SEC’s controversial proxy access rule tossed out by court


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A federal appeals court on Friday invalidated a controversial Securities and Exchange Commission rule to make it easier for shareholders to force out company directors.

The rule allowed large shareholders to have their board nominees listed on company-mailed proxy ballots along with the management’s preferred candidates instead of being forced to spend the money to send out separate ballots.


The rule was supported by public pension funds, labor unions, shareholder advocates and some investment managers as a way to help shareholders force changes at under-performing companies and curb high executive compensation.

But many large companies opposed the rule. They argued it would open the door for hedge funds and corporate raiders to manipulate companies and would give too much power to special interest groups, such as labor unions.

The U.S. Chamber of Commerce and the Business Roundtable filed suit last year to challenge the rule, which was approved 3-2 by the SEC’s Democratic majority. The two large business organizations argued that the contested shareholder elections would distract company management and would benefit labor unions in contract negotiations.

On Friday, a three-judge panel of the U.S. Court of Appeals for the District of Columbia agreed and tossed out the rule.

The judges, all Republican appointees, said the SEC acted ‘arbitrarily and capriciously’ in not properly evaluating the impact on companies. Among the potential consequences of the rule were increased costs companies would face fighting shareholder nominees.

The court decision leaves the door open for the SEC to do more analysis and try to enact the rule again. Last year’s sweeping overhaul of financial regulations gave the SEC the authority to enact rules increasing shareholder access to company proxy mailings.


The rule was one of the first enacted after the legislation was enacted last year.

The U.S. Chamber of Commerce and Business Roundtable cheered Friday’s court decision.

“This is a big win for America’s job creators and investors,” said Chamber President Tom Donohue. “We applaud the court’s decision to prevent special interest politics from being injected into the boardroom.’

He said the decision also ‘sends a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs.’

Ann Yerger, executive director of the Council of Institutional Investors, said the court decision was ‘deeply disappointing’ to long-term shareholders.

‘We will continue to advocate for proxy access and will encourage the SEC to promptly address the court’s concerns,’ she said. ‘Proxy access is a core shareowner right that is standard in many countries. It would invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.’


Shareholders get new access to proxy ballot process

-- Jim Puzzanghera