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Daily Show's Dodd-Frank One Year Update

http://www.thecorporatecounsel.net/Blog/2011/07/canadas-continuous-disclosure-review-program.html

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HT: Broc

Does the SEC need to do more cost-benefit analysis of Dodd-Frank rule making?

JW Verret has a nice write up of the question.

Ted Frank on Congress' effort to reverse US v. Skilling

Concise and to the point:

We know overcriminalization and overaggressive DOJ prosecutions are a problem. So, of course, Congress is looking into making the "honest services" criminal statute vague and broad again post-Skilling. [BLT; House Judiciary; HR 2572]

For background on the honest services law, see this post.

Where now on proxy access?

Steven Davidoff analyzes the SEC's options:

The United States Court of Appeals for the District of Columbia Circuit has taken a chainsaw to the Securities and Exchange Commission’s proxy access rule, striking it down in a 21-page opinion. A panel of three judges from the appeals court based its ruling last week on what it perceived to be the S.E.C.’s failure to fully consider the costs and the benefits of this rule. With the S.E.C. wounded and proxy access seemingly on life support, if not dead, the question is what comes next?

The S.E.C. has three options:

1. Appeal the D.C. Circuit opinion to the full federal appeals court.

2. Rewrite the rule and address the deficiencies cited by the D.C. Circuit.

3. Do nothing and let the proxy rule die.

.... The S.E.C. has invested years in proxy access, so if it does not appeal I also suspect the commission will not let the rule die. Instead, I believe the S.E.C. will rewrite this rule with more analysis along the lines advocated by the D.C. Circuit Court. But any rule-making process will take another six months to a year as the S.E.C. again deals with the controversial nature of these rules. Proxy access will at best not be proposed again until 2012 and likely not be effective until 2013. And there will be another court challenge, meaning a likely delay even beyond that.

Which means the outcome of proxy access may depend on the outcome of the 2012 election. As Davidoff correctly points out, a GOP-dominated SEC is unlikely to move forward with proxy access.

Did the GSEs cause the subprime mortgage crisis?

The argument over the role Fannie Mae and Freddie Mac played in the subprime mortgage crisis continues to rage unabated. In a recent contribution to the literature, Patric H. Hendershott and Kevin Villani argue that:

The responsibility for the massive failures of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, at the center of American housing finance and the private securitization system that supports housing finance, falls directly on regulators and indirectly on their political overseers. Private and GSE prudential regulators were given politically determined social lending goals that ultimately trumped prudential regulation, forcing the GSEs to fund subprime lending in competition with private label securitizers. The result was the extension of lower and lower quality loans, creating a race-to-the-bottom between the GSEs and private mortgage providers, all while regulators and politicians looked on approvingly. The financial crisis resulted when many of those loans turned sour in the latter part of the last decade.

We find no evidence that the United States housing market has unique characteristics requiring a hybrid GSE system, thus we conclude that the system and the political risks it is subject to are unnecessary. Any U.S. housing finance policy that does not safeguard prudential regulation from political influence by separating housing subsidy from finance and eliminating government- induced distortions will result in another systemic failure. To re-privatize the GSEs while maintaining their political goals, or to create new, specially chartered enterprises that pursue those goals, would exacerbate systemic risk.

It is vastly frustrating that so little has been done to fundamentally improve the regulation of the housing sector these many years later.

Biter Bit: George Soros closes hedge fund to outsiders

Liek a lot of wealthy liberals, George Soros is a big fan of government regulations that don't affect him. Unfortunately, despite being one of liberalism and the Democratic Party's major financial backers, the Democrat-sponsored Dodd-Frank law has bitten Soros in a big way. Fortunately for Soros, the law does have a loophole that lets him stay oin business for himself and avoid regulation, as the WSJ explains:

George Soros is turning his legendary hedge-fund firm into a $24.5 billion "family office," a move that allows it to avoid a new level of regulatory oversight facing many hedge funds. ... Soros Fund Management LLC, told clients it will no longer manage outside investors' money. It will return less than $1 billion to investors and manage the remaining approximately $24.5 billion—including funds owned by Mr. Soros, his family and their foundations—through a family office.

