Appeals Court Rejects Proxy Access Regs

A U.S. Securities and Exchange Commission rule making it easier for shareholders to oust board members was rejected by a federal appeals court.

The U.S. Court of Appeals in Washington today agreed with the U.S. Chamber of Commerce and the Business Roundtable that the SEC failed to study the cost to companies of fighting a challenge from shareholders and connect those costs to “efficiency, competition, and capital formation.”

The rule, known as proxy access, was mandated by the Dodd- Frank financial-regulatory overhaul enacted last year amid criticism that some corporate boards failed to keep management in check in the run up to the 2008 financial crisis. The rule would have allowed investors or shareholder groups that own at least 3 percent of a company's stock for three years to put their own board nominees on proxy statements.

“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,” U.S. Circuit Judge Douglas Ginsburg wrote for the unanimous three-judge panel.

The SEC could request a hearing before all District of Columbia Circuit judges or appeal to the Supreme Court. The agency could also opt to redraft the rule from scratch.

Kevin Callahan, an SEC spokesman, said the commission is “reviewing the decision and considering our options.”

Chamber's Challenge
“The court's decision is deeply disappointing to long-term shareowners,” said Amy Borrus, a spokeswoman for the Council of Institutional Investors in Washington. “We think proxy access is a core shareholder right and is standard in many countries.”

The chamber and the Business Roundtable, which represents chief executive officers of the nation's biggest companies, challenged the rule in a lawsuit in September, claiming the SEC botched its responsibility to consider the cost and potential abuse of the rule.

The rule could have cost big companies facing a proxy battle as much as $14 million each, said Eugene Scalia, a lawyer at Gibson, Dunn & Crutcher LLP in Washington who represents the business groups, during oral argument in April.

Potential Costs
The SEC, which put the measure on hold pending the outcome of the business groups' suit, argued the potential costs are reasonable because not every board will oppose a candidate put forward by shareholders.

Ginsburg, in the ruling, said that argument “had no basis beyond mere speculation.”

The SEC, according to the ruling, didn't respond to public comments arguing that investors with special interests, such as unions and state and local governments, would use the rule to leverage concessions from companies.

“We applaud the court's decision to prevent special interest politics from being injected into the boardroom,” Tom Donohue, president of the Chamber of Commerce, said in a statement. “Today's 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.”

Flawed economic analysis has been a focus of successful efforts to overturn SEC rules in recent years.

Business groups including the Chamber of Commerce have benefitted from a 1996 revision of securities laws that require the regulator to consider factors other than investor protection when writing rules. Specifically, the law requires the SEC to evaluate whether its regulations will promote “efficiency, competition and capital formation.”

Appeals Court
Today's loss for the SEC is at least the fifth time since 2005 that the appeals court in Washington has rejected SEC regulations on the grounds that the commission didn't adequately justify its actions.

SEC Chairwoman Mary Schapiro said in arguing for the rule that the 2008 credit crisis, which cost financial firms almost $2 trillion worldwide, showed shareholders needed more clout in picking board members.

Under the regulation, shareholders would be able to nominate at least one director and as much as 25 percent of a board. Investors couldn't use the rule if their intent is to oust a majority of board members and take over a company.

The case is Business Roundtable v. Securities and Exchange Commission, 10-1305, U.S. Court of Appeals, District of Columbia (Washington).

Bloomberg News

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor