THE FOLLY OF RULE 14a-11: BUSINESS ROUNDTABLE V. SEC AND THE COMMISSION'S NEXT STEP

INTRODUCTIONThe Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) has been stretching the United States Securities and Exchange Commission's resources dangerously thin-to the extent that the securities rule-maker has had to abandon some pressing matters (filling crucial job openings) to address others (promulgating 105 rules, conducting more than twenty studies, and creating five new offices).1 Common sense dictates that in a time of financial crisis, the last thing the government would want to do is undercapitalize and overburden one of its financial watch-dog agencies. Recent invalidations of Commission rules show that this is indeed what Dodd-Frank has exacerbated, demonstrating that the agency needs to refocus.2In a recent invalidation, Business Roundtable v. SEC,3 the United States Court of Appeals for the District of Columbia Circuit invalidated Rule 14a-11, which would have required public companies to publish certain shareholders' director nominations in proxy statements.4 A proxy statement is a required statement filed in advance of the annual meeting when a U.S. company solicits shareholder votes.5 The purpose of a proxy statement is to "promote 'the free exercise of the voting rights of stockholders' by ensuring that proxies would be solicited with 'explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.'"6 Although the Commission could have appealed the D.C. Circuit's decision, the Commission formally announced on September 7, 2011, that it would not seek immediate review.7 The court's tabling of the constitutional issues8 raised in Business Roundtable puts the Commission in an uncomfortable position: the Commission can start over and craft a new 14a-11-type rule that accounts for a cost-benefit analysis, but those efforts may ultimately be struck down based on a First Amendment challenge. The D.C. Circuit lambasted the Commission for failing-yet again-to adequately analyze the cost-benefit analysis of a proposed rule;9 but solving the cost-benefit problem would not necessarily mean that the rest of the Commission's reasoning was sound. This dilemma could cost the Commission-and the average American taxpayer- significant amounts of money and time.10This Note argues that had the D.C. Circuit reached the First Amendment issue in its analysis, the Commission would have learned that any such mandatory proxy access rule will not withstand strict scrutiny. In particular, this Note contends that even if the Commission can provide economic support for a new version of Rule 14a-11, so long as the rule requires mandatory proxy access,11 the rule would be subject to strict scrutiny and thus would fail that review because the Commission would be unable to show a compelling interest or narrow tailoring. Part I provides the context surrounding Rule 14a-11 and briefly explains the corporate First Amendment jurisprudence under which any new version of the rule would be analyzed. Part II discusses the First Amendment implications of Rule 14a-11's possible successor and argues that any subsequent Rule 14a- 11 attempts will fail under the strict scrutiny analysis that would be applied. This Note concludes by recommending that the Commission not waste its resources on replacing Rule 14a-11 because the successor rule would fail strict scrutiny and be declared unconstitutional.I. BACKGROUND: FIRST AMENDMENT RIGHTS OF THE CORPORATION AND A HISTORY OF RULE 14a-11The Commission passed Rule 14a-11 in a 3-2 decision in August 2010 after an arduous fourteen months of deliberation and sifting through over 500 sharply-divided comment letters.12 Had it been enacted without challenge, Rule 14a-11 would have allowed an individual shareholder, or group of shareholders, to include a nominee of the shareholder's choice in a public company's proxy statement in certain instances.13 A Shareholder could file a Schedule 14N14 and provide a copy of their nomination to the company if the shareholder owned at least three percent of the voting power entitled to vote in the election of directors, had held that power for at least three years, and intended to continue to own these securities through the upcoming director election. …