De Vries v. Tower Semiconductor Ltd.De Vries v. Tower Semiconductor Ltd.
This case pits an old law against a “novel” argument.2 Gregory Schiller (“Schiller“) individually appeals the dismissal of a shareholder class action complaint filed against Tower Semiconductor Ltd. (“Tower“), its directors, and certain Tower investors. The complaint alleges that a Tower proxy statement issued by defendants was materially misleading and therefore violated
Background
As the facts of this case are not particularly relevant to the disposition of this appeal, we offer only those necessary to provide context to Schiller‘s claims. In the year 2000, Tower began to secure financing for the construction of a semiconductor fabrication facility (“Fab 2“) in Israel. To this end, Tower entered into agreements with two sets of companies (collectively “Fab 2 Investors“), which agreed to provide Tower with approximately $305 million in financing in exchange for stock and credits toward the purchase of semiconductors. The agreements divided the total promised financing into installments and conditioned the payment of each installment upon the attainment of a different construction milestone. At the beginning of 2001, Tower further contracted with two Israeli banks to borrow $550 million for the construction project. This loan was conditioned on Tower‘s ability to comply with a timeline for raising $103 million in additional financing.
On March 31, 2002, Tower distributed a proxy statement disclosing that it was currently negotiating with the Israeli banks to reschedule the date by which it had to meet its next financing obligation. The proxy statement sought shareholder approval of a plan under which the Fab 2 Investors would accelerate certain installments of their $305 million commitment without regard to the attainment of the corresponding construction milestones in return for seven million shares of Tower stock. The proxy statement explained that once the installments were accelerated, the banks would postpone the date by which Tower had to meet its next financing obligation until the end of July 2002. Tower believed that the plan would “permit us to better pursue our efforts to bring strategic investors and to raise other funding.”
While the plan received the necessary votes for approval, not all Tower shareholders were content with the arrangement. Schiller and others voiced their objection by filing a class action in the district court. The complaint alleged that Tower‘s proxy statement was false and misleading in violation of
Defendants mounted a straightforward defense. They argued that Tower is a foreign private issuer and therefore that Rule 3a12-3 removes them from the reach of
Discussion
Section 14(a) of the Exchange Act bars the dissemination of proxy statements “in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”
such other securities . . . as the Commission may, by such rules and regulations as it deems consistent with the public interest and the protection of investors, either unconditionally or upon specified terms and conditions or for stated periods, exempt from the operation of any one or more provisions of this chapter which by their terms do not apply to an “exempted security” or to “exempted securities.”
The rule exempting foreign private issuers from
In 1964, Congress amended the Exchange Act by adding
In 1966, the SEC amended Rule 3a12-3. Although preserving much of the 1935 version of the rule, the SEC withdrew the exemption from
[considered] the extent of the trading market for foreign securities in the United States, the disclosure and reporting requirements and practices in many of the countries whose issuers have securities traded in the United States, the requirements of many leading foreign stock exchanges, and the nature of the information presently furnished to the Commission by foreign issuers having securities registered under the Securities Act of 1933, having securities listed on a national securities exchange, and those for whose securities ADR‘s [American Depository Receipts] have been issued.
Id. The Commission has amended Rule 3a12-3 since 1966. See, e.g., Exchange Act Release No. 16,371, 1979 WL 169934, at *10 (Nov. 29, 1979). Nevertheless, Schiller focuses on the 1966 version of the rule, which he characterizes as “the current version of the relevant exemption.”5
As noted above, Schiller does not appeal the district court‘s determination that Tower is a foreign private issuer for purposes of Rule 3a12-3 but rather challenges the validity of Rule 3a12-3 itself. In our opinion, this challenge consists of both a substantive and procedural component. Schiller argues that in light of
I. Two Preliminary Issues
We begin our analysis of Schiller‘s claims by noting that our authority to review the Commission‘s adoption of Rule 3a12-3 does not derive from the Securities Exchange Act but rather from the Administrative Procedure Act (“APA“). To be sure,
A. Statute of Limitations
The Commission argues that, at its core, Schiller‘s claim amounts to nothing more than an allegation of a procedural defect in the Commission‘s adoption of Rule 3a12-3 and that such procedural challenges must be brought within the relevant statutory time period following promulgation of the rule.7 In support of its argument, the Commission relies upon a line of precedent in the D.C. Circuit making the applicability of statutory limitation periods to claims challenging agency action dependent upon whether the challenge is procedural or substantive in nature. The D.C. Circuit has explained that while substantive challenges to agency action—for example, claims that agency action is unconstitutional, that it exceeds the scope of the agency‘s substantive authority, or that it is premised on an erroneous interpretation of a statutory term—have no time bars, “challenges to the procedural lineage of agency regulations, whether raised by direct appeal, by petition for amendment or rescission of the regulation or as a defense to an agency enforcement proceeding, will not be entertained outside the [time] period provided by statute.” JEM Broad. Co. v. FCC, 22 F.3d 320, 325 (D.C.Cir.1994). Underlying the statutory limitations period is a concern for the agency‘s interest in prompt review and the public‘s settled expectations regarding agency action. Id. While an agency‘s ultra vires or unconstitutional act might outweigh these policy concerns and therefore justify reaching an otherwise time-barred challenge to agency action, a mere procedural defect does not. Id. Accordingly, in JEM Broadcasting, the D.C. Circuit found that the plaintiff was time-barred from asserting a claim, brought outside of the statutory limitations period, that the FCC‘s promulgation of certain rules failed to provide for notice and comment rulemaking in violation of the APA.
