Thursday, September 30, 2010

Business Groups Challenge SEC Proxy Access Rule in Federal Appeals Court

The US Chamber of Commerce and the Business Roundtable have asked a federal appeals court to invalidate the recently adopted SEC proxy access rule, Exchange Act Rule 14a-11. In a petition to the US Court of Appeals for the District of Columbia, the business groups said that Rule 14a-11 is arbitrary and capricious, violates the Administrative Procedure Act, and was adopted without a proper assessment of its effect on efficiency, competition, and capital formation. The petition also asserts that the rule violates company rights under the First and Fifth Amendments. At the same time, the business groups asked the SEC to stay the rule's effect until the litigative challenge is resolved. While the Dodd-Frank Act specifically authorized the SEC to adopt the proxy access rule in an effort to insulate the SEC from a challenge to its rulemaking authority, the business groups said that the Dodd-Frank provision does not exempt the SEC from following the law when it conducts rulemaking.

In a brief filed with the SEC stay petition. the groups said that the SEC erred in appraising the costs of the rule. The SEC did not dispute evidence that hotly contested elections would be costly, but hypothesized that such elections may not occur since directors may decide not to oppose shareholder nominees. This hypothesis conflicts with the directorial fiduciary duties, said the brief, since such duty may compel company directors to spend significant amounts to defeat shareholder nominees they believe to be unqualified. More broadly, the brief, which was signed by Eugene Scalia of Gibson Dunn, noted that proxy access has been one of the most contentious issues in the history of the SEC because disagreements over a proxy access rule prefigure the disagreements that will emerge when proxy access is actually used. Thus, in the view of the business groups, it was not reasonable for the SEC to premise its cost analysis on the assumption that companies would become passive and acquiescent once access nominees are advanced. 

The brief also contends that the adoption is arbitrary and capricious in its treatment of state law. While claiming to effectuate rights under state law, asserted the brief, the proxy access rules effectively moot them by establishing by fiat a federal proxy access regime regardless of what system a company's shareholders would adopt under the law of Delaware or any state.  Delaware specifically addresses shareholder access to the proxy for director nominations and provides for an access mechanism through a bylaw amendment.

No comments: