Public and union pension funds will use proxy access to further “their special interests rather than the interests of shareholders as a whole,” according to the opening brief filed Dec. 1 in a suit by the Business Roundtable and the U.S. Chamber of Commerce.
The suit seeks to overturn Securities and Exchange Commission rules that will require shareholder access to corporate proxy materials to nominate directors of corporate boards.
“Union and government pension funds are the most activist shareholders (and) were leading proponents of the rules,” according to the 215-page brief, filled in the U.S. Court of Appeals in Washington. The appellate court has jurisdiction for reviewing final SEC rules.
“There is no evidence that union and government pension funds are the most activist shareholders because they are especially conscientious financial custodians. Rather, union members can benefit as employees by forcing companies to take certain actions that deliver no benefits to shareholders,” the brief states.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law July 21 by President Barack Obama, authorized the SEC to adopt the proxy access rules. The rules, adopted by the SEC on Aug. 25, were to have already gone into effect Nov. 15, but after the Business Roundtable and U.S. Chamber of Commerce filed their lawsuit Sept. 29, the SEC on Oct. 4 suspended implementation of the rules pending resolution of the case.
During the rule proposal process, comments to the SEC “warned that special-interest investors would use proxy access as leverage to obtain concessions from companies; as a "soap box' to voice disagreements with company policy; and to seek the election of candidates favorable to the special interests of labor unions or the political officials in charge of government pension funds,” according to the brief.
The SEC's proxy access rules will harm corporations through “the distraction of directors and management from the performance of their responsibilities, and loss in shareholder value due to the threatened or actual election of certain shareholder nominees using company proxy materials,” the brief states.
The access rules also apply to investment companies.
John Nester, SEC spokesman, declined to comment on the brief but said in a statement, “The commission believes that its rules are lawful and in the best interests of investors, and we intend to vigorously defend them in court.”
Amy Borrus, deputy director of the Council of Institutional Investors, said she hasn't seen the brief, but said in a statement, “In general, though, the notion that proxy access will let labor or another group foist a narrow, special-interest director on a board is wrong. First, union funds have a fiduciary duty to act in the best interest of their plan participants and beneficiaries. They have a track record of voting their proxies thoughtfully and with the care expected of fiduciaries, so no one should assume they will use proxy access to further labor or other special interests. Second, in a contested election, a candidate will have to receive a plurality of the votes to win a seat. Activist investors don't have enough votes to put someone on a board. Any shareowner-nominated candidate will have to be highly qualified and perceived as someone who will add value, to win the support of mutual funds, endowments and other institutional investors. Someone who does win that kind of support is not a "special interest' director; he or she clearly represents a broad swath of investors.”
CII plans to file an amicus brief, but Ms. Borrus said she isn't sure when.
The CII, whose membership includes corporate as well as public and union pension funds, adopted a policy a few years ago by majority vote favoring access for long-term shareholders holding at least 3% of a company's stock.
