D.C. Circuit Strikes Down Proxy Access Rule
- The U.S. Court of Appeals for the D.C. Circuit has vacated the Securities and Exchange Commission's Rule 14a-11, which would have required public companies to include director nominations made by qualifying shareholders in their proxy materials. Business Roundtable v. SEC, No. 10-1305 (D.C. Cir. July 22, 2011). In a 3 - 0 opinion written by Judge Ginsburg, the court accepted the petitioners' arguments that the SEC neglected both to quantify the costs companies would incur opposing shareholder nominees and to substantiate the rule's predicted benefits; failed to consider the consequences of union and state pension funds using the rule; and failed properly to evaluate the frequency with which shareholders would initiate election contests. The court found it unnecessary to address the petitioners' First Amendment challenge to the rule.
The court gave special attention to the rule's application to investment companies. The court ruled that the SEC failed adequately to address whether the regulatory requirements of the Investment Company Act of 1940 reduce the need for, and hence the benefit to be had from, proxy access for shareholders of investment companies. It also ruled that the SEC failed to deal with the concern that Rule 14a-11 will impose greater costs upon investment companies by disrupting the unitary and cluster board structures with the introduction of shareholder-nominated directors who sit on the board of a single fund, thereby requiring multiple, separate board meetings and making governance less efficient.
As of this writing, the SEC has had no response to the ruling, other than a spokesman's statement that it is reviewing the decision and considering its options. Essentially, it has four options: to let the rule expire; to repropose the rule, either in its present form or altered as the SEC thinks best; to seek rehearing en banc before all nine judges of the court; or to seek review by the Supreme Court, which would require the approval of the Office of the Solicitor General. The SEC must also decide what to do about its amendment to Rule 14a-8, requiring companies to include certain shareholder proposals relating to election procedures in their proxy statements. That amendment was not under consideration by the court, but the SEC stayed the amendment pending the court's decision.
The court's opinion is available online at
For my most recent post on the case, see
John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
FundLaw Listowner http://groups.yahoo.com/group/fundlaw