Proxy Access Rule Vacated by D.C. Court of Appeals in Blow to Activist Investors
On July 22, 2011, in Business Roundtable c. Securities and Exchange Commission, the U.S. Court of Appeals for the District of Columbia vacated Rule 14a-11 promulgated under the Securities Exchange Act of 1934, the “proxy access rule” (the “Rule”), adopted by the Securities and Exchange Commission (“SEC”) in 2010. The Rule would have allowed shareholders who hold at least 3 % of outstanding shares of a public company continuously for at least three years1 and who have no intention of seeking a change in control to nominate at least one director, but never more than 25% of all directors, to be included on such company’s proxy card and in such company’s proxy statement. After the case was filed, the SEC delayed making the Rule effective (which was scheduled to become effective on November 15, 2010) until the court ruled. The Rule would have allowed investors to cheaply and efficiently get at least one director elected by shareholders to a public company board without having to file and mail its own proxy statement.
The decision was a comprehensive rebuke to the SEC and its administrative process in adopting the Rule. Judge Ginsburg’s decision vacated the Rule as against both public companies and investment companies after finding that the SEC violated the Administrative Procedure Act by not adequately considering the Rule’s effect upon efficiency, competition, and capital formation, as required by both the Securities Exchange Act of 1934 and the Investment Company Act of 1940. In fact, the court found repeated examples of the SEC having been arbitrary, capricious and illogical or inconsistent in its cost-benefit analysis.