The D.C. Circuit Court of Appeals today vacated Exchange Act Rule 14a-11, which would have required U.S. public companies to include shareholder nominees for election as directors in their proxy materials under certain conditions. The court found that, in adopting the rule, the SEC violated the Administrative Procedure Act by failing to adequately consider the rule’s effect on efficiency, competition, and capital formation.
The SEC adopted Rule 14a-11 last summer and the rule was initially scheduled to become effective last fall. After the petitioners notified the SEC that they intended to challenge the rule, however, the SEC voluntarily stayed it, pending the outcome of the court proceedings. The SEC has yet not indicated whether it will seek en banc or Supreme Court review of today's decision. Absent such further proceedings, today's decision essentially directs the SEC to begin its proxy access analysis and rulemaking anew. Given the many demands on the SEC's current resources, in light of the Dodd-Frank Act and otherwise, this may mean that proxy access is essentially dead yet again, at least for the time being.
The court did not address the petitioners' First Amendment challenge to the proxy access rule, an argument that may have special resonance in light of the Supreme Court's recent commercial speech cases. If the SEC, having been sent back to the drawing board, is able to overcome the court's Administrative Procedure Act concerns by developing a more comprehensive and complete administrative record, it may yet find a First Amendment obstacle lurking in its quest to impose proxy access.
The SEC has issued a statement indicating that its rule allowing shareholders to submit proposals for proxy access at their companies, which it adopted at the same time as Rule 14a-11, is unaffected by the court's decision.
See the D.C. Circuit opinion, Business Roundtable and Chamber of Commerce v. Securities and Exchange Commission, No. 10-1305 ( D.C. Cir. filed July 22, 2011).
See the SEC statement on the decision.
See the September 7, 2010 Davis Polk memo on Rule 14a-11, vacated today.