to meet the requirements of section 3(f)?