08/08/2011
On July 22, 2011, in Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission, the D.C. Circuit overturned the proxy access rule (14a-11) adopted by the Securities and Exchange Commission (SEC) last August.
The new rule was initially adopted by the SEC on August 25, 2010 pursuant to the authority given to it in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July of 2010. According to an SEC press release dated August 25, 2010, the new rule would have required each affected company to include the nominees of significant, long-term shareholders in the company's proxy materials alongside the nominees of management. In addition to rule 14a-11, the SEC simultaneously added a new rule 14a-8, which would allow shareholders to include proposals in the company's proxy materials. The SEC stayed the implementation of both rules 14a-11 and 14a-8 pending the litigation.
In its decision, the D.C. Circuit ruled that the SEC acted in a manner that was arbitrary and capricious when it put the new rules for proxy access in place last year. The court noted that the SEC has "a unique obligation to consider the effect of a new rule upon 'efficiency, competition, and capital formation.'" Furthermore, the court agreed with the Business Roundtable and the Chamber of Commerce that the SEC's failure to "apprise itself—and hence the public and the Congress—of the economic consequences of a proposed regulation" made promulgation of the rule arbitrary and capricious and not in accordance with law. In making its ruling, the court noted that the SEC had not made a complete analysis of the costs and benefits of the new rules and had completely failed to address the potential abuse of the new rules by groups with special interests, such as unions and state pension funds, might abuse the new mechanisms being created.
Not addressed by the ruling is new rule 14a-8. New rule 14a-8 expands the scope of what can be addressed in a 14a-8 proposal; the expansion would allow shareholders to propose procedures for the inclusion of shareholder director nominations in the company proxy materials. The SEC had stayed the effectiveness of the new rule in light of the litigation because, as it has stated, it views the two rules as being "intertwined." However, there has not yet been any indication from the SEC as to whether it will continue to stay the effectiveness of 14a-8 or if it will implement it separately while it goes back to the drawing board on 14a-11.
Following the ruling, an SEC spokesman gave no indication of the agency's next move. The spokesman said the agency would review the decision and consider its options. The SEC could continue to pursue the case before the Circuit Court or could appeal the case directly to the Supreme Court. The SEC could also restart the proxy access rulemaking process and make adjustments to its economic analysis in order to address the cost-benefit issues raised by the Circuit Court. Regardless of the SEC's next step however, it is unlikely that any proxy access rule will be in place for the 2012 proxy season.
For more information on this alert, contact Craig Evans at 816.691.3186 or any of our Corporate Finance attorneys.