In the present case, Schiller asserts that his challenge should not be time-barred because it is substantive, not procedural. As noted above, there does indeed seem to be a substantive component to Schiller‘s claim. Schiller argues that
Ultimately, however, we are under no obligation to resolve the issue of whether Schiller‘s claim is time-barred. Because defendants failed to include this statute-of-limitations defense in their answer to the plaintiff‘s complaint, we at least have the discretion, and might even be required under
B. Primary Jurisdiction
The Commission also argues that the doctrine of primary jurisdiction requires Schiller to have brought his challenge first to the Commission before proceeding to the district court. Even assuming that the issue of primary jurisdiction is one that we can raise on our own motion, see Pharm. Research and Mfrs. of Am. v. Walsh, 538 U.S. 644, 674, 123 S.Ct. 1855, 155 L.Ed.2d 889 (2003) (Breyer, J., concurring), we do not find the doctrine applicable here.
The Exchange Act does not contain a “primary jurisdiction” provision that would control in this case, although it does provide that “[n]o objection to an order or rule of the Commission, for which review is sought under [
Even when primary jurisdiction is not statutorily required, however, courts may still apply the doctrine as a prudential matter. See S. Utah Wilderness Alliance v. Bureau of Land Mgmt., 425 F.3d 735, 750 (10th Cir.2005) (“Primary jurisdiction is a prudential doctrine designed to allocate authority between courts and administrative agencies.“). Although “[n]o fixed formula exists for applying the doctrine of primary jurisdiction,” United States v. W. Pac. R.R. Co., 352 U.S. 59, 64, 77 S.Ct. 161, 1 L.Ed.2d 126 (1956), we have generally considered four factors:
(1) whether the question at issue is within the conventional experience of judges or whether it involves technical or policy considerations within the agency‘s particular field of expertise;
(2) whether the question at issue is particularly within the agency‘s discretion;
(3) whether there exists a substantial danger of inconsistent rulings; and
(4) whether a prior application to the agency has been made,
Ellis v. Tribune Television Co., 443 F.3d 71, 82-83 (2d Cir.2006) (citing Nat‘l Commc‘ns Ass‘n., Inc. v. AT & T Co., 46 F.3d 220, 222 (2d Cir.1995)).
The question in the present case— whether the Commission complied with its statutory mandate in promulgating Rule 3a12-3—does not involve technical or policy considerations within the agency‘s particular field of expertise but instead simply requires us to engage in an activity—statutory interpretation—that is the daily fare of federal judges. Cf. Baltimore & Ohio Chicago Terminal R.R. Co. v. Wisconsin Cent. Ltd., 154 F.3d 404, 411 (7th Cir.1998) (stating that the doctrine of primary jurisdiction does not extend to pure issues of law). Further, the question presented does not fall particularly within the agency‘s discretion. For obvious reasons, whether an agency has ignored its statutory mandate is a question for the judiciary, not the agency, to address; this remains true even though in answering the question presented, we might defer to an agency‘s interpretation of the statute it administers. Because the Commission would normally not be expected to rule on whether it had exceeded its own statutory authority, we likewise do not have to worry about inconsistent rulings. Finally, we note that although the party challenging the agency action (in this case, Schiller) made no prior application to the agency, a fact that would normally weigh against primary jurisdiction, in this case such a fact seems simply irrelevant, given that the question presented is not one that the Commission would be expected to decide. Because three of the four factors weigh against primary jurisdiction in this case— and the fourth turns out to be irrelevant— we conclude that this matter should not be referred to the Commission.8 We therefore turn to the merits and address Schiller‘s substantive and procedural challenges to Rule 3a12-3.
