SEC Proxy Access Regime Invalidated by Court of Appeals
Last Friday the United States Court of Appeals for the District of Columbia invalidated the key component of the SEC’s proxy access regime. In general, but subject to various limitations, the regime required companies to include in their proxy statements, and on their proxy cards, director candidates selected by 3% shareholders (or shareholder groups). By agreement among the SEC and the two plaintiffs – the Business Roundtable and the Chamber of Commerce – the SEC previously had stayed implementation of the regime pending the outcome of the case so companies have not been required to comply. The Court’s action is good news for those who were concerned that proxy access would provide single interest (e.g., labor and environmental groups) and other dissident shareholders the ability to disrupt the director election process for purposes that did not reflect the best interest of shareholders as a whole.
The Court’s decision is not, however dispositive of proxy access. The decision was based upon the Court’s conclusion that the SEC’s action, in adopting the proxy access regime, was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” the standard imposed by the Administrative Procedure Act. In turn, this was predicated on the Court’s conclusion that the SEC had not appropriately considered the regime’s “effect on efficiency, competition and capital formation,” a standard imposed by both the Exchange Act and the Investment Company Act for rule-making by the SEC. And, in turn, this reflects the Court’s view that the SEC had not realistically considered the likelihood of shareholder-selected candidates being included in a proxy statement and the myriad of defense and other costs attendant to that inclusion. The Court based its decision solely on the APA standard as applied to the Exchange Act and Investment Company Act requirements and did not address the plaintiffs’ First Amendment and other substantive arguments. As a result, the SEC can reconsider the proxy access regime and, if it properly considers in a non-arbitrary and non-capricious manner the impact of the regime on the “efficiency, competition and capital formation,” either reapprove the regime or some variation of the regime.
So far, the SEC has not given any indication of its plans. Based upon their prior public statements, the SEC’s membership remains divided three-to-two in favor of proxy access, and the term of the most critical member expires this month. In the past, the SEC has tended to re-propose rules that were successfully challenged on procedural grounds, but not those that were successfully challenged on substantive grounds where further proceedings could not address the substantive issue without a major overhaul of the proposal. It also is not clear whether the overall political environment in Washington is as receptive as it was last year to proxy access. As a result of this uncertainty, interested companies need to remain alert on this topic and, should further SEC action appear likely, weigh in promptly through comment letters and encouragement to the groups that represent their interests. Given the complexity of the topic and the SEC’s Dodd-Frank responsibilities, however, we do not foresee any circumstances under which proxy access will be re-implemented in time for the 2012 proxy season.