A letter to his investors dated Tuesday said the switch takes advantage of "an exception" in the Dodd-Frank financial legislation. Family offices, regardless of their size, won't face the same regulations being imposed on hedge funds and private-equity firms. ...

The pending hedge-fund regulation was born out of the financial crisis and aims partly to help regulators keep tabs on risks to markets that could be mounting based on hedge-fund trading. ... The new rules require many hedge funds to register with the Securities and Exchange Commission by March 2012. SEC-registered managers are expected to have compliance programs that meet certain standards and to participate in proposed systemic-risk reporting, which would require them to turn over more data about their strategies and trading exposures to the U.S. government on a confidential basis.

One particular concern of managers, besides the time and money spent on compliance, is that once the funds become registered they will be subject to more onerous reporting requirements, including public disclosures about their operations, personnel and the amount of assets they manage.

You'd think that as a good liberal, Soros would be happy to comply with new regulations. After all, his fellow lefties claim that "Soros believes that the public interest should always prevail over his own self-interest, a position that sets him far apart from contemporary neo-liberals who hold the common good (such as it exists in their way of thinking) can only be achieved through pursuit of self-interest and personal gain." If so, however. shouldn't the public interest in disclosure trump Soros' personal self-interest?

Indeed, isn't avoiding regulatory burdens and costs something only conservatives do?  Or is it a case of do as I say, not as I do?

Out of print SF coming to eBook format

From the Guardian:

... from Arthur C Clarke to Philip K Dick, Marion Zimmer Bradley to Robert Silverberg, Gollancz is making thousands of classic out-of-print SFF titles available as ebooks. The SF Gateway launches this autumn with more than 1,000 titles by almost 100 authors, with plans to increase this to 3,000 titles by the end of 2012 and 5,000 by 2014. Wow. "Wherever possible, the SF Gateway will offer the complete backlist of the authors included," says Gollancz in its announcement.

A complete list of the authors already signed up – they're negotiating with many more – is here (warning: PDF). Tanith Lee is there, and deservedly so – I wrote here about how I couldn't believe she was out of print. Harry Harrison, James P Blaylock, Theodore Sturgeon, EE "Doc" Smith, my beloved Tim Powers – it's basically the great and the good of science fiction and fantasy, and they're all going to be available at the click of a button (pricing is yet to be revealed, but will be "in line with prevailing market trend, but competitive and value for money", apparently).

Wonderful development, I think.

Do we really need the SEC?

Maybe not if a new paper by, inter alia, Brian Cheffins is correct. In it, he and his coauthors argue that:

This study of initial public offerings (IPOs) carried out on the Berlin and London stock exchanges between 1900 and 1913 casts doubt on the received “law and finance” wisdom that legally mandated investor protection is pivotal to the development of capital markets. IPOs that resulted in official quotations on the London Stock Exchange performed as well as Berlin IPOs despite the Berlin market being more extensively regulated than the laissez faire London market. Moreover, the IPO failure rate on these two stock markets was lower than it was with better regulated US IPOs later in the 20th century.

Citation: Chambers, David, Burhop, Carsten and Cheffins, Brian R., Is Regulation Essential to Stock Market Development? Going Public in London and Berlin, 1900-1913 (July 12, 2011). Available at SSRN: http://ssrn.com/abstract=1884190

Group decision making

Some years ago, I wrote an article entitled Why a Board? Group Decisionmaking in Corporate Governance. Vanderbilt Law Review, Vol. 55, pp. 1-55, 2002. Available at SSRN: http://ssrn.com/abstract=266683. In it, I argued that:

