The U.S. Chamber of Commerce and the Business Roundtable filed a legal challenge to the recently adopted SEC proxy access rules. The groups asked the SEC to stay adoption of such rules, which will give certain shareholders the right to include their nominees in corporate proxy materials. The proxy access rules are scheduled to take effect on November 15, 2010. The groups stated that they will ask the U.S. Court of Appeals for the District of Columbia to block the rules if the SEC does not grant the requested stay.

The proxy access rules approved by the SEC on August 25, 2010, in a 3-2 vote, apply to shareholders owning at least 3% of a company’s total voting power who have held their shares for at least three years. Shareholder activists have long sought such proxy access, maintaining that it is needed to effectively challenge entrenched directors and officers. Please see our prior discussion of the proxy access rules.

The groups’ petition to the SEC states that the rules are arbitrary and capricious in violation of the Administrative Procedure Act, and that the SEC failed to properly assess the rules’ effects on “efficiency, competition and capital formation” as required by the Securities Exchange Act of 1934 and the Investment Company Act of 1940. According to the groups’ press release, in adopting the proxy access rules, the SEC:

  • erred in appraising the costs that proxy access would impose on U.S. corporations, shareholders, and workers;
  • ignored evidence and studies highlighting the adverse consequences of proxy access, including the leverage that it may provide to activist shareholders;
  • claimed to be empowering shareholders, but actually restricted shareholders’ ability to prevent special interest shareholders from triggering costly election contests; and
  • claimed to be effectuating state law rights, but gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process.  

In response, the SEC stated that the proxy access rules are lawful and in the best interest of the public and shareholders, and that it would carefully consider and timely respond to the motion for a stay.

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