On July 22, 2011, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit vacated the proxy access rules pursuant to its ruling on the petition filed by the Business Roundtable and U.S. Chamber of Commerce (the “petitioners”) for review of these rules. The court found that the Securities and Exchange Commission (SEC) “acted arbitrarily and capriciously for having failed … adequately to assess the economic effects of a new rule.”
In August 2010, the SEC adopted final rules permitting eligible shareholders to name director nominees in a company’s proxy materials. In September 2010, the petitioners filed a petition for review of the proxy access rules. In October 2010, the SEC stayed the rules pending resolution of the litigation.
The petitioners argued that, among other things, the SEC violated the Administrative Procedure Act for failing to adequately consider the proxy access rules’ effect on efficiency, competition and capital formation. In its decision, the court found that:
the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.
In its analysis, the court stated that the SEC:
- failed to adequately consider the costs and benefits of the proxy access rules,
- arbitrarily acted in not evaluating the costs that could be imposed on companies from the use of the rule by shareholders representing special interests, particularly union and government pension funds, and
- arbitrarily ignored the effect of the final rules on the total number of election contests.
The court also found that the rules are invalid as applied specifically to investment companies. The court declined to address the First Amendment challenge to the rule.
The SEC could seek a rehearing by the entire D.C. Circuit, consider an appeal directly to the U.S. Supreme Court or propose new proxy access rules.