D.C. Circuit Vacates Proxy Access Rule

On July 22, the D.C. Circuit Court of Appeals vacated Exchange Act Rule 14a-11, the proxy access rule that was approved by the Securities and Exchange Commission ("SEC") in August 2010. The rule sought to provide certain shareholders with the right to nominate corporate directors and have those nominations appear in corporate proxy statements. The rule was originally expected to be effective in November 2010, but it was stayed pending a request for judicial review by the U.S. Chamber of Commerce and the Business Roundtable.

The D.C. Circuit held (.pdf) that the SEC "acted arbitrarily and capriciously" in failing to adequately assess the economic effects of the new rule, including the costs that companies may incur in opposing shareholder nominees. The Court specifically noted the likelihood that "institutional investors with special interests" such as "unions and state and local governments whose interest in jobs may well be greater than their interest in share value" might seek to utilize the rule. The Court found that "by ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests…the Commission acted arbitrarily."

A separate rule issued at the same time as the proxy access rule, Rule 14a-8(i)(8), was not impacted by the Court’s decision. This rule limits corporate capacity to exclude shareholder proposals seeking revisions to a company’s procedural requirements for shareholder director nominations.

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