In addition to my very long post below, several other prominent law and business bloggers have commented on the decision striking down the SEC's proxy access rule (14a-11). The following are snatched from my newsreader in reverse chronological order:
Sean Hackbarth at the US Chamber's blog:
The appeals court sided with the business groups’ lawyers, who argued that investors with special interests, including unions and state and local governments, would be likely to put the maximization of shareholder value second to other interests.
“By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily,” Judge Douglas Ginsburg said in the ruling, joined by Chief Judge David Sentelle and Judge Janice Rogers Brown.
The SEC, the appeals court said, “inconsistently and opportunistically framed the costs and benefits of the rule” and also failed “to respond to substantial problems raised by commenters.”
The Chamber's president and CEO Tom Donohue was pleased with the ruling:
We applaud the court’s decision to prevent special interest politics from being injected into the boardroom. Companies and directors need to continue to focus on the important work of creating jobs and reviving our economy. Today’s decision also sends a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs.
Adam O. Emmerich of Wachtell Lipton:
The court did not reach plaintiffs’ claims that proxy access rules are fundamentally unconstitutional, theoretically leaving open the possibility that an access regime could be implemented in revised form in the future if the above defects are addressed. It is unclear whether the SEC will continue to pursue proxy access in the face of this unqualified rejection of such a high-profile initiative which had been many years in the making. What is virtually certain, however, is that proxy access will not apply to the 2012 proxy season.
While shareholder activists are likely to be disappointed by this decision and seek to portray it as a setback for “shareholder democracy,” we believe this is a positive development for American corporations and their shareholders. As we have always said, proxy access is not a necessary or even beneficial element of corporate governance. Shareholders have many avenues to influence boards of directors, who are in general more independent, more engaged and more vigilant than ever before, and we do not expect this ruling to decrease the frequency of proxy contests.
The most interesting part of the opinion is where the Court considered the possibility that union and state pension funds might use Rule 14a-11 for personal gain. The Court: "By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily." ...
... The opinion is a rather limited indictment of the proxy access proposal, relying on the lack of sufficient justification. The SEC is considering its options. While it might challenge the ruling, I suspect that the agency is more likely to produce a newly justified rule in the near future.
This decision brings to light a fundamental problem at the SEC. Speaking against my own interest as a securities lawyer, I think it is an agency with too many lawyers and not enough economists. The Federal Reserve and Federal Trade Commission are better regulators because they have teams of sharp economists to consider the effects of new rules. As Senator Shelby noted in a recent hearing, the SEC on the other hand has over a thousand lawyers and less than 25 economists. Today’s decision is one of the predictable results. So were similar decisions striking down rules on the same basis in American Equity v. SEC and in Chamber of Commerce v. SEC.
The SEC has now proposed rules on proxy access in 2011, 2009, 2007 and 2003. It still doesn’t have a rule in place. That’s a lot of man hours to put into writing a rule that is never ultimately adopted. I wonder if Chairman Schapiro will look to re-write the rule given all the deadlines she is facing under Dodd-Frank. I don’t think we’ve seen the last of Rule 14a-11, but I think it may be awhile before it is resurrected. What would a new SEC rule look like? I doubt it would cover investment companies, as the opinion gave particular attention to the SEC’s decision to apply the rule to them. I would also suspect it would allow for an opt-out procedure. We’ll see.
Let’s not forget that the changes to Rule 14a-8 are still in place. So shareholders can still adopt election bylaws which specify proxy access procedures at a particular company. It’s never to early for boards to consider putting into place the proxy access defenses that I have developed.
... let me briefly lament the D.C. Circuit's vacating of the proxy access rule. I have my own reservations about the rule, in particular the SEC's failure to allow shareholders to opt out in any way they choose. Still, I think it's on balance a pretty sensible and defensible rule. The SEC's documents proposing and finalizing the rule are about extensive as I have ever seen from that agency, and they had voluminous comments from all sides to help guide them. The D.C. Circuit cherrypicks areas where it asserts the SEC didn't do enough. It will almost always be possible to do that with any agency rulemaking. Requiring that level of deliberation could well make the task of rule-writing for Dodd-Frank more daunting still. This opinion is little more than the judges ignoring the proper judicial rule of deference to an agency involved in notice-and-comment rulemaking and asserting their own naked political preferences. Talk about judicial activism.
As those of us committed to proxy access start over again, difficult but not impossible in the current political climate, we would do well to take Fisch’s advice on an alternative approach:
- The SEC should amend Regulation 14a to require the issuer to disclose, in its proxy statement, all properly-nominated director candidates, regardless of whether the nomination is made by a nominating committee, a shareholder or some other mechanism. Provide for comparable disclosures, regardless of the source of the nomination.
- Amend Rule 14a-4 to require the issuer’s proxy card to give shareholders the opportunity to vote for any of the candidates included in the proxy statement. The proxy card would thus constitute a universal ballot for all properly-nominated candidates.
- Encourage firm-specific experiments by retaining the recently adopted amendments to the election exclusion under Rule 14a-8 authorizing the inclusion of shareholder proposals concerning the process by which directors are selected.
Jim Hamilton offers up a detailed summary of the opinion.