The default statutory model of corporate governance contemplates not a single hierarch but rather a multi-member body that acts collegially. Why? This article reviews evidence that group decisionmaking is often preferable to that of individuals, focusing on evidence that groups are particularly likely to be more effective decisionmakers in settings analogous to those in which boards operate. Most of this evidence comes not from neo-classical economics, but from the behavioral sciences. In particular, cognitive psychology has a long-standing tradition of studying individual versus group decisionmaking. This article contends that behavioral research, taken together with various strands of new institutional economics, sheds considerable light on the role of the board of directors. In addition, the analysis has implications for several sub-regimes within corporate law. Are those sub-regimes well-designed to encourage optimal board behavior? Two such sub-regimes are surveyed here: First, the seemingly formalistic rules governing board decisionmaking processes turn out to make considerable sense in light of the experimental data on group decisionmaking. Second, the adverse consequences of judicial review for effective team functioning turns out to be a partial explanation for the business judgment rule.

Ever since then, I've kept an eye out for interesting new research on group versus individual decision making. The latest to catch my eye is When Do Groups Perform Better than Individuals? A Company Takeover Experiment, which unlike many relevant studies has direct application to corporate governance:

It is still an open question when groups will perform better than individuals in intellectual tasks. We report that in a company takeover experiment, groups placed better bids than individuals and substantially reduced the winner’s curse. This improvement was mostly due to peer pressure over the minority opinion and to group learning. Learning took place from interacting and negotiating consensus with others, not simply from observing their bids. When there was disagreement within a group, what prevailed was not the best proposal but the one of the majority. Groups underperformed with respect to a “truth wins” benchmark although they outperformed individuals deciding in isolation.

Very interesting and very pertinent to those of us who try to figure out how to make boards more effective by improving group decision making processes.

Video of yours truly on the creeping federalization of corporate law

A caustic take on say on pay litigation

TK Kersetter lets loose with both barrels on a phenomenon we've been tracking here at PB.com for a while:

... companies that failed the say-on-pay shareholder vote (that is, they did not garner a majority of shareholder support) that are now being sued have fallen into the black regulatory hole known as: UNINTENDED CONSEQUENCES. I equate this to the modern-day expression: “My Bad!” In other words, it’s the creators of the regulation saying, “Oh, sorry companies… This wasn’t our intention, but now it is what it is.” Who couldn’t see this coming? Even I (fully admitting I’m not the sharpest tool in the shed at times), knew that the plaintiff’s bar would capitalize on this newly formed soft underbelly of American companies. And it sure didn’t take long.

You'll recall from our earlier discussion that aggressive plaintiff lawyers are suing companies with failed say on pay votes, despite the undisputable fact that "Dodd-Frank and the legislative history make clear that while both the say on pay and say when on pay votes must be tabulated and disclosed, neither is binding on the board of directors. The act and its legislative history further make clear that the votes shall not be deemed either to effect or affect the fiduciary duties of directors. S. Rep. No. 111-176, at 134 (2010)."

Anyway, back to Kersetter:

The sad part is, every expert I have been able to talk to believes these cases (eight filed so far) are frivolous and cannot be won if they to go to trial. And that’s OK for the law firms that filed the suits because more often than not they would prefer to settle than fight it in court. Two of the cases, one of which was clearly in the “egregious abuse of comp” category, have been settled. The other targeted companies are going through that frustrating exercise of, “Should we spend the time, energy, and money to fight a frivolous lawsuit that we are pretty sure to win?”… or “Do we settle, pay our blood money for not getting shareholder support, and get our company and board out of the negative limelight?” I wish that decision was as easy as it sounds and that all companies would stand their ground. But the facts are, sometimes settling is the best business decision… no matter how bad it ticks you off.

That's what the plaintiff's bar is counting on. As I've said before, "Sharks got to eat. Until Rule 11 has real teeth and we adopt loser pays with respect to class action legal fees, lawyers are going to bring these sorts of cases."

