In a resounding victory for public companies Friday, the United States Court of Appeals for the District of Columbia Circuit struck down the Securities and Exchange Commission’s rule on proxy access. The controversial proxy access rule would have permitted shareholders to more easily and more cheaply nominate a minority slate of director candidates for election on an issuer’s board if they held at least 3% of the issuer’s stock for at least three years. Without reaching the merits of the actual rule, the appeals court struck down the rule because the panel (all three of which were Republican appointees) determined that the SEC had acted “arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects of a new rule.”
While we do not believe proxy access is dead, particularly since it was authorized by Congress in the Dodd-Frank Act, we expect that the rule is dead for at least the 2012 proxy season. Regardless of whether the SEC chooses to appeal to the entire appeals court or the U.S. Supreme Court or rewrite the rule to comply with the decision, it is highly unlikely that any of the choices will lead to the enactment of proxy access by the 2012 proxy season. Because the SEC is currently inundated with rulemaking from Dodd-Frank, we don’t believe a new rule (with a more thoroughly weighed cost/benefit analysis) will come back until late 2012, at the earliest.
The court did not address the merits of the Business Round Table/ U.S. Chamber of Commerce’s First Amendment argument or their argument that shareholders themselves should vote to determine whether proxy access should be adopted for each issuer. Thus, even if the SEC did propose a new rule and provided a plausible cost/benefit analysis that passes the court’s muster, the new rule could still be struck down on other grounds.
To read the court decision, click here.