Thursday, August 4, 2011

U.S. Court of Appeals Denies Proxy Access in July 22, 2011 Decision

In a U.S. Court of Appeals ruling on July 22, 2011, proxy access was denied in favor of the case presented by the U.S. Chamber of Commerce and Business Round Table.


July 21, 2010 - The Dodd-Frank Wall Street Reform and Consumer Protection Act is passed. Tucked away in the omnibus bill under Title IX (Investor Protections and Improvements to the Regulation of Securities), Subtitle G (Strengthening Corporate Governance), Sec. 971 (proxy access) is a rule that gives the SEC the authority to issue a rule on proxy access (giving shareholders the right to nominate directors in corporate proxy statements as opposed to having to mail their own proxy statements).

August 25, 2010 - The SEC votes 3-2 along party lines to allow proxy access (Rule 14a-11). A shareholder, or group of shareholders, is eligible to use proxy access if they have owned 3% or more of a given company's shares continuously for at least the past 3 years. Companies under a $75M market capitalization are exempt for three years. Moreover, under the proxy access rule, shareholders can only nominate no more than one or what is 25% of the number of company director (whichever is greater). A final limitation is that proxy access cannot be used "for the purpose of changing control of the company".

September 29, 2010 - The U.S. Chamber of Commerce and Business Roundtable files a legal challenge to the SEC's final proxy access rules and requests a stay of those rules (as well a repeal). The petitioners argued that the SEC's judgment was "unlawful under the Investment Company Act, Securities Exchange Act, and Administrative Procedure Act… The Proxy Access Rules are arbitrary and capricious…, do not promote efficiency, competition, and capital formation…"

October 4, 2010 - The SEC stays proxy access, finding that "[a]mong other things, a stay avoids potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity".

July 22, 2011 - The U.S. Court of Appeals for the District of Columbia overturns the SEC's decision, thus denying proxy access. The three Republican-appointed judges who made the ruling write in the decision,  "We agree with the petitions and hold the [SEC] acted arbitrarily and capriciously for having failed once again… adequately to assess the economic effects of a new rule. Here the [SEC] 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" .

According to Los Angeles Times, "[t]he court decision leaves the door open for the SEC to do more analysis and enact a revised rule".

Tom Donohue, President of the Chamber of Commerce, commented that the decision is "a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs".

Posted by David Schatz, Hedge Fund Solutions