On Friday, July 22, 2011, the U.S. Court of Appeals for the District of Columbia Circuit invalidated a significant proxy access rule that had been adopted by the U.S. Securities and Exchange Commission in 2010. Rule 14a-11, which would have required public companies to include director nominees of significant, long-term shareholders in the company’s proxy materials, was successfully challenged by the Business Roundtable and the U.S. Chamber of Commerce. In October 2010, the SEC had stayed the effectiveness of Rule 14a-11 in response to the petition filed by the Business Roundtable and the Chamber of Commerce pending the outcome of the proceedings.
In its opinion, the D.C. Circuit ruled that the adoption of the proxy access rule violated the federal Administrative Procedure Act because the SEC acted “arbitrarily and capriciously” in adopting the rule. Under the Administrative Procedure Act, the SEC was required to examine data that is relevant to the rule, articulate a satisfactory explanation for its action and determine the economic implications of the rule. In this case, the D.C. Circuit found that the SEC “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 addition, the D.C. Circuit found that the SEC acted arbitrarily in applying the rule to investment companies. The Court did not address the petitioners’ First Amendment challenges to the rule.
Although the D.C. Circuit invalidated the rule on procedural grounds, this ruling could make it difficult for the SEC to readopt the rule without substantive changes or at all, particularly after the SEC accurately identifies the costs and benefits of the rule, supports its predictive judgments and does not contradict itself as required by the ruling. At this time, it is not clear what action the SEC may take in response to the ruling. The SEC has issued a statement that it is considering its options going forward. The statement also noted that the amendments to Rule 14a-8 allowing shareholders to submit proposals for proxy access, which were adopted at the same time as Rule 14a-11, were unaffected by the Court’s decision.
A copy of our August 2010 update on the shareholder proxy access rule is available here.