Today the federal appellate court in Washington, D.C. invalidated the SEC's "proxy access" rule, which would have required that director candidates nominated by certain large shareholders be included in a company's proxy materials.
Gibson, Dunn & Crutcher LLP represented the plaintiffs, or "petitioners," in the case, Business Roundtable and the U.S. Chamber of Commerce.
In its decision, which is available here, the Court criticized numerous aspects of the SEC's assessment of the rule's costs and benefits, stating that the SEC "relied upon insufficient empirical data when it concluded that [the proxy access rule] will improve board performance and increase shareholder value." The Court also concluded that the SEC had "duck[ed] serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds." The Court noted particular errors in the SEC's extension of the rule to mutual funds and other investment companies.
In vacating the rule on these grounds, the Court concluded that it did not need to address other arguments the petitioners had raised, including that the SEC improperly rejected reasonable alternatives to a proxy access rule, and that the rule violated the First Amendment. As a result of the Court's decision, the proxy access rule will not go into effect. Should the SEC choose to re-propose a rule mandating shareholder access to company proxy materials for director elections, it will need to overcome the numerous deficiencies identified by the Court.
The case did not directly concern the SEC's rule amendment allowing shareholder proposals on proxy access (often called "private ordering"). That rule and related rules were voluntarily stayed by the SEC in light of the proxy access litigation; the SEC must determine how to handle the stay now that the Court has issued its decision.
The Court's explanation of how regulatory costs and benefits should be considered is likely to serve as a precedent for future SEC rulemakings and for rulemakings by other agencies.