Kersetter continues:

As I’ve said before, many of these lawsuits aren’t developed based on mass shareholder discontent and unfortunately they don’t have to be. All it takes is one volunteer or malcontent shareholder (or sometimes a recruited shareholder) for the plaintiffs’ bar to file the suit. Then they hope for what all these chasers hope for: a company eager to settle. Well I’m here to support those companies, because what’s right sometimes overrides what’s prudent ,and I hope that some companies will fight the battle and clear up this mess for the rest of us.

Maybe more important, though, is to make sure your congressmen and the SEC see how ridiculous some of these lawsuits are and ensure they understand that nonbinding shareholder votes—even those won but where the percentages of votes were close—are not incidental, and often there is nothing “nonbinding” about them. I promised in my last blog that after this rant I would turn to some positive issues. Honestly, it might take me a while because with all that facing today’s American businesses, this is an unintended consequence that we could have predicted and we shouldn’t be dealing with.

And the Washington idiots that passed Dodd-Frank wonder why the economy is struggling.

Is Obama playing politics with the debt limit/default?

If this report from Jennifer Rubin is true, the answer's yes:

A Republican aide e-mails me: “The Speaker, Sen. Reid and Sen. McConnell all agreed on the general framework of a two-part plan. A short-term increase (with cuts greater than the increase), combined with a committee to find long-term savings before the rest of the increase would be considered. Sen. Reid took the bipartisan plan to the White House and the President said no.”

If this is accurate the president is playing with fire. By halting a bipartisan deal he imperils the country’s finances and can rightly be accused of putting partisanship above all else. The ONLY reason to reject a short-term, two-step deal embraced by both the House and Senate is to avoid another approval-killing face-off for President Obama before the election. Next to pulling troops out of Afghanistan to fit the election calendar, this is the most irresponsible and shameful move of his presidency.

 

Blogosphere reactions to proxy access decision

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:

On Business Roundtable and Chamber of Commerce v. SEC, Mike Scarcella at The BLT reports:

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.

Gordon Smith:

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. 

JW Verret:

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.

Brett McDonnell:

... 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.

James McRitchie:

 

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:

 

1. 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.
2. 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.
3. 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.

Proxy Access Invalidated on APA Grounds

The DC Circuit has struck down the SEC's proxy access rule. The opinion is here. Here is background from my essay The Corporate Governance Provisions of Dodd-Frank (October, 27 2010):

Dodd-Frank § 971 affirms that the SEC has authority to adopt a proxy access rule. At the same time, however, the legislative history makes clear that Congress intends that the SEC “should have wide latitude in setting the terms of such proxy access.” In particular, § 971 expressly authorizes the SEC to exempt “an issuer or class of issuers” from any proxy access rule and specifically requires the SEC to “take into account, among other considerations, whether” proxy access “ disproportionately burdens small issuers.”

Section 971 probably was unnecessary. An SEC rulemaking proceeding on proxy access was well advanced long before Dodd-Frank was adopted, so a shove from Congress was superfluous. Although the SEC lacks authority to regulate the substance of shareholder voting rights, moreover, proxy access almost certainly fell within the disclosure and process sphere over which the SEC has unquestioned authority. By adopting § 971, however, Congress did preempt an expected challenge to any forthcoming SEC regulation.

On August 25, 2010, just a few weeks after Dodd-Frank became law, the SEC adopted Rule 14a-11, which will require companies to include in their proxy materials, alongside the nominees of the incumbent board, the nominees of shareholders who own at least 3 percent of the company’s shares and have done so continuously for at least the prior three years. A shareholder may not use the rule to take over the company. Instead, the shareholder is limited to putting forward a short slate consisting of at least one nominee or up to 25% of the company’s board of directors, whichever is greater. Application of the rule to small companies will be deferred for three years, while the SEC studies its impact on them.

