Last year, the U.S. Securities and Exchange Commission (SEC) adopted a rule that would have given major shareholders of publicly traded companies greater nominating power for corporate directors. Yesterday, the U.S. Court of Appeals for the D.C. Circuit issued a decision stating that it would not approve the agency's proposed proxy access rule, which had been mandated after the Congressional push for financial reform and overhaul under the Dodd-Frank Act.
The SEC has proposed about 70 rules thus far and according to SEC Chairman Mary Schapiro, the commission must evaluate the " 'efficiency, competition and capital formation' " of every proposed rule. Chairman Schapiro testified before the United States Senate Committee on Banking, Housing and Urban Affairs the day before the court's ruling on the proxy access rule. The loss in this case is not the first for the agency that is seeking to carry out its assigned duties under Dodd-Frank.
The rule before the court was supported by investor advocates, but was then challenged by the US Chamber of Commerce and the Business Roundtable. The court agreed with these groups who had argued that special interest investors would not necessarily put shareholder value as paramount when nominating directors.
The court voiced its concern that the rule could impose serious costs to companies as they fight these shareholders' attempts to remove and replace board members. The court found the rule to be "arbitrary and capricious" in that in their view the commission had not provided sufficient data as to improvement of board performance or increase in shareholder value.
Major shareholders representing special interests, such as unions and pension funds, could have a serious impact on the costs of the process and according to the court, these costs were not adequately considered. The shareholders' nominees would have been included in proxy materials with management's nominees.
The court wrote in it's decision 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.' "
The SEC has issued several statements all of which have said options are being considered as to next steps in view of the court's decision.
The New York firm of Gusrae Kaplan Nusbaum PLLC represents industry members in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.
