with the U.S. Court of Appeals for the District of Columbia Circuit asking the Securities and Exchange Commission to stop the recently enacted shareholder proxy access rules from being implemented.
The chamber and the organization of CEOs are seeking a stay of Rule 14a-11, but not for the amendment to Rule 14a-8 [Read press release
.]. They have asked the court to make a decision on the stay motion by Oct. 5. The new rules would give all shareholders with at least 3 percent of ownership for at least three years the right to have their own director candidates added to the proxy ballot alongside management’s without having to engage in an expensive proxy fight. The petitioners argue that the rules would favor the special interests of unions and pension funds.
The suit was all but telegraphed by Commissioner Kathleen Casey during the SEC’s Aug. 25 vote [See my Aug. 25 post
.] when she said the rule is “so fundamentally and fatally flawed it will have great difficulty surviving judicial scrutiny” as she made her dissenting vote.
What does the suit mean for all the parties involved (shareholders, corporate secretaries, management, directors) who are preparing for the upcoming proxy season? I was able to reach out to one governance expert who recently wrote a recent post for our blog on state law under proxy access.
“In the short term, the filing of the complaint will not change the need for public companies to consider changes to their bylaws or otherwise prepare for access,” Frederick Alexander, an attorney with Morris, Nichols, Arsht & Tunnell LLP, wrote in an e-mail. “From a long-term perspective, however, the complaint raises a number of important issues about the role of state and federal law in the regulation of corporations, and how SEC action pursuant to Dodd-Frank [Act] should balance the two.”
The suit charges that the SEC’s rules are “arbitrary and capricious and otherwise not in accordance with law,” “exceed the commission’s authority” and “violate the issuers’ [public companies] rights under the First and Fifth amendments.” The endgame for the chamber and the Roundtable is to have the court issue a permanent injunction against the implementation of the new rules.
David Hirschmann, president and CEO of the chamber’s Center for Capital Markets Competitiveness, made clear why his organization took the action. “The SEC’s proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders,” he said. “This special interest-driven rule will give small groups of special interest activist investors significant leverage over a business’ activities. This will undermine a company’s ability to grow and create jobs.”
Specifically, a joint statement from both organizations spelled out four reasons for the court to grant an injunction. They said the SEC:
- Erred in appraising the costs that proxy access would impose on American corporations, shareholders, and workers at a time our economy can least afford it.
- Ignored evidence and studies highlighting the adverse consequences of proxy access, including that activist shareholders would use the rule as leverage to further their special interest agendas.
- Claimed to be empowering shareholders, but actually restricted shareholders’ ability to prevent special interest shareholders from triggering costly election contests.
- Claimed to be effectuating state law rights, but gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process.
The SEC has a wait-and-see approach regarding this litigation. “We believe that the Commission’s proxy access rules are both lawful and in the best interests of the public and shareholders,” John Nester, an SEC spokesman said in a statement. “The Commission will, of course, carefully consider and timely respond to the motion for a stay.”
As expected, shareholder groups were not pleased.
“What the U.S. Chamber regards as “special interests’ is in reality the vast majority of Americans who manage their investments and retirement needs through pension funds and mutual funds,” Anne Sheehan, director of corporate governance for CalSTRS, wrote in an e-mail. “Proxy access enables these shareholders—in our case, the teachers of the State of California—to hold corporate board members accountable for their actions. What the financial crisis proved is that the boards of directors of the failed financial firms were asleep at the wheel and not properly overseeing the management of the shareholders’ hard-earned capital.
“Proxy access simply gives large, long-term investors the right to nominate candidates when a board has failed us. It does not secure the election of those candidates. Shareholders are the only ones that can do that. We are pro-shareholder and shareholder choice in this matter and we believe that by making boards more accountable, our capital system will be more sustainable.”
In a prepared statement
, The Council of Institutional Investors has even vowed to file an amicus curiae
brief with the court in favor of the new rules.
“The Council fought long and hard for U.S. shareowners to gain the right to have their board candidates considered alongside those of management,” said Ann Yerger, the CII executive director. “Proxy access will make companies more responsive to their shareowners and more vigilant in their oversight of companies. This basic right is widely accepted in many other countries and the Council will fight to preserve it here.”
It looks like two of Corporate America’s biggest advocates believe one SEC commissioner’s intimation that the SEC’s new proxy access rules would not hold up in court, raising some doubt about how companies and shareholders should proceed for the 2011 proxy season.
The U.S. Chamber of Commerce and the Business Roundtable today have filed a