The U.S. Court of Appeals for the District of Columbia Circuit has struck down a Securities and Exchange Commission rule that would have let company shareholders nominate one or two director nominees to their boards. The proxy access rule would have allowed groups with possession of a minimum 3% voting power of a company’s stock for a minimum of three years to nominate board candidates. Companies would have had to include information about these shareholder-nominated director candidates in their proxy materials.
The SEC had approved the regulation last year. It would have gone into effect in November, but the Commission stayed it after the US Chamber of Commerce and the Business Roundtable filed their legal challenge asking for the stay. The Business groups had said the rule was in violation of the Administrative Procedure Act and would “handcuff directors and boards,” exclude the majority of retail shareholders, and worsen the “short-term focus” considered among the main causes of the economic crisis. There were also concerns that the proxy access rule would let hedge funds, union-connected pension funds, corporate raiders, and hedge funds elect directors who would do as they directed.
The Chamber of Commerce and Business Roundtable also accused the SEC of disregarding studies and evidence that revealed the” adverse consequences of proxy access,” attempting to restrict the ability of shareholders to stop special interest groups from starting up expensive election contests, and not giving full consideration to state laws about access to principles about and related to proxy that already exist.
In its July 22 ruling the appeals court agreed with the two parties’ claim that the SEC behaved “arbitrarily and capriciously” when it failed to “adequately consider” how the rule would impact “efficiency, competition, and capital formation.” The court also said that the SEC did not “supported its predictive judgments,” failed to address the problems brought up by commenters, and “contradicted itself.”
Following the court’s decision, US Chamber of Commerce CEO and president Tom Donahue said: praised the court’s ruling, which refused to let “special interest politics” to be infused “into the boardroom.” Shepherd Smith Edwards & Kantas LTD LLP and stockbroker fraud lawyer William Shepherd, however, had this to say about Donahue’s statement: “This is an outrageous statement for the Kings of special interest politics to make! In fact, this story is really about special interest politics in the courtroom.”
While businesses that opposed the proxy access rule feared it would give environmental and labor union groups more power at corporations and that shareholder value would suffer, its supporters had argued that giving shareholders a bigger hand in who got to sit on corporate boards could have prevented the financial crisis.
According to Investment News, there is evidence that unions could use any additional voting influence to advance their interests. It was just several years ago that the California Public Employees’ Retirement System used its shareholder power in Safeway Inc. to try to vote out chief executive Steven Burd. It also pressured the company to resolve a strike under conditions that favored unions. CalPERS’s efforts failed both times.
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Related Web Resources:
Striking a blow to SEC, court voids investor rule, Investors.com, July 22, 2011
U.S. Chamber Joins Business Roundtable in Lawsuit Challenging Securities and Exchange Commission, US Chamber of Commerce, September 29, 2010
Read the legal challenge filed by the Business Roundtable and the US Chamber of Commerce (PDF)
Read SEC’s Proxy Access Rule (PDF)
More Blog Posts:
SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011
SEC Examines Proxy Advisory Firms, Institutional Investors Securities Blog, October 14, 2010
SEC Proposes New Rule to Verify Swap Transactions, Institutional Investors Securities Blog, January 27, 2011