by James Hyatt
The U.S. Chamber of Commerce and the Business Roundtable filed a legal challenge to the recently issued Securities and Exchange Commission rules on proxy access.
The groups have asked the SEC to stay adoption of rules giving certain shareholders the right to include their nominees in corporate proxy materials. The rules have been scheduled to take effect Nov. 15, 2010.
The groups said in an announcement that they will ask the U.S. Court of Appeals for the District of Columbia — the federal circuit court that generally oversees legal challenges — to block the rules if the SEC doesn’t agree to a stay.
SEC spokesman John Nester said, in response to the legal challenge, “we believe that the Commission’s proxy access rules are both lawful and in the best interest of the public and shareholders. The Commission will, of course, carefully consider and timely respond to the motion for a stay.”
The rules approved by the SEC Aug. 25 in a 3-2 vote would apply to shareholders owning at least 3% of a company’s total voting power, and such shareholders would be required to have held their shares for at least three years. Shareholder activists have long sought such “proxy access,” asserting that such permission is needed to effectively challenge entrenched directors and officers.
The new rules “empowers unions and other special interests at the expense of the vast majority of retail shareholders,” declared David Hirschmann, president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness. He said it will give “special interest activist investors significant leverage over a business’ activities. This will undermine a company’s ability to grow and create jobs.”
Larry Burton, executive director of the Business Roundtable, which lobbies on behalf of blue-chip companies, said “this unprecedented intrusion into areas historically reserved for the states would handcuff directors and boards, shut out the vast majority of retail shareholders and exacerbate the short-term focus that is now seen as one of the root causes of the financial crisis.”
The petition to the SEC says the rule is arbitrary and capricious, violates the Administrative Procedure Act, and that the SEC failed to properly assess the rule’s effects on “efficiency, competition and capital formation” as required by law. And, the groups’ summary said, the rule “gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process.”
The Council of Institutional Investors, long-time supporters of proxy access for shareholders, called the U.S. Chamber of Commerce/Business Roundtable challenge to the new SEC rule “an assault on a fundamental shareowner right.” The group said it would file an amicus curiae brief in support of the rules.
Ann Yerger, executive director said “this basic right is widely accepted in many other countries and the Council wil fight to preserve it here.”