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Prominent Law Professors? Amicus Brief Refutes Argument that SEC Proxy Access Rule Violates First Amendment

By Jim Hamilton

An amicus brief filed in the DC Circuit Court of Appeals by prominent law professors refuted the argument advanced by business groups that the SEC?s proxy access rule violates the First Amendment to the US Constitution. In their brief, the law professors specifically avoid policy and procedure arguments, but instead dissected the First Amendment claim to show that companies? constitutional rights are not diminished by Rule 14a-11. Some 70 years of federal securities regulations have governed corporate communications and withstood legal challenges, the brief asserts, and subjecting these laws to strict First Amendment scrutiny would eviscerate the government?s ability to enact and enforce regulations that promote market integrity, capital formation, and investor protection. Oral argument is set for April 7, 2011. (Business Roundtable and Chamber of Commerce v. SEC, DC Circuit Court of Appeals, No. 10-1305).

The business groups are contending that the proxy access rule violates the First Amendment by forcing companies to fund and carry campaign speech by third parties that is opposed by the company?s duly elected board of directors. The groups say that the freedom of speech protected by the First Amendment includes a right not to be compelled to speak, or to carry the speech of a third party.

According to the law professors, Rule 14a-11 does not regulate core political speech so as to implicate the concerns identified by the Court in Citizens United v. FEC, 130 S.Ct.876, 929 (2010). At most, said amici, it regulates disclosures that a company must make to shareholders related to the governance of the corporation and thus facilitates a corporate democracy that the Court has recognized as an important tool for shareholders to prevent abuses by management.
Moreover, the amicus brief says that courts have held that shareholders have an ownership interest in companies, making shareholder initiated speech part of companies? internal affairs. The First Amendment does not support arguments against annual meetings at which shareholders are free to criticize company officers or policies, nor against company requirements to inform shareholders regarding issues necessitating their vote. The brief also points out that nothing in Rule 14a-11 prevents company officers from communicating their opposition to shareholders? board nominees.

The First Amendment has never been held to restrict state law requiring a company to provide a forum for shareholders to speak, contended amici. Under Delaware law, for example, companies must hold an annual meeting to provide shareholders with a forum to air their views about management. The business groups do not suggest that requiring an annual meeting violates the First Amendment even though it facilitates speech by individual shareholders who attend the meeting. Rule 14a-11 merely creates another venue, similar to the annual meeting, to foster communication among shareholders to promote more informed voting and provides an opportunity for shareholders and management to communicate.

In adopting Rule 14a-11, the SEC noted that the new rules will enable the proxy process to more closely approximate the conditions of the shareholder meeting. For companies with dispersed shareholders, noted amici, Rule 14a-11 provides an effective means for shareholders to speak to each other and to company directors and to act as owners of the corporation. According to the law professors, inconsistencies in the business groups? First Amendment argument illustrate the confusion that will be created if securities laws are subject to strict scrutiny under the First Amendment.

The business groups concede that Rule 14a-8 is permissible under the First Amendment, noted the brief, but argue that Rule 14a-11 is not. Yet, said amici, the groups offer no principled rationale for why the First Amendment should treat these two rules that require companies to include shareholder statements in proxy materials differently. Like Rule 14a-11, Rule 14a-8 requires a company, in certain circumstances, to include in its proxy statement material provided by shareholders regardless of whether the company?s board or management agrees with the shareholders? position.

Likewise, while the business groups challenging the SEC regulation complain that Rule 14a-11 violates the First Amendment merely because it compels speech, they are silent as to why the alternative of requiring separate solicitation materials does not. In either case, reasoned amici, the SEC rules compel certain disclosures. Rule 14a-11 merely establishes additional disclosure requirements for a corporation in the event a qualifying shareholder nominates a candidate for election as a director.

Further, amici believe that the broad reading of the First Amendment advanced by the business groups would eviscerate state laws that promote the shareholder franchise. To ensure that shareholders are informed when voting on corporate issues, state law requires the board to make full disclosure to shareholders of all material information in the corporation?s possession.

Even more broadly, the argument that all regulation of speech is subject to strict scrutiny under the First Amendment would also require unprecedented court intrusion in Congress?s ability to regulate broad areas of economic activity In the view of amici, adopting the broad construction of the First Amendment being urged on the DC Circuit would preclude Congress from passing laws in areas that it traditionally regulates by compelling disclosures or prohibiting speech, such as antitrust, labor relations, consumer protection, health and safety, and commercial transactions.

Full post as published by Jim Hamilton's World of Securities Regulation on February 11, 2011 (boomark / email).