July 28, 2011
Practice Group(s):
Corporate
D.C. Circuit Strikes Down SEC’s Proxy
Access Rule
In August of 2010, the SEC adopted Rule 14a-11 pursuant to a grant of authority contained in the
recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. Rule 14a-11 required
public companies to include in their proxy materials nominations for director from qualified
shareholders. To be qualified, a shareholder generally had to own at least 3% of a company’s
outstanding shares for a minimum of three years.
Always a controversial issue, activist shareholders long considered proxy access the holy grail of their
efforts. In fact, in the decades preceding adoption of Rule 14a-11, the SEC had reviewed and
debated—but ultimately abandoned—a variety of rule proposals aimed at liberalizing proxy access.
Each effort to implement new proxy access rules met with outspoken disapproval from corporateinterest advocates such as the Business Roundtable and the U.S. Chamber of Commerce. Rule 14a-11
was no exception. At the time of its adoption, the Business Roundtable and the Chamber of
Commerce (the “petitioners”) brought suit alleging that the SEC, in adopting Rule 14a-11, had acted
arbitrarily and capriciously in violation of the Administrative Procedure Act and that the rule violated
the First Amendment and should be struck down. In response to that lawsuit, the SEC agreed to delay
implementation of Rule 14a-11 in exchange for expedited judicial review, so that the rule did not
apply during the 2011 proxy season.
On Friday, July 22, the U.S. Court of Appeals for the D.C. Circuit issued its opinion agreeing with the
petitioners and striking down the new proxy access rule by finding that “the Commission acted
arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects
of a new rule.” In its analysis, the court called attention to lapses in the Commission’s adoption
process that would likely entail significant and indeterminate financial consequences if the rule was
implemented. These lapses included instances where the Commission had engaged in “mere
speculation” in assessing the costs of the new rule, “relied upon insufficient empirical data” for its
conclusion that the new rule would improve board performance and increase shareholder value, and
“duck[ed] serious evaluation of the costs that could be imposed upon companies from use of [Rule
14a-11] by shareholders representing special interests, particularly union and government pension
funds.” On account of the Commission’s failure to adequately evaluate the economic effects of the
rule, the court granted the petitioners’ motion and vacated the rule. Because the court decided the case
on statutory grounds, it did not reach the Constitutional claim.
The Circuit Court’s decision very likely means that Rule 14a-11 will not be effective in time for the
2012 proxy season, given the steps the SEC would need to take to address the decision. Further, the
Circuit Court didn’t address the First Amendment challenge to the proxy access rule, leaving a
potential future obstacle to the rule’s enactment. It is unclear whether the SEC will seek to challenge
the Circuit Court’s decision with further litigation.
Finally, we note that when the SEC adopted Rule 14a-11, it also amended Rule 14a-8 to permit
shareholders to propose additional proxy access. While the amendment to Rule 14a-8 was not
challenged, the SEC stayed the effectiveness of the amendment because it was designed to
complement Rule 14a-11. The SEC could allow the Rule 14a-8 amendment to become effective
D.C. Circuit Strikes Down SEC’s Proxy Access Rule
(possibly giving rise to shareholder proposals in 2012 related to proxy access) or keep the Rule 14a-8
stay in place until it determines what action, if any, to take with respect to Rule 14a-11.
We will keep you updated on future developments on proxy access, Rule 14a-8 and any related
matters.
Authors:
J. Craig Walker
craig.walker@klgates.com
+1.312.807.4321
Robert K. Smith
robert.smith@klgates.com
+1.202.778.9376
Ryan P. Swan
ryan.swan@klgates.com
+1.312.807.4346
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