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October 08, 2010
Proxy Access Rules On Hold Until Court Challenge by Chamber of Commerce is Heard
    by Robert Kropp

Resolution of lawsuit is expected to be too late for proxy access rules to be implemented for 2011 proxy season.

Responding to a lawsuit filed by the US Chamber of Commerce and the Business Roundtable that challenges its authority to implement rules on proxy access, the US Securities and Exchange Commission (SEC) announced this week that it would delay implementation of the rules until it receives an expedited ruling from the courts, which, it anticipates, will come no earlier than late Spring of 2011.

The rules on proxy access being challenged by the business organizations would allow shareowners to submit alternate slates of candidates for corporate boards of directors. The financial regulatory reform bill passed earlier this year explicitly authorizes the SEC to adopt such rules.

Under the rules, shareowners who have owned at least three percent of a company for at least three years will be eligible to have their nominees for boards of directors included in corporate proxy materials. Shareowners will be permitted to aggregate their holdings to meet the three percent threshold.

In petitioning for review by the US Court of Appeals for the District of Columbia, the business organizations argued that the rules adopted by the SEC are "arbitrary and capricious," and would allow "activist shareholders (to) use the rule as leverage to further their special interest agendas."

Investor groups wasted little time in attacking the lawsuit. The Council of Institutional Investors (CII), an association of public, union and corporate pension funds with combined assets of more than $3 trillion, called the lawsuit "an assault on a fundamental shareowner right," and plans to submit an amicus curiae brief with the Court in support of the rules.

Ann Yerger, executive director of CII, stated, "Proxy access will make companies more responsive to their shareowners and more vigilant in their oversight of companies. This basic right is widely accepted in many other countries and the Council will fight to preserve it here."

Also, the
Social Investment Forum (SIF) stated in a press release, "We believe the case filed by the Chamber and the Roundtable is without merit and unproductive in achieving what is in the best interests of America's companies, shareholders and economy—promoting vibrant capital markets with the right amount of oversight and accountability for corporate executives." spoke with Peter DeSimone, Director of Programs at SIF, who said, "It's a critically important issue for our members."

"The lawsuit accuses the SEC of proceeding in a whimsical and capricious manner, which could not be further from the truth," DeSimone said. "The debate over proxy access has spanned several decades, and the resulting rule came about after several consultations with a wide range of stakeholders, including corporations. To say that it was just thrown out there is false."

"The Chamber frames the intent of this rule as giving a small minority of activist shareholders and unions the right to derail a board's true mission, which is to advise the company on management to ensure long-term shareholder value," he continued. "That too couldn't be further from the truth. Proxy access is for all shareholders."

Noting that the rule adopted by the SEC represented a significant compromise for investors, DeSimone said, "The SEC has been extremely cautious in the way it has proceeded, even though it has always stated that it has clear authority to issue rules on proxy access. And they were conservative in the rule they laid out. A holding percentage of three percent is very difficult to achieve, and on top of that the investors have to prove they have held that three percent position for three years. Our members are long-term investors, but that's still a very difficult threshold to meet."

At the time of the SEC ruling in August, DeSimone told, "We would have preferred if the ownership threshold for large companies was left at one percent, and the holding period at one year. Three percent is a compromise. It's doable but makes it more difficult for institutional investors. It might be too tough, and if that's the case we'll press the SEC to reconsider."

According to the SEC rule, "A company would be required to include no more than one shareholder nominee or the number of nominees that represents 25% of the company’s board of directors, whichever is greater."

DeSimone said, "Under the rule, at best you would have a dissident voice on the board. Especially when you consider the financial crisis, as well as accounting scandals that go back a decade, I think a lot of boards could use a dissident voice."

"Evidently, the Chamber wants to limit competition for board elections, and I always thought that the Chamber was a group that loved free competition," he added.

Because the SEC has opted to delay implementation of the proxy access rules until after an expedited ruling from the Court, the ability of investors to nominate alternate slates of directors will not occur until 2012. DeSimone said, "Our members have been waiting for proxy access for several decades, and we can wait a few more months and another proxy season for it to be enacted."

A concern of investors, and a reason why involvement by them in the lawsuit is critical, is the success the Chamber has had in arguing cases against the SEC before the Court of Appeals for the District of Columbia in the past. According to an
article in the Wall Street Journal, "The same D.C. federal appeals court granted a request by the Chamber to halt the implementation of new mutual-fund-governance rules a few years ago, after the SEC refused to do so."
In addition,
Bloomberg reported, "Scalia (Eugene Scalia of the law firm Gibson Dunn & Crutcher, retained by the Chamber and the Roundtable for the case) is three-for-three in winning suits against the SEC, including cases that challenged rules for mutual funds and fixed-indexed annuities on the grounds that the agency made procedural missteps in writing regulations."


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