Well, the Fifth Circuit reached its decision in National Center for Public Policy Research et al. v. SEC, which I previously blogged about here and here. As I predicted, the panel chose to leave the SEC’s 14a-8 review process in place, but also as I suspected, Judge Jones – the only GOP appointee on the panel – dissented.

So I presume we’ll see a petition for rehearing en banc, and it wouldn’t surprise me at all if the full court took up the case, meaning, this may not the final word.

Recall, the claim was that the SEC engages in viewpoint discrimination when it issues no-action letters regarding companies’ attempts to exclude shareholder proposals from their proxy statements.  NCPPR claimed the SEC favors liberal proposals and disfavors conservative ones.  Separately, the National Association of Manufacturers intervened to argue that the entire 14a-8 system is unauthorized by the Exchange Act and is unconstitutional.

The SEC’s main argument was that no-action letters are not final orders subject to challenge.  The Democratic appointees on the panel agreed, but assuming Judge Jones’s dissent is a template for how the full Fifth Circuit would view the matter, it threatens to scramble the 14a-8 process, but perhaps in a manner that the incoming Trump Administration would find amenable.

Judge Jones argued that no-action letters are final orders because they constrain agency – SEC – discretion in a particular way, namely, they limit the SEC’s ability to bring an enforcement action.  And, further, she claimed that the SEC conceded that if they are final orders, they are arbitrary and capricious as a matter of law, because they do not state their reasoning.

Now, assuming the entire Fifth Circuit agrees, the upshot, as I understand it, is that the SEC would be required to offer more detailed reasoning in each and every no-action letter it issues under 14a-8.  That would be incredibly burdensome for the staff.

Meanwhile, under the first Trump Administration, the SEC adopted a policy of not issuing letters at all – instead, it switched to oral rulings, and often declined to weigh in on no-action requests (a policy the Biden SEC reversed).

At the time, some commenters believed this tilted the playing field in favor of management, because, absent an SEC opinion, management would simply decline to include proposals in their proxy statements and dare proponents to sue.  Since proponents are as a group less resourced than corporations and less likely to file a lawsuit, management would be pretty safe.  Others worried that the whole situation just created uncertainty around litigation risk, and that corporations would prefer to have the guidance.

If the Fifth Circuit functionally mandates that the SEC either not act at all, or act with a full explication of its reasons, I assume that the Trump SEC would choose not to act at all in most cases.  Companies would still be required to first petition the SEC to exclude a proposal – that’s part of Rule 14a-8 itself – but they wouldn’t expect an answer.  Meaning, the entire system of SEC adjudication of 14a-8 proposals would end, and companies would be left to include proposals in their proxies, or not, at their discretion, depending on their tolerance for litigation risk.  For most proposals (maybe not by Starboard Value, but others), the tolerance would presumably be pretty high, if for no other reason than if a shareholder did have the wherewithal to file lawsuit, the company could easily just settle it by belatedly agreeing to include the proposal in its proxy materials.

And another thing. On this week’s Shareholder Primacy podcast, Mike Levin and I talk about the legal uncertainty surrounding controlling stockholders, and director say-on-pay. Available on Spotify, Apple, and Youtube.