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The DC Circuit Court of Appeals struck down the Securities and Exchange Commission’s proxy access rule on Friday, marking the first judicial casualty of the Dodd-Frank Act.
At issue was whether a company must pay to distribute proxy statements about shareholder-nominated candidates for the company’s board of directors. Traditionally, a company selected its own board members and sent ballots with information about the nominees to the shareholders in proxy statements; shareholders who wished to make their own nominations were responsible for disseminating their own proxy statements.
Under the proxy access rule, the company had to bear the cost of providing such information for a shareholder or group of shareholders who had at least three percent of the voting power of the company's securities entitled to be voted for at least three years prior to the date the nominating shareholder or group submits notice of its intent to use the rule.
The rule arose from the Commission's concerns that the proxy process stifled shareholders' rights under state corporation law to nominate and elect directors. The rule required a company subject to the Securities Exchange Act proxy rules, including an investment company like a mutual fund, to include in its proxy materials the "name of a person or persons nominated by a shareholder or group of shareholders for election to the board of directors."
The Business Roundtable and U.S. Chamber of Commerce challenged the rule, arguing that the rule promulgation process violated the Administrative Procedures Act because, in part, the SEC failed to adequately consider the rule's effect upon efficiency, competition, and capital formation.
The circuit agreed, noting that the SEC's reasoning was "unutterably mindless," and vacated the rule. The court is not stopping the Commission from offering a new, identical proxy access rule; it is merely requiring that the Commission demonstrate that it has evaluated federally-mandated criteria before enacting a new rule.