SEC’s proxy access rule tossed out by court
A federal appeals court invalidated a controversial Securities and Exchange Commission rule that made it easier for shareholders to force out company directors.
Acting on a suit by business groups, a three-judge panel of the U.S. Court of Appeals for the District of Columbia unanimously tossed out the rule Friday. The judges said the SEC did not adequately consider the rule’s effect on companies.
The rule let large shareholders place their board nominees on company-mailed proxy ballots along with the management’s preferred candidates instead of being required to spend the money to send out separate ballots.
Approved 3-2 by the SEC’s Democratic majority last year, the so-called proxy access rule was supported by public pension funds, labor unions, shareholder advocates and some investment managers. They said it would help shareholders force changes at underperforming companies and curb high executive compensation.
But many large companies opposed the increased access. They argued that 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, arguing that the contested shareholder elections would distract company management and would benefit labor unions. Such challenges to rules of government agencies go directly to the appeals court.
The judges, all Republican appointees, agreed with the business groups. They ruled that the SEC acted “arbitrarily and capriciously” in not properly evaluating the effect 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 enact a revised rule. SEC spokesman Kevin Callahan said the agency was reviewing the decision and considering its options.
Last year’s sweeping overhaul of financial regulations gave the SEC the authority to enact rules increasing shareholder access to company proxy mailings.
The two business groups cheered Friday’s court decision.
Chamber of Commerce President Tom Donohue said the judges kept “special interest politics from being injected into the boardroom” and also sent “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 she was disappointed by the court’s decision. She said the SEC should address the court’s concerns and move ahead with a new proxy access rule.
“It would invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies,” Yerger said.