Proxy access has been highly controversial. As SEC Commissioner Troy Paredes pointed out in dissenting from adoption of new Rule 14a-11, proxy access marks a considerable displacement of state corporate law by federal securities regulation:

Rule 14a-11’s immutability conflicts with state law. Rule 14a-11 is not limited to facilitating the ability of shareholders to exercise their state law rights, but instead confers upon shareholders a new substantive federal right that in many respects runs counter to what state corporate law otherwise provides.

Commissioner Paredes further pointed out that:

The mixed empirical results do not support the Commission’s decision to impose a one-size-fits-all minimum right of access. Some studies have shown that certain means of enhancing corporate accountability, such as de-staggering boards, may increase firm value, but these studies do not test the impact of proxy access specifically. Accordingly, what the Commission properly can infer from these data is limited and, in any event, other studies show competing results. Recent economic work examining proxy access specifically is of particular interest in that the findings suggest that the costs of proxy access may outweigh the potential benefits, although the results are not uniform. The net effect of proxy access — be it for better or for worse — would seem to vary based on a company’s particular characteristics and circumstances.

To my mind, the adopting release’s treatment of the economic studies is not evenhanded. The release goes to some length in questioning studies that call the benefits of proxy access into doubt — critiquing the authors’ methodologies, noting that the studies’ results are open to interpretation, and cautioning against drawing “sharp inferences” from the data. By way of contrast, the release too readily embraces and extrapolates from the studies it characterizes as supporting the rulemaking, as if these studies were on point and above critique when in fact they are not.

SEC Commissioner Kathleen Casey pointed out in her dissent that the new rule favors activist investors who may seek to use the new access rights to engage in private rent seeking:

The paradigm of a power struggle between directors and shareholders is one that activist, largely institutional, investors assiduously promote, and this rule illustrates a troubling trend in our recent and ongoing rulemaking in favor of empowering these shareholders through, among other things, increasingly federalized corporate governance requirements. Yet, these shareholders do not necessarily represent the interests of all shareholders, and the Commission betrays its mission when it treats these investors as a proxy for all shareholders.

The Chamber and Business Roundtable originally planned to challenge Rule 14a-11 on grounds that the SEC lacked authority to adopt it, per the earlier decision in Business Roundtable v. SEC, 905 F.2d 406. In my view, that claim would have failed, even if Congress had not adopted sec. 971. See my essay  The Scope of the SEC's Authority Over Shareholder Voting Rights (May 2007). Section 971 ensured that there was no doubt that the SEC had the requisite authority. (For discussion of the earlier BRT decision and the issues it raised, see my essay The Short Life and Resurrection of SEC Rule 19c-4.)

In this new case, however, the DC Circuit sided with the BRT and Chamber on administrative procedure grounds. candidly, while I am pleased, I'm also surprised. I had thought--and said publicly--that this suit was a long shot. In any event, the court--per an opinion by Douglas Ginsburg--held that:

We ... hold the Commission acted arbitrarily and capriciously for having failed once again — as it did most recently in American Equity Investment Life Insurance Company v. SEC, 613 F.3d 166, 167-68 (D.C. Cir. 2010), and before that in Chamber of Commerce, 412 F.3d at 136 —   adequately to assess the economic effects of a new rule. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.

That's a pretty serious smack down. "Once again failed," citing cases. "Opportunistically" assessed the evidence. "Contradicted itself." Ouch. The SEC definitely got a serious spanking from a court that was not amused.

Some interesting points. First, the court agreed with those of us who have argued that a board often will have not just the right--but the duty--to oppose shareholder nominees:

[T]he American Bar Association Committee on Federal Regulation of Securities commented: "If the [shareholder] nominee is determined [by the board] not to be as appropriate a candidate as those to be nominated by the board's independent nominating committee ..., then the board will be compelled by its fiduciary duty to make an appropriate effort to oppose the nominee, as boards now do in traditional proxy contests."

