Updated 4:39 p.m.
A federal appeals court in Washington today struck down a U.S. Securities and Exchange Commission rule that would have made it easier for shareholders of publicly traded companies to nominate corporate directors.
The U.S. Court of Appeals for the D.C. Circuit said in a unanimous three-judge ruling that the commission failed to provide sufficient data showing how the rule would improve board performance and increase shareholder value through the election of dissident nominees.
Gibson, Dunn & Crutcher partner Eugene Scalia argued for the Business Roundtable and the U.S. Chamber of Commerce, the two groups that challenged the rule. The case generated substantial friend-of-the-court briefing. “The agency does not know what it has wrought,” Scalia told the panel judges in April.
The appeals court sided with the business groups’ lawyers, who argued that investors with special interests, including unions and state and local governments, would be likely to put the maximization of shareholder value second to other interests.
“By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily,” Judge Douglas Ginsburg said in the ruling, joined by Chief Judge David Sentelle and Judge Janice Rogers Brown.
The SEC, the appeals court said, “inconsistently and opportunistically framed the costs and benefits of the rule” and also failed “to respond to substantial problems raised by commenters.”
The SEC said the new rule, which was on hold pending the outcome of the appeal, would have required companies to "include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management."
The commission said proxy access is "designed to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors."
Meredith Cross, director of the SEC Division of Corporation Finance, said in a prepared statement the appeals court decision was a disappointment.
"We are considering our options going forward," Cross said. "We note that our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court's decision."
In an e-mail this afternoon, Scalia said: “Our clients have long believed that proxy access rested on illusory benefits, and imposed significant, unacknowledged costs. Today, the Court agreed. This decision is likely to give the SEC serious pause before revisiting proxy access. It’s also a reminder to government agencies generally of the importance of carefully considering regulations’ costs and benefits, under Dodd-Frank or any other federal program.”