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July 25, 2011
Court of Appeals Strikes Down SEC Rule on Proxy Access
    by Robert Kropp

The Court agreed with the Chamber of Commerce in finding that the rule, which would have allowed shareowners to have their nominees for boards of directors included in proxy materials, was "arbitrary and capricious."

Dealing a blow to the corporate governance concerns of sustainable investors and others, the US Court of Appeals in Washington DC ruled last Friday that the Securities and Exchange Commission (SEC) "was arbitrary and capricious in promulgating Rule 14a-11." The rule, if it had been enacted, would permit shareowners who have owned at least three percent of a company for at least three years to have their nominees for boards of directors included in corporate proxy materials.

When the SEC adopted the rule for proxy access last August, Ann Yerger, executive director of the Council of Institutional Investors (CII), stated, "Access to the proxy will invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies." And a CII press release at the time stated, "The final rule reflects the SECís thorough, year-long review of extensive public comments and a careful balancing of investor and corporate interests."

However, the US Chamber of Commerce disagreed, arguing that the rule would allow "activist shareholders (to) use the rule as leverage to further their special interest agendas." In October, the Chamber filed the lawsuit that was decided in its favor by the Court of Appeals last week.

The Court's decision was notable for its criticism of the Commission, stating that it "failed adequately to consider the rule's effect upon efficiency, competition, and capital formation."

"For these reasons and more," the Court continued, "We grant the petition for review and vacate the rule."

In a press release, Yerger called the decision "deeply disappointing," and said, "We will continue to advocate for proxy access and will encourage the SEC to promptly address the court's concerns. Proxy access is a core shareowner right that is standard in many countries."

Meredith Cross, director of the Corporation Finance Division of the SEC, described the Commission as "disappointed" by the ruling, but added, "We note 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."

According to Ted Allen of Risk Metrics, "The unavailability of a market-wide access regime could mean a rise in traditional boardroom challenges via proxy fights and a jump in 'just vote no' campaigns against directors. In addition, the court decision may inspire activists to file access bylaw proposals at various companies in 2012."

The SEC has 45 days from the date of the Court's decision in which to seek judicial review.


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