II. The Merits
A. Substantive Challenge
Schiller‘s substantive challenge focuses on the common language used in the two Exchange Act sections—
Schiller‘s interpretation finds support in neither the text nor in basic principles of logic. Nowhere does
Additionally, Schiller‘s reading of the two statutory provisions simply belies simple logic. The practical effect of an exemption—which, after all, renders protections that would otherwise be in force inapplicable with respect to a particular class of securities or issuers—is, everything else being equal, a decrease in the net level of investor protection. Therefore, the prohibition of any decrease in the level of investor protection would at the very least substantially curtail, if not completely eviscerate, the Commission‘s exemptive authority.9 Such an effect is clearly at odds with the congressional intent to grant the Commission flexibility in adopting exemptions. We therefore conclude that the most plausible reading of
B. Procedural Challenge
The gist of Schiller‘s procedural challenge is that in promulgating Rule 3a12-3, the Commission failed to follow certain procedures required by
Nevertheless, Congress may require an even more detailed statement of basis and purpose, and Schiller claims that Congress did precisely that in enacting
The Commission may by rules and regulations, or upon application of an interested person, by order, after notice and opportunity for hearing, exempt in whole or in part any issuer or class of issuers from the provisions of subsection (g) of this section or from Section 13, 14, or 15(d) of this title or may be exempt from Section 16 of this title any officer, director, or beneficial owner of securities of any issuer, any security of which is required to be registered pursuant to subsection (g) hereof, upon such terms and conditions and for such period as it deems necessary or appropriate, if the Commission finds, by reason of the number of public investors, amount of trading interest in the securities, the nature and extent of the activities of the issuer, income or assets of the issuer, or otherwise, that such action is not inconsistent with the public interest or the protection of investors. The Commission may, for the purposes of any of the above-mentioned sections or subsections of this chapter, classify issuers and prescribe requirements appropriate for each such class.
Id. 78 Stat. at 568 (codified at
such other securities . . . as the Commission may, by such rules and regulations as it deems consistent with the public interest and the protection of investors, either unconditionally or upon specified terms and conditions or for stated periods, exempt from the operation of any one or more provisions of this chapter which by their terms do not apply to an “exempted security” or to “exempted securities.”
Section 12(h) enlarged upon the Commission‘s exemptive authority in
In drafting
Drawing our attention to the differences in language between
Even if we were inclined to read
More fundamentally, Schiller‘s reading of the statute reflects a misapplication of basic principles of statutory construction. This is not a case where the more specific statute should govern the more general, see, e.g., Carr v. Marietta Corp., 211 F.3d 724, 734 (2d Cir.2000), for the simple reason that the differences in statutory language that Schiller highlights do not in any meaningful way render
Nor do we think that our reading of
In any event, other interpretive rules, where more convincing, can take precedence over general principles of statutory construction. Cf. Krause v. Titleserv, Inc., 402 F.3d 119, 128 (2d Cir.2005) (rejecting argument based on statutory canon of avoiding surplusage because this canon “`should not take precedence over more convincing reasons‘” (quoting Hakala v. Deutsche Bank AG, 343 F.3d 111, 116 (2d Cir.2003))). In the present case, the text of the statute strongly suggests that Congress did not intend to amend
C. Whether the Commission Provided Adequate Evidence of Reasoned Decisionmaking
Although Schiller‘s brief is far from clear on the matter, Schiller seems to argue that even if
The adequacy of the Commission‘s statement in connection with its promulgation of Rule 3a12-3 depends in large part upon what we view as the Commission‘s statement and what level of detail an adequate statement requires. The answer to the first question would seem to be obvious. The plain language of the APA is clear that whatever the statement is, it must at least be incorporated into the adopted rule. See
Courts have likewise adopted a functional approach for determining the level of detail required in an adequate statement of basis and purpose. The D.C. Circuit has stated that “[a]t the least, such a statement should indicate the major issues of policy that were raised in the proceedings and explain why the agency decided to respond to these issues as it did, particularly in light of the statutory objectives that the rule must serve.” Indep. U.S. Tanker Owners Comm., 809 F.2d at 852. At the same time, however, that same court has recognized that it “will `uphold a decision of less than ideal clarity if the agency‘s path may reasonably be discerned.‘” Int‘l Bhd. of Teamsters, Chauffeurs, Warehousemen and Helpers of Am. v. United States, 735 F.2d 1525, 1531 (D.C.Cir.1984) (quoting Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 286, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974)).