Second, the court slapped down the SEC's claim--which parroted the claims of shareholder power advocates--that shareholder activism is beneficial for corporate performance:

The petitioners also maintain, and we agree, the Commission relied upon insufficient empirical data when it concluded that Rule 14a-11 will improve board performance and increase shareholder value by facilitating the election of dissident shareholder nominees. ... The Commission acknowledged the numerous studies submitted by commenters that reached the opposite result. ... One commenter, for example, submitted an empirical study showing that "when dissident directors win board seats, those firms underperform peers by 19 to 40% over the two years following the proxy contest." Elaine Buckberg, NERA Econ. Consulting, & Jonathan Macey, Yale Law School, Report on Effects of Proposed SEC Rule 14a-11 on Efficiency, Competitiveness and Capital Formation 9 (2009), available at www.nera.com/upload/Buckberg_Macey_Report_FINAL.pdf. The Commission completely discounted those studies "because of questions raised by subsequent studies, limitations acknowledged by the studies' authors, or [its] own concerns about the studies' methodology or scope." 

The Commission instead relied exclusively and heavily upon two relatively unpersuasive studies, one concerning the effect of "hybrid boards" (which include some dissident directors) and the other concerning the effect of proxy contests in general, upon shareholder value. Id. at 56,762 & n.921 (citing Chris Cernich et al., IRRC Inst. for Corporate Responsibility, Effectiveness of Hybrid Boards (May 2009), available at www.irrcinstitute.org/pdf/IRRC_05_09_EffectiveHybridBoar ds.pdf, and J. Harold Mulherin & Annette B. Poulsen, Proxy Contests & Corporate Change: Implications for Shareholder Wealth, 47 J. Fin. Econ. 279 (1998)). Indeed, the Commission "recognize[d] the limitations of the Cernich (2009) study," and noted "its long-term findings on shareholder value creation are difficult to interpret." Id. at 56,760/3 n.911. In view of the admittedly (and at best) "mixed" empirical evidence, id. at 56,761/1, we think the Commission has not sufficiently supported its conclusion that increasing the potential for election of directors nominated by shareholders will result in improved board and company performance and shareholder value....

I have consistently argued that proxy access will not result in improved board performance, so I'm especially pleased by this aspect of the holding. See, e.g., Shareholder Activism in the Obama Era (July 22, 2009).

Third, the Court agreed with those of us who have argued that certain institutional investors--most notably union pension funds and state and local government pension funds--would use proxy access as leverage to extract private gains at the expense of other shareholders (see my Obama Era article, cited above):

Notwithstanding the ownership and holding requirements, there is good reason to believe institutional investors with special interests will be able to use the rule and, as more than one commenter noted, "public and union pension funds" are the institutional investors "most likely to make use of proxy access." ... Nonetheless, the Commission failed to respond to comments arguing that investors with a special interest, such as unions and state and local governments whose interests in jobs may well be greater than their interest in share value, can be expected to pursue self-interested objectives rather than the goal of maximizing shareholder value, and will likely cause companies to incur costs even when their nominee is unlikely to be elected.

Note how Paredes and Casey are also vindicated here.

This is a big win for those of us who believe in the board-centric model of corporate governance and for the dominance of state law in regulating corporate governance.

But it is not the end of the story. Obviously, the SEC could appeal. The SEC could also go back to the rule-making process and try again. Neither would be surprising. Proxy access is a major goal of the union bosses and therefore has strong support from Democrats in Congress and the Democratic members of the Commission.

In addition, there is a private ordering solution. Shareholders who want proxy access can put forward proposals under Rule 14a-8 to amend the issuer's bylaws so as to permit shareholder nominees to be included on the proxy card.

But tonight let's celebrate a solid win for the good guys.

Proxy access struck down

I'm out and about w/o access to my computer. Just heard CNBC report that the SEC's proxy access was struck down by DC Circuit. Pleased but surprised. Will blog ASAP when back at computer.