SEC Sued Over 'Proxy Access'

by Glen Shapiro, LawAndTax-News.com, New York

04 October 2010

The United States Chamber of Commerce (USCC) and Business Roundtable have filed a legal challenge to the final rules of the Securities and Exchange Commission (SEC) requiring a corporation to adopt changes in its proxy materials to facilitate the rights of shareholders to nominate directors to a company's board.

The SEC's approval of the new measures on August 25 followed enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provided the SEC with explicit authority to make rules addressing shareholder access to company proxy materials. This "proxy access" was designed to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors.

The new rules, which were adopted by the SEC with only a 3:2 majority vote, require companies to include the nominees of “significant, long-term shareholders” (owning at least 3% of the company's shares continuously for at least the prior three years) in their proxy materials, alongside the nominees of management.

“The SEC’s proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders,” said David Hirschmann, president of the USCC’s Center for Capital Markets Competitiveness. “This special interest-driven rule will give small groups of special interest activist investors significant leverage over a [company's] activities. This will undermine a company’s ability to grow and create jobs.”

In a petition for review filed in the US Court of Appeals, the USCC and Business Roundtable charge that the rule is arbitrary and capricious, and that the SEC failed to assess properly the rule’s effects on “efficiency, competition and capital formation” as required by law.

In adopting the rule, they also add that the SEC “erred in appraising the costs that proxy access would impose on American corporations, shareholders, and workers at a time our economy can least afford it”, and that it “ignored evidence and studies highlighting the adverse consequences of proxy access, including that activist shareholders would use the rule as leverage to further their special interest agendas”.

“While Congress may have authorized the SEC to consider a proxy rule, Congress never exempted the SEC from following the law when promulgating new regulations,” said Robin Conrad, executive vice president of the National Chamber Litigation Center, the USCC’s lawyers. “The SEC failed to engage in evidence-based rulemaking, and we intend to hold the SEC to its statutory obligation to conduct a thorough cost-benefit analysis.”

Kathleen L. Casey, one of the two SEC commissioners who voted against on August 25, said in her dissenting statement that the “rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny.”

However, in an initial response, an SEC spokesman is reported as saying that the SEC believes that its proxy access rules “are both lawful and in the best interest of the public and shareholders”, and that the SEC “will, of course, carefully consider and timely respond to the motion for a stay."

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