The SEC’s proxy access rule, which would allow stockholders to have their nominees for director positions included in the company’s proxy materials, is under challenge in the U.S. Court of Appeals for the D.C. Circuit. The challenge was brought by the U.S. Chamber of Commerce and the Business Roundtable, with amicus curiae support from the State of Delaware. On the opposing side, the Council of Institutional Investors, TIAA-CREF and fourteen other funds have filed a brief supporting the SEC’s position.
The SEC has attempted to adopt some form of proxy access in almost every decade since it was created and had proposed a version of proxy access in 2009. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the SEC express authority to address the issue and, in August 2010, the SEC adopted Rule 14a-11 under the Securities Exchange Act of 1934. The rule originally had an effective date of November 2010, but the SEC stayed the effectiveness in the face of the legal challenge.
Lawyers for Delaware, the country’s preeminent jurisdiction for incorporations, argue that the new rule “denies stockholders their state law right to freely amend proxy access bylaws.” In August 2009, Delaware amended its corporate code to clarify that stockholders have the right to amend a corporation’s bylaws to establish a right of proxy access. This means stockholders of Delaware corporations have “the ability to decide whether and when stockholders would be granted such a right of access.” The Delaware amicus brief asserts that the SEC’s rule “is completely contradictory to Delaware’s newly adopted statute” and “ignores Delaware’s policy of allowing stockholders, through their ability to amend bylaws, to determine how a particular corporation will protect the rights of stockholders in the election process.”
The SEC has filed a brief defending the rule, arguing against “exclusive reliance on such ‘private ordering.’” According to the SEC, “access to the proxy should not be determined by private ordering because it would not be appropriate to permit a company’s board or a majority of shareholders to deprive other shareholders of an effective means to freely exercise their franchise rights as owners of public companies.” Agreeing with the SEC, the Council of Institutional Investors and the named funds argue that the company-by-company approach permitted in Delaware “would impose staggering costs” and would allow “one generation of shareholders to disenfranchise the next.”
One of the petitioners’ primary arguments against the rule is that the SEC violated the Administrative Procedure Act by failing to perform an adequate cost-benefit analysis of the rule’s effects. The case is scheduled for oral argument on April 7, 2011.
For more information about the SEC’s adoption of the rule, see the Client Advisory published by Alston & Bird.