DC Court of Appeals Strikes Down Proxy Access Rule

July 22, 2011

The U.S. Court of Appeals in Washington struck down the “proxy access rule” adopted by the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rule, had it been effective, would have allowed investors or shareholder groups that own at least 3% of a company’s stock for three years to put their own board nominees on proxy statements.

Incumbent directors of corporations, mutual funds and other issuers nominate board candidates for election at shareholder meetings.  Prior to the election, the issuer disseminates information about the nominees to shareholders, and includes a proxy statement and proxy voting card for those not attending the meeting. Under the proposed proxy access rule, issuers would have been required to also prepare and distribute information on nominations made by an individual shareholder or a group of shareholders and list those nominees on the proxy voting card.  The directors potentially would also have been required by their fiduciary duty to expend considerable funds of the issuer to defeat shareholder nominees they deemed as unsuitable for advancing the best interests of all shareholders.

The SEC argued that the proxy access rule could create “potential benefits of improved board and company performance and shareholder value” sufficient to “justify its potential costs.”  The Court found that the SEC failed to back up this argument with sufficient analysis.  It ruled that the SEC failed to adequately weigh the costs and benefits of the rule and to connect them to efficiency, competition, and capital formation.  Judge Douglas H. Ginsburg, who authored the opinion, stated that “[b]y ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily.”

The SEC could seek a rehearing of the case before the entire U.S. Court of Appeals or request a review of the decision by the U.S. Supreme Court.  The SEC has not yet decided whether it will pursue either option or redraft the rule.

Click here to access the decision.


Exchange-Traded Funds (ETFs), Investment Advisers, Investment Companies, Judicial