In a stinging rebuke of the Securities and Exchange Commission, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit has vacated SEC Rule 14a-11, finding that the SEC had acted arbitrarily and capriciously in adopting the proxy access rule without realistically assessing and weighing the rule’s effect upon efficiency, competition and capital formation. Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission (D.C. Cir. July 22, 2011). Read the full decision here.
Unlike certain other aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the SEC was authorized, but not required, to establish rules governing access to proxy statements. Rule 14a-11 was adopted on August 25, 2010 in a 3-2 vote split along party lines and challenged by the Business Roundtable and U.S. Chamber of Commerce in a lawsuit filed on September 29, 2010. As a result of the suit, the SEC voluntarily stayed effectiveness of both Rule 14a-11 and certain revisions to Rule 14a-8 (although the revisions to Rule 14a-8 were not challenged in the lawsuit).
Rule 14a-11 would have required public companies to permit any shareholder or group of shareholders owning at least 3% of a public company’s voting stock for at least three years to include director nominees in company proxy materials. The rule applied to all public companies and registered investment companies subject to the proxy rules, unless applicable state or foreign law or a company's governing documents prohibited shareholders from nominating board candidates. At the same time it adopted Rule 14a-11, the SEC also adopted amendments to Rule 14a-8 that would permit shareholders to include proposals in the company's proxy materials to establish procedures for shareholders to nominate directors (such as proxy access bylaws).
In its ruling, the Circuit Court stated that “the Commission 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 opinion reserved special criticism for the SEC’s cost-benefit analysis relating to application of the rule to investment companies registered under the Investment Company Act of 1940.
Kevin J. Callahan, an SEC spokesman, said the agency was “reviewing the decision and considering our options.” The SEC could pursue the case before the Circuit Court or appeal the case directly to the Supreme Court. The SEC could also decide to begin the proxy access rulemaking process again and address the cost-benefit issues raised by the Circuit Court. If the SEC does this it is highly unlikely that a new rule will be in place in time for the 2012 proxy season. The SEC could also simply decide to abandon the Rule 14a-11 initiative.
Whether the SEC decides to continue or abandon its Rule 14a-11 initiative, it may decide to lift its voluntary stay on the revisions to Rule 14a-8, paving the way for companies and their shareholders to adopt proxy access rules by private ordering.
We will continue to update you as there are further developments related to the proxy access rule.