Wednesday, September 07, 2011

SEC Will Not Ask for DC Circuit Rehearing of Proxy Access Ruling or Appeal it to Supreme Court

The SEC will not ask for a rehearing of a DC Circuit panel opinion vacating the proxy access rule, Rule 1e4a-11, nor will the Commission appeal the ruling to the US Supreme Court. In an effort to ensure that the SEC carefully considers and learns from the court's objections as it determines the best path forward, SEC Chairman Mary Schapiro asked the staff to continue reviewing the decision as well as the comments the Commission previously received from interested parties.

Chairman Schapiro said that the Commission remains committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards. In her view, providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and the financial markets. It is a process that helps make boards more accountable for the risks undertaken by the companies they manage.

A unanimous panel of the DC Circuit Court of Appeals ruled that the SEC was arbitrary and capricious in promulgating the proxy access rule and vacated the rule. Among other things, the appeals panel found that the SEC’s discussion of the estimated frequency of nominations under Rule 14a-11 was internally inconsistent and therefore arbitrary. The appeals court also found that the Commission relied upon insufficient empirical data when it concluded that Rule 14a-11 would improve board performance and increase shareholder value by facilitating the election of dissident shareholder nominees. Business Roundtable and Chamber of Commerce v. SEC, DC Circuit, No. 10-1305, July 22, 2011.

The term proxy access is shorthand for a framework of rules under which a shareholder may require the corporation to include in its proxy statement and proxy card a person nominated by the shareholders, but not by the board of directors, for election to the board.

Last year, when the Commission adopted Rule 14a-11, it also adopted amendments to Rule 14a-8, the shareholder proposal rule. Under those amendments, eligible shareholders are permitted to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials. Through this procedure, shareholders and companies have the opportunity to establish proxy access standards on a company-by-company basis, rather than a specified standard like that contained in Rule 14a-11.

Although the amendments to Rule 14a-8 were not challenged in the litigation, the Commission voluntarily stayed their effective date at the time it stayed the effective date of Rule 14a-11. The Commission's stay order provides that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further Commission action when the court's decision is finalized, which is expected to be September 13. Thus, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.

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