Similarly, in the Second Circuit, we have upheld regulations accompanied by statements of less than ideal clarity. See N.Y. Foreign Freight Forwarders and Brokers Ass‘n, Inc. v. Fed. Maritime Comm‘n, 337 F.2d 289, 296 (2d Cir.1964) (upholding a regulation where the statement explained merely that the rules “have for their purpose the establishment of standards and criteria to be observed and maintained by licensed independent ocean freight forwarders, ocean freight brokers and ocean-going common carriers in the conduct of their business affairs“). And on at least one occasion we have even upheld a regulation with no statement at all where the basis and purpose was obvious. See Hoving Corp. v. FTC, 290 F.2d 803, 807 (2d Cir.1961); see also Ala. Ass‘n of Ins. Agents, 533 F.2d at 236-37 (citing Hoving approvingly); Tabor v. Joint Bd. for Enrollment of Actuaries, 566 F.2d 705, 710 (D.C.Cir.1977) (citing Alabama Ass‘n of Insurance Agents approvingly for the same proposition); Citizens to Save Spencer County, 600 F.2d at 884 & n. 201 (citing Tabor approvingly for the same proposition); Cal-Almond, Inc. v. U.S. Dep‘t of Agric., 14 F.3d 429, 443 (9th Cir.1993) (citing Citizens to Save Spencer County approvingly for the same proposition). Thus, the caselaw is clear that, taking into account the adopting release as well as any materials or statements that the agency has made public in the course of the rulemaking, we can find a statement adequate if the agency‘s path of reasoning can be reasonably discerned. In the present case, these principles do not mean that the Commission must demonstrate that Rule 3a12-3 would confer additional protections upon investors or even leave investors with the same level of protection in the absence of the exemption. Rather, based on our reading of the statute, see Part II, supra (discussing Schiller‘s substantive challenge), these principles mean that at the most the Commission must indicate that the exemption serves some interest and that it leaves in place adequate investor protections.
Although that requirement is not particularly onerous, the Commission does not give us much to go on. The adopting release accompanying the 1966 Rule is, in the Commission‘s own words, “fairly brief,” and even that characterization is charitable. Nowhere in the adopting release does the Commission provide any reason for adopting a foreign private issuer exemption from
But that does not leave us completely in the dark as to Rule 3a12-3‘s basis and purpose. In 1965, the Commission issued a notice of proposed rulemaking announcing the proposed amendments to Rule 3a12-3 that were adopted later that year. Registration of Foreign Securities, 30 Fed. Reg. 14,737, 14,737 (1965) (“1965 Notice“). The 1965 Notice includes the Commission‘s underlying rationale for the proposed amendments.
As the 1965 Notice explains, the proposed amendments to Rule 3a12-3 were the culmination of a study, conducted by the Commission, into the state of the foreign securities markets:
[T]he Commission consulted with representatives of American brokers, dealers, financial analysts, and the principal banks issuing American Depositary Receipts (ADR‘s) who are interested in foreign securities, and received recommendations from interested domestic and foreign groups. The Commission also studied the extent of the trading market for foreign securities in the United States, the disclosure and reporting requirements and practices in many of the countries whose issuers have securities traded in the United States, the requirements of many leading foreign stock exchanges, and the nature of the information presently furnished to the Commission by foreign issuers listed . . . on a national securities exchange . . . .
Id. at 14,738. Importantly, the Commission explained in the 1965 Notice that “[t]he study revealed continuing improvement in the reporting of financial and economic information by foreign issuers.” Id. The Commission also explained that “[t]his improvement has resulted from changes in foreign corporate laws, stock exchange requirements and increasing voluntary disclosure by the companies themselves.” Id.
Based on the 1965 Notice, we are easily able to discern the Commission‘s decision path. In determining whether an exemption from
Conclusion
Although perhaps “novel,” Schiller‘s argument is ultimately unpersuasive. Rule 3a12-3 weathers this storm not because of its impressive longevity. Rather, Rule 3a12-3 survives Schiller‘s challenge because it was promulgated pursuant to the Commission‘s statutory mandate. Accordingly, we conclude that Rule 3a12-3 is a valid Commission rule and therefore affirm the judgment of the district court.
Notes
any foreign issuer other than a foreign government except an issuer meeting the following conditions:
(1) More than 50 percent of the issuer‘s outstanding voting securities are directly or indirectly held of record by residents of the United States; and
(2) Any of the following:
(i) The majority of the executive officers or directors are United States citizens or residents;
(ii) More than 50 percent of the assets of the issuer are located in the United States; or
(iii) The business of the issuer is administered principally in the United States.