On Friday, July 22, 2011, the D.C. Circuit Court of Appeals issued an Opinion vacating Exchange Act Rule 14a-11. Business Roundtable v. SEC, No. 10-1305, slip op. (D.C. Cir. Jul. 22, 2011). The Rule, which was previously discussed here, allowed 3% shareholders (or larger) can use the company proxy statement to nominate directors.

Typically, prior to a publicly-traded company's annual meeting, incumbent directors will nominate a candidate for each vacancy on the board and include information about each nominee in the proxy materials distributed to all shareholders. A shareholder who wishes to nominate a different candidate may separately file his own proxy statement and solicit votes from shareholders, thereby initiating a proxy contest. As described by the Court, the Rule, announced on August 25, 2010, required "under certain circumstances, a company's proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder's, or a group of shareholders', nominees for director."

Business Roundtable and the U.S. Chamber of Commerce filed a petition with the D.C. Circuit challenging the Rule, arguing that it was promulgated in violation of the Administrative Procedures Act ("APA") because, among other things, "the Commission failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation," as required under provisions of the Exchange Act and the Investment Company Act of 1940. The implementation of the Rule was stayed while the case was decided.

The Court, in an opinion by Judge Ginsburg, struck down the Rule, holding that

the Commission acted arbitrarily and capriciously for having failed once again … adequately to assess the economic effects of a new rule. Here 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. For these and other reasons, its decision to apply the rule to investment companies was also arbitrary.

Business Roundtable v. SEC, slip op. at 7.