In August 2010, the SEC adopted a proxy access rule that sought to impose a requirement on companies to include information about stockholder nominees for directors in a company’s proxy statement and on the proxy card if the nominees met specified criteria, and the stockholders making such nominations held shares representing at least three percent of the company’s outstanding voting power and had held such shares for at least the last three years. In October 2010, the SEC granted a stay of the rule pending resolution of a petition filed by the Business Roundtable and the U.S. Chamber of Commerce with the D.C. Circuit in September 2010.
On July 22, 2011, the Court of Appeals for the District of Columbia vacated the SEC’s proxy access rule. The court found the promulgation of the new rule to be arbitrary and capricious and, therefore, in violation the Administrative Procedure Act. The court held that the SEC “failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation,” as required by federal securities laws.
In particular, the court found that the SEC did not estimate and quantify the costs it expected companies to incur under the new rule, relied upon insufficient empirical data for concluding the benefits of the new rule and failed to consider the costs on companies of the new rule being used by stockholders with special interests to promote their narrow interests to the detriment of stockholders generally, such as unions or state governments seeking labor benefits.
The SEC may either appeal the decision to the Supreme Court or repromulgate the proxy access rule with further economic analysis addressing the issues raised in the decision.
In response to the court’s decision, the SEC expressed disappointment but noted that the related rule amendment, which was adopted at the same time, was unaffected by the court’s decision as it wasn’t subject to the lawsuit. This amendment of Rule 14a-8 allows stockholders to submit proposals for proxy access at their companies and was stayed at the same time that the SEC stayed its proxy access rule. The SEC may lift the stay on the amendment which would make it effective for the 2012 proxy season.