In a setback for activist investors, a federal appeals court has struck down the Securities and Exchange Commission’s controversial proxy access rule.
Today’s decision by the U.S. Court of Appeals for the D.C. Circuit was not a great surprise, given the skepticism that the court’s three-judge panel expressed during oral arguments in April. (For more on those arguments, click here.)
The appeals court's action means that the SEC's proxy access rule won't be in place for the 2012 proxy season. The unavailability of a marketwide access regime could mean a rise in traditional boardroom challenges via proxy fights and a jump in "just vote 'no'" campaigns against directors. In addition, the court decision may inspire activists to file access bylaw proposals at various companies in 2012.
The SEC voted 3-2 last August to adopt Rule 14a-11, which would have allowed long-term shareholders to join together to nominate board candidates to appear on management proxy statements at both operating and investment companies. The SEC also approved amendments to Rule 14a-8 to allow investors to file access bylaw proposals. The SEC put both rule changes on hold in October after the U.S. Chamber of Commerce and the Business Roundtable filed a lawsuit over Rule 14a-11.
The D.C. Circuit panel concluded that the SEC acted “arbitrarily and capriciously” in approving Rule 14a-11 because it failed to properly consider the costs and benefits of the rule. The court also said the SEC contradicted itself when estimating the frequency of potential board election contests under the rule. The panel also faulted the SEC for not addressing corporate concerns about the use of proxy access by labor funds and public employees “to pursue self-interested objectives rather than the goal of maximizing shareholder value.”
“The court’s decision is deeply disappointing to long-term shareowners,” Ann Yerger, executive director of the Council of Institutional Investors, said in a press release. “We think the court got it wrong. We will continue to advocate for proxy access and will encourage the SEC to promptly address the court’s concerns. Proxy access is a core shareowner right that is standard in many countries. It would invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.”
The SEC now has 45 days to decide whether to ask the three-judge panel to reconsider its ruling or seek a rehearing by the full nine-judge D.C. Circuit, agency observers said. If the commission doesn’t seek additional judicial review, it would then have to decide whether to redo its economic analysis and try to revive Rule 14a-11. Given the SEC’s heavy workload of Dodd-Frank Act rulemakings, it appears unlikely that the commission would move quickly to resurrect the rule.
In the meantime, it appears that investors will be able to take advantage of the SEC’s amendments to Rule 14a-8, which were not challenged by the business groups, and file access bylaw proposals next season. The SEC had issued a stay on the Rule 14a-8 changes, but that likely will be lifted before the filing deadlines for most 2012 meetings.
“We are disappointed by today's decision striking down a rule that made it easier for shareholders to nominate a candidate to a company's board of directors,” Meredith Cross, director of the SEC’s Corporation Finance Division, said in a statement. “We are considering our options going forward. We note that our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court's decision."