Federal Proxy Access Rule Vacated by D.C. Circuit Court

August 2011

A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously struck down Securities and Exchange Commission Rule 14a-11, also known as the Proxy Access Rule.

The SEC was authorized but not required under the Dodd-Frank Wall Street Reform and Consumer Protection Act to establish rules governing access to proxy statements. On August 25, 2010 the Proxy Access Rule was adopted by the SEC. In response to the adoption of the Proxy Access Rule, the Business Roundtable and the U.S. Chamber of Commerce filed a legal challenge to the rule, arguing that the SEC acted arbitrarily and capriciously in adopting the rule by neglecting its responsibility to assess the likely economic consequences of the rule. The SEC stayed the November 15, 2010 effective and compliance date of the rule in October, 2010.

The proposed Proxy Access Rule would have required a company, subject to proxy rules under the Securities Exchange Act of 1934, to include in its proxy materials, the name of a person or persons nominated by a qualifying shareholder or group of shareholders for election to the board of directors. To use this alternative path to nominate and elect directors, a qualifying shareholder or group of shareholders must own at least 3% of the company’s voting stock for at least 3 years and submit a statement in support of its nominees to the SEC and the company for inclusion in the company’s proxy materials.

Prior to the adoption of the Proxy Access Rule, shareholders were required to prepare and distribute their own proxy statement for the purpose of nominating director candidates not supported by the current board, the expense of which deterred nomination of directors by shareholders.

The court vacated the Proxy Access Rule holding that the SEC failed to adequately consider the rule’s effect on efficiency, competition and capital formation as required by both the Securities Exchange Act of 1934 and the Investment Company Act of 1940. More specifically, the court noted that the SEC failed to quantify the costs a company may incur in opposition of a shareholder director nominee, despite empirical evidence of the costs of proxy contests. The court also determined the SEC relied on insufficient empirical data to conclude that board performance would improve and shareholder value would increase if dissident shareholder nominees were elected. Finally, the court held the SEC did not adequately consider how special interest groups, such as unions and state pension funds, might use the rule to promote their narrow interests.

The SEC is currently reviewing the decision and considering its options of appealing the decision, rewriting the rule to address the deficiencies referred to by the court or abandoning Proxy Access Rule altogether. Regardless of the approach taken by the SEC, it is not probable that a Proxy Access Rule in any form will be in place prior to the 2012 proxy season.

For more information on how this may impact your organization, please contact Jonathan M. Calla.

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