The Magazine of Corporate Responsibility

Federal Appeals Court Vacates SEC Proxy Access Rules

by James Hyatt

The U.S. Court of Appeals for the District of Columbia Circuit vacated Securities and Exchange Commission rules adopted in 2010 designed to give shareholders the ability to nominate directors through corporate proxy materials.

Proxy_Crop_iS_FeatureThe ruling agreed with the challengers – the U.S. Chamber of Commerce and the Business Roundtable (a group of blue-chip companies) – that the SEC “acted arbitrarily and capriciously for having failed once again…to adequately assess
the economic effects of a new rule.”

The SEC had approved the rules by a 3-2 vote in August 2010 after Congress authorized proxy access – procedures under which shareholders can get their nominees for corporate directors included in proxy materials issued by public companies – in passing the Dodd-Frank Wall Street Reform and Consumer Protection Act.

After business groups challenged decision , the SEC stayed the rules and the issue  was argued at the D.C. Circuit appeals court last spring.

The rules would have applied to shareholders owning at least 3% of a company’s total voting power and who had held their shares for at least three years.  Such holders would have been able nominate candidates for boards of directors via the corporate proxy materials, avoiding a costly and complicated separate proxy solicitation.

The three-judge panel’s decision said that because it concluded the SEC failed to justify the new rules, the court didn’t need to address the companies’ argument that the SEC arbitrarily rejected proposed alternatives to the proxy access rules.

Tom Donohue, president and CEO of  the U.S. Chamber, called the decision “a big win for  America’s job creators and investors.  We applaud the court’s decision to prevent special interest politics from being injected into the boardroom.” He said the decision “also sends a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation
outweigh the costs.”

The business groups’ discussion of the decision is available here.

Meredith Cross, Director of the SEC's Division of Corporation Finance, said in a statement: "We are disappointed by today's decision striking down a rule that made it easier for shareholders to nominate a candidate to a company's board of directors. We are considering our options going forward. We note that our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court's decision."

The appeals court panel said the SEC had “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”

The ruling also said that that SEC’s decision to apply the proxy access rule to investment companies “was also arbitrary.”

The court said there is “good reason to believe that institutional investors with special interests” – such as unions and pension funds -- would use the proxy access rules to advance their own issues and chided the SEC for “ducking serious evaluation of the costs that could be imposed” by shareholders representing special interests.

A number of shareholder groups including major institutional investors have sought proxy access as a way to address situations where, they believe, management and corporate boards have too cozy a relationship and too often ignore the interest of shareholders.

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