On July 22, 2011, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit vacated Rule 14a-11 under the Securities Exchange Act, the U.S. Securities and Exchange Commission’s (Commission) “proxy access” rule adopted in August 2010. The rule would have made it easier for investors to get their own nominees onto public company boards by requiring companies to include such nominees on the corporate proxy ballot in certain circumstances.
In September 2010, the U.S. Chamber of Commerce and the Business Roundtable sued to overturn Rule 14a-11. In response to the litigation, in October 2010, the Commission stayed Rule 14a-11 and amendments to Rule 14a-8 that would require a company to include in its proxy statement a shareholder proposal that seeks proxy access.
In vacating Rule 14a-11, the court found that the Commission acted “arbitrarily and capriciously” in not appropriately considering the economic impacts of the rule. The court was critical of the Commission, noting 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 Commission has not yet indicated if it will seek a rehearing, appeal to the U.S. Supreme Court, or restart the rulemaking process for a revised rule. In response to the D.C. Circuit’s opinion, Meredith Cross, the Director of the Commission’s Division of Corporate Finance, stated that “[w]e are considering our options going forward.” She also noted that “our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court's decision,” hinting that the Commission will lift its stay on the amendments to Rule 14a-8 that would permit such shareholder proposals. Accordingly, while it is unlikely that public companies will have to deal with mandated proxy access for the 2012 proxy season given the court’s decision, they may have to deal with shareholder proposals on the topic.
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Mark T. Plichta
John K. Wilson