The U.S. Court of Appeals in Washington on Friday overturned SEC rules that would have required corporations to provide shareholder access to corporate proxy materials to nominate directors.
“(W)e 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,” Judge Douglas H. Ginsburg wrote in the court’s 3-0 opinion.
Mr. Ginsburg said the SEC failed to respond to concerns that union, state and local pension funds “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.”
The court sided with Business Roundtable and the U.S. Chamber of Commerce, which filed suit in September 2010 to invalidate the rule.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Barack Obama in July 2010, included a provision requiring proxy access and authorized the SEC to adopt implementation rules.
The rules, adopted by the SEC in August 2010, were to have gone into effect that November but were suspended by the SEC in October after the suit was filed with the appeals court, which has jurisdiction for reviewing final SEC rules.
Under SEC rules, shareholders have to own at least 3% of a company’s shares continuously for at least the prior three years to be eligible to have their nominees included in the proxy materials.
The opinion cited the U.S. Chamber argument that companies would spend substantially to oppose candidates nominated by shareholders. Because the agency failed to estimate costs of doing that, “we believe it neglected its statutory obligation to assess the economic consequences of its rule.” the opinion said.
The SEC “is reviewing the decision and considering our options,” said spokesman Kevin Callahan.
Ann Yerger, executive director of the Council of Institutional Investors, which filed a brief supporting proxy access, called the decision “deeply disappointing to long-term shareowners.”
“We think the court got it wrong. We will continue to advocate for proxy access and will encourage the SEC to promptly address the court’s concerns,” she said in a statement.
Anne Stausboll, chief executive officer of the $241.3 billion California Public Employees’ Retirement System, Sacramento, said in a statement: “Today’s decision is a missed opportunity to bring corporate America in line with best practices in corporate governance observed in other financial markets. Proxy access is one of our top priorities. We are committed to supporting the commission in its efforts to protect the interests of shareowners and will continue to advocate for the adoption and implementation of a meaningful proxy access rule.”
Sandy Cutler, chairman and CEO of Eaton Corp. and chairman of Business Roundtable’s corporate leadership initiative, said in a joint statement of the Business Roundtable and U.S. Chamber: “By vacating the rule, the court has effectively placed great importance on the long-term interests of shareholders and businesses alike. The judges agreed with Business Roundtable and the Chamber of Commerce that the commission failed to do what was required, and that’s to consider the rule’s impact on efficiency, competition and capital formation.”
“We applaud the court’s decision to prevent special-interest politics from being injected into the boardroom,” Thomas J. Donohue, president and CEO of the U.S. Chamber, said in the joint statement. “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.”
The Kirkland & Ellis LLP law firm in a statement called the ruling, “V-day for corporate America.”
Business Roundtable is an association of CEOs of major U.S. companies. The U.S. Chamber represents more than 3 million businesses